The cost of making money
How to avoid overpaying for financial advice
Financial advice can encompass a lot of different services, so how do you make sure you are paying the right amount?
Investment management can cost as little as 0.25 percent of a portfolio’s value each year. Yet many people still pay 1 percent, or even more.
Here’s what you should know to avoid overpaying:
1 The basics Financial advice falls primarily into two categories: investment management, which includes picking the right mix of stocks, bonds and cash; and financial planning, which can include everything from budgeting advice to estate planning.
Comprehensive financial planners typically charge a percentage of the clients’ assets that they manage. But the bigger the portfolio, the lower the fee. The median annual charge was 1 percent for portfolios of $1 million or less, sliding to 0.5 percent for portfolios of $5 million to $10 million, according to a survey by trade publication Inside Information.
Investment management fees vary greatly, due in part to competition from robo-advisers.
These digital advisers usually charge about 0.25 percent of the portfolio's value. Some services combine automated investing with access to financial planners for slightly more.
2 What to watch for Bob Veres, the Inside Information publisher who conducted the survey and who has tracked the financial planning industry for decades, says any adviser who merely provides a well-allocated portfolio and periodic statements is overcharging at anything more than 0.5 percent. On the other hand, anyone who provides full-service financial planning for less than 1 percent of assets under management is underpaid.
The bulk of advisers handling portfolios worth less than $1 million charge between 1 percent and 2 percent of assets under management, Veres found. That may be a reasonable amount, if clients are getting plenty of financial planning services. But some charge more than 2 percent, and a handful charge in excess of 4 percent. It’s hard to imagine what might justify those costs.
One suggestion: If you’re not rich or you’re just starting out, consider using an automated approach for your investing — either a robo-adviser or a low-cost target date retirement fund that makes the investment decisions for you. When you need real financial planning help down the road, hire a fee-only financial planner who charges by the hour. The advice won’t be cheap — figure on $150 an hour or so — but it may be the best deal you can get.