‘I finally woke up to reality.’ I’ve been paying a percentage of my investments to a financial advisor for years now, but I don’t think it’s worth it. Is the 1% fee really fair?
Does your financial advisor charge you a reasonable fee?
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We recently received this note from a reader that we thought was worth investigating, as we received many questions from readers about whether the mentoring fee was worth it:
“After so many years of paying for custodianship, I finally realized the reality that it could not be in the best interest of the investor as long as the manager was rewarded for the assets under management.”
Is this reader correct? Well, first of all the AUM model – which stands for assets under management and is usually 1% of a person’s fixed assets – is not without controversy. And the answer to whether it’s worth it is still unclear – and depends on what they do for you, what they charge, and how much work you want to do yourself, among other issues. . Here are the pros and cons. (Looking for a new financial advisor? This tool can help you match with an advisor who can meet your needs.)
Some say AUM is never a truly fair model – and instead say most financial advisors should charge by the hour or per project. “I vehemently oppose the untapped nature of the AUM model. It doesn’t make sense to just pay ever-increasing fees simply because your investments have grown,” says certified financial planner David Barfield of Datapoint Financial Planning.
If you have a $1 million portfolio and you’re paying 1% AUM fees, you’d expect to pay around $10,000 per year for the advisor’s services. If that $1 million grows to $1.5 million, your fees will increase by about $5,000 per year to $15,000 per year.
Have questions or comments about your financial advisor? Email [email protected] for advice.
And Shawn Ballinger, certified financial planner at Columbus Street Financial Planning, says a fiduciary advisor’s compensation really shouldn’t be tied to market performance. “Advisor compensation will increase over time based on historical market performance. Management model (AUM) properties have inherent contradictions, most notably when clients ask if they should pay off their mortgage with investments held with an AUM fee advisor or not,” Ballinger said. (Looking for a new financial advisor? This tool can help you match with an advisor who can meet your needs.)
What’s more, he said, the industry is used to meeting customers once a year, providing updates on the economy and their portfolios, inviting them out to dinner, and charging 1%. to manage their investments. “This doesn’t work anymore and people are starting to realize that,” says Presogna. And it’s important to note that those with smaller portfolios may have a harder time finding an AUM-based advisor. This Marketwatch’s Pick guide highlight when you shouldn’t pay 1% AUM fees and consider a flat fee advisor instead.
That said, AUM advisors are usually worth what you pay them for. According to certified financial planner Eric Presogna of One Up Financial, the amount of fees and value transferred is something to consider. “$10,000 a year flat fee or 1% AUM to manage someone’s lifetime savings of $1 million, build, monitor and update their financial plan, provide a plan and tax preparation, estate planning, insurance, financial education for their children and more, all the added value for clients can be undisputed. I think it depends on transparency about the fees charged and the services provided,” Presogna said. (Looking for a new financial advisor? This tool can help you match with an advisor who can meet your needs.)
And Lynn Dunston, certified financial planner at Moneta, says there is a significant misunderstanding among consumers when it comes to asset-based consulting fees. “I am a fee-only planner and I work as a trustee 100% of the time and I can tell you there are certainly circumstances where a property subject to management fees is not only suitable but also actually better for the customer,” says Dunston. If someone has a very complex financial problem that requires a lot of time and is working on behalf of an advisor, hourly fees can add up quickly and create a barrier between the client and the advisor, especially if the client felt the need to limit the advisor’s time to reach a certain cost.
James Kinney, certified financial planner at Financial Pathway Advisors, recommends asking yourself whether a paid hourly advisor is more in their interests than an advisor paid by AUM. are not. “In my experience, no. What I’ve noticed is that my hourly clients tend to act first and ask for advice later. I think there’s a built-in incentive to ask for advice when you know it’s going to cost you a few hundred dollars per hour. On the other hand, if an AUM advisor’s portfolio loses 10%, their income also drops 10%. It is a powerful incentive to manage risk and return in a way that is largely in the best interests of their clients, Kinney said.
In the end, there’s no one-size-fits-all answer – some people, such as those who tend to be more experienced, knowledgeable and disciplined may do better with an hourly consultant. while others are probably better off keeping an eye on the store. (Looking for a new financial advisor? This tool can help you match with an advisor who can meet your needs.)
Have questions or comments about your financial advisor? Email [email protected] for advice.
* The questions are edited for brevity and clarity.
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