The question of how to pay a financial advisor comes up frequently in personal finance literature. Typically, the discussion focuses on conflicts of interest and goes something like this:
- Commission-paid advisors have very large (perhaps insurmountable) conflicts of interest with their clients,
- Advisors who charge a percentage of assets under management have smaller, though still meaningful, conflicts of interest with their clients, and
- Advisors who charge hourly fees or who use a fee-for-service system have few conflicts of interest with their clients.
That’s all well and good, and I’d agree with such analysis. But I think there’s also something to be said for a simple common sense approach:
Is your advisor’s fee-structure a good match for the type of service he/she provides you?
Financial Advisors as Doctors
By way of analogy: You probably don’t pay your doctor an annual retainer. Nor do you pay an annual fee that’s a function of how much you weigh or how tall you are.
Most likely, you pay per visit. Why is that?
I suspect it has something to do with the nature of the service your doctor provides: an annual checkup, plus consultations when a specific need arises. In other words, most days, you don’t need your doctor to do anything for you.
The same goes for investing. From day-to-day, managing a portfolio requires very little work. And for many of us, that work can be almost completely automated.
That said, an unbiased advisor who can answer the more complicated questions and point out possibilities for planning is surely valuable. For example:
- Should you execute a Roth conversion this year? And if so, how much of your IRA should you convert?
- When should you start taking social security payments?
- Would it be wise to annuitize a portion of your portfolio in order to minimize the risk of running out of money?
- How should you draw down your accounts in retirement? Should you take money out of taxable, tax-deferred, or tax-free accounts first?
But the nuts and bolts of investing and portfolio management is simple:
- Select an appropriate asset allocation.
- Minimize costs.
- Rebalance according to an explicit plan in order to keep your risk level where you want it to be.
Call me crazy, but I don’t see much need for ongoing help with that.