The Finance Buff recently wrote an article asking how much unbiased financial advice should cost. I think it’s hard to say how much it should cost because the value of the advice depends a great deal upon the circumstances of the person receiving the advice.
However, if you’re considering using a financial advisor, it can help to have an idea of how much financial advice usually does cost.
Financial advisors can be broken down into two broad categories based upon how they charge for their services:
- Commission-paid financial advisors, or
- Fee-only advisors, who generally charge in one (or more) of the following ways:
- Assets under management fees,
- Hourly fees, or
- Specific fees for a given service.
Though there are exceptions, commission-paid advisors are usually associated with large “full-service” brokerage firms, and fee-only advisors are typically a part of smaller, independent practices.
Commission-Based Advisors (a.k.a. Stockbrokers)
Most full-service brokerage firms have a cost structure along these lines:
- Commissions of up to 5.75% on each investment.
- An additional cost per year that could be anywhere from 0.20% to upwards of 2% (due to the funds they use having higher annual expenses than index funds or ETFs).
- Administrative fees for an account.
In exchange for those costs, you get (biased) investment recommendations. No comprehensive financial planning or anything of that sort. Due to the limited degree of services, biased recommendations, and generally high costs, I think most investors are best served by staying away from commission-paid advisors.
Assets Under Management Fees
One of the most common compensation structures for fee-only advisors is an “assets under management” fee where you pay a quarterly or annual fee equal to a certain percentage of the value of your portfolio. How much you’ll pay depends upon what services you’re looking for.
For example, at the “investment-advice-only” end of the spectrum, you’ll find firms like Portfolio Solutions (run by Rick Ferri–an author with an investment philosophy very similar to my own). Their website describes their services this way:
“The business of Portfolio Solutions is professional portfolio management. We do not offer comprehensive financial planning, estate planning or tax advice.”
For their services, they charge 0.25% per year (subject to a $500 per-quarter minimum fee per household). If you’re looking for somebody to provide more comprehensive services, you can expect to pay more.
Hourly Fees
Other fee-only advisors charge a simple hourly fee for their services, much like an accountant or an attorney. The hourly rate varies depending upon the geographic location and the credentials of the advisor, but from what I’ve seen, anywhere from $100-$250 per hour would be typical.
Fee-for-Service
Finally, some advisors charge a one-time fee for a given service. This is similar to the hourly fee structure, but with the added advantage that you know ahead of time exactly what you’ll be paying, and exactly what you can expect to receive in return.
A quick bit of research shows that fees for specific projects vary wildly. However, it may be due to the fact that the services provided vary just as much. For example, a “retirement planning” package could be as simple as a two-hour meeting in which investment suggestions are made to suit your goals, or it could be an ongoing process including such things as tax planning and assessments of insurance needs.
My advice here would be to avoid the assumption that “more is better.” Just because a given advisor offers a certain service as part of their retirement planning process doesn’t mean that you need that service. Put some serious thought into what services you need, then shop around for quotes from various local advisors.
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{ 25 comments… read them below or add one }
Good post, I think the public needs to understand how advisors are compensated and the inherent conflicts that arise from commissions.
I would add one other compensation method, Fee-Based. This is probably the most confusing to the public. A typical fee-based arrangement will start with a financial plan that is done for a fixed fee. If the client then want so continue working with that advisor, implementation of plan recommendations such as mutual funds, annuities, or insurance products are done via commissioned products.
This is in contrast to fee-only (full disclosure I am a fee-only advisor) where the advisor receives NO compensation from the providers of financial products, eliminating this inherent conflict of interest.
I often encounter potential clients who refer to fee-only as fee-based. Not knowing the difference can be very costly to an individual seeking financial advice.
Indeed, that is an important distinction–one I wasn’t even aware of to tell you the truth. Thanks for pointing it out, Roger.
“Just because a given advisor offers a certain service as part of their retirement planning process doesn’t mean that you need that service. Put some serious thought into what services you need, then shop around for quotes from various local advisors.”
This is great advice. Many advisors that charge a one-time fee for a given service can customize the service and the fee to meet a need. A lot of hourly planners do this type of project work as well, and flat fees are often based on time expectation. So if you are willing to some of the work on your own, it will cost the planner less time therefore costing you less money.
@ Roger Wohlner: Agreed, “fee-based” is an confusing term, but I hesitate to include it as a separate category. It’s really part of a commission paid advisor category. Either an advisor gets commissions or they don’t (i.e. either they are fee-only or they are not.) “fee-based” is often positioned as a middle ground where none actually exists.
Dylan, great comment and greetings to a fellow NAPFA member. You are right in that fee-based involves commissions and therfore is a sub-set. I’ve also seen many industry references to fee-based as a distinct compensation method. I generally break it out as well just because it is so confusing to the investing public. The issue whether you lump fee-based into the commission category or not is clarity for the public.
I’ll share a few more thoughts about “fee-based.” I’ve too have seen it referenced many times as its own compensation method, but it is purely a marketing term that has no specific definition. Commission, fee-only, percentage of assets under management, hourly charges, and flat fee have all be defined in applicable law. Fee-based is not.
Both commission advisors or fee-only advisors can advertise themselves as “fee-based” with out any regulatory ramifications. In other words, it can mean whatever the person using it says it means. And this is exactly why it is such a confusing term to consumers (and many advisors too).
Also, a lot of what is referred to as “fee-based” is actually regular, old-fashioned commission in disguise. A lot of advisors receive a cut for selling a third-party’s advisory service and call it a fee. But the fee is not paid to the advisor by the client; it’s paid by the third party as transactional compensation. I’ve heard a number of advises refer to level-load class C share mutual funds as “fee-based.”
Dylan, I think we both agree that C shares trailing fees are commissions regardless of what anyone says.
Commercial plug (if Mike will allow) if consumers want to find a Fee-Only advisor in their area they should go the NAPFA site at http://www.napfa.org and check out the find an advisor tab on the left hand side of the site. They might also check out Garrett Planning if they are looking for an hourly fee-only planner (many Garrett advisors are also NAPFA members).
Roger, I think the fact that, as a couple of really smart NAPFA advisors, we disagree on the use of “fee-based” is testament to its ambiguity.
I agree with all of you. Mike, this is a good article outlining the estimated costs. Dylan and Roger, you’re right in saying “fee-based” is just a marketing term. I think anyone who uses that should be legally required to say “we’re trying to rip you off from both ends”… It’s faux “objective” advice that’s really geared to getting clients to buy commission products.
Mike, in regards to your comment on flat fee advisors:
“Just because a given advisor offers a certain service as part of their retirement planning process doesn’t mean that you need that service. Put some serious thought into what services you need, then shop around for quotes from various local advisors.”
I believe this is why hourly advisors may be a better option for most people. When advisors set up a flat fee structure, they have to plan for a higher-than-average amount of time or they could end up losing a lot of money. If you have a simple situation, an hourly planner could help you for a low cost. Of course, I’m slightly biased since I’ll be running my financial planning business under an hourly model.
Also, it is like you said. The more you do yourself, the cheaper it will be. I would add that the more organized you are the less you’ll pay as well. I’ve spent a lot of time just wading through tons of junk to find the little bit of information I need. More is not always better. Giving your planner 5 years of account statements isn’t going to help him get the job done any better or quicker.
I have an insurance background and have worked with commission-only, fee-based and fee-only advisors (using the term loosely here). First of all, most fee-based advisors tend to have an attitude about objectivity and their own recommendations that is more in line with commission-only brokers. Fee-only advisors tend to be much more aware of conflicts of interest and objectivity (although some still have other biases).
Having said that, I’ve found two ways to gauge where a fee-based advisor is on the spectrum:
1. Ask them what percentage of their income is made up by fees and commissions. Then ask them why they sell so many commissioned products (if they do). There are times when paying a commission is a better deal than paying a fee, but those times tend to be few. Their percentage should probably reflect that.
2. Ask them how objective they find the advice of most insurance agents. Fee-only advisors are generally distrustful of most insurance agents. Whereas, many fee-based advisors see most insurance agents as more trustworthy. I’m not saying all insurance agents are untrustworthy, but the less trustworthy insurance agents are in the eyes of your advisor, the more objective that advisor will tend to be. (As long as they don’t think it’s all a conspiracy theory.)
Yes, I do insurance stuff still (although I don’t sell insurance). But hopefully through my work, folks can find agents they can trust.
Mike,
Thanks for the round up of costs; it’s pretty amazing how much the fees can be.
Doing some quick math- the Assets Under Management Fee provider requires an $800,000 investment to get the 0.25% fee rate. The minimum fees make it a lot more expensive if you have less… At $100,000 their $2000 minimum yearly fee is 2% of your investment.
I am very skeptical that an advisor could increase returns by 2% unless you were making horrible mistakes- market timing, picking hot stocks, etc.
@Dylan or Roger
What value to you provide to your clients over reading a book like Mike’s Investing Made Simple, picking a lazy portfolios and sticking with the plan? I realize not everyone could do that without help, especially during a bear market but for someone that can is there still any added value?
-Rick Francis
Rick,
I’m not responding on Roger or Dylan’s behalf, but I can come up with a few ways a planner can add value on the investment side of things:
1. Time – If you pay the advisor, then you don’t have to spend the time doing it yourself.
2. Opportunities – A good planner will be aware of opportunities for you to save money, either through lower cost investments, tax strategies, or estate planning, that you would not have known about on your own.
3. Accountability – Too many people panic when the stock market goes down and then they sell (at the worst time). Having a planner gives you someone to talk to and remind you of what you should (and should not) be doing and why. Basically, they can keep you from doing stupid things.
You’ll notice I don’t think any advisor is going to give you “added value” in investment returns (except for the increased return that could be attributed to the items I mentioned above). Unless, of course, they have a crystal ball…
Rick,
My clients are typically involved delegators for whom I act as their ongoing “Financial Quarterback.” They generally do not have the time, inclination, and/ or the expertise to do it themselves. The value added is that someone is looking at their entire financial situation (more than just investments) on a regular basis and helping keep them on track towards their goal(s). They also value a detached, third party perspective. Financial planning, in my opinion, is a process not just a one-time event.
I often start a client relationship with a financial planning review of the client’s situation. This review and the accompanying suggestions might be enough for the client to go forward on their own. Other times they see the value of an ongoing relationship with an advisor.
In my case my fees cover more than just investing, but this full-service approach may not be right for everyone. In many cases one of the many excellent fee-only hourly planners in NAPFA and/or the Garrett network might be the ticket.
To your question about Mike’s book, it is an excellent resource. Whether it is enough of a reference for someone to go out and manage their own investments/finances will vary based on that individual’s expertise and interest in the process.
“When advisors set up a flat fee structure, they have to plan for a higher-than-average amount of time or they could end up losing a lot of money.”
Paul, this may be the case for some, but many will discount that time versus their hourly equivalent because a project is essentially a “bulk purchase” of time.
@Rick Francis: I cannot add any investment value over maintaining lazy portfolio of low cost index funds and or ETFs. My advice won’t increase returns if you already know how to do this. If you don’t, the time it takes me to tell you how to invest, won’t cost much more than a couple of copies of Mikes book (explanations won’t be as detailed, but it only takes a few minutes to explain the important points).
I add value in the planning, usually by answering other questions that relate to investing like saving or spending (amounts, to/from where, and how to), asset allocation, asset location, and insurance (who, what, and how much). Most of my clients are knowledgeable DIY-ers or want or become knowledgeable DIY-ers regarding investing and other areas of personal finance. They hire me to fill in the gaps and/or validate their own conclusions. People that hire me to help them plan their finances find value in balancing over-planning and under-planning. One can cost you unnecessarily now; the other can cost you unnecessarily in the future.
Paul said it well, “a good planner will be aware of opportunities for you to save money.” If I can’t deliver value exceeding my fee, I won’t take the work.
As a registered hourly-only investment adviser in CA working on a ChFC via the American College, I primarily help clients with cash flow analysis and planning using conservative expected returns from asset classes. I try to refer everyone to an advisor for specific investment advice, especially if there’s an existing portfolio of any complexity, e.g., individual stocks, unrealized capital gains, etc.
Unfortunately, most of my clients don’t meet the typical advisor minimums, and like Rick said, even if the advisor will accept a low minimum amount of assets, the fees are often more expensive.
If a DYI definitely wants to set up his or her own portfolio, i.e., doesn’t want to pay AUM fees to an advisor, I recommend a diversified portfolio of ETFs if the person is willing/able to manage rebalancing or recommend a Vanguard target retirement fund if not.
Since I try to avoid offering specific investment advice if possible, you might think there shouldn’t be much work to do, but that’s wrong! People need help organizing their finances, understanding cash flows, making cash flow projections into the future, figuring out how much debt they can afford, how much they need to save for retirement and so on.
I make a distinction between what is essentially bookkeeping, e.g., setting up Quicken/QuickBooks, downloading & categorizing transactions, and what is planning. For bookkeeping tasks I charge a $65 hourly bookkeeping rate, and for planning I charge $125.
I bill conservatively. For example, if I have to start from scratch obtaining 12 months of cash flow data from available downloads (typically limited to 90 days) and manual entry from bank statements, that’s going to be about 8-10 hours at the bookkeeping rate, so a client may pay as much as $650 just to get to the planning stage.
At that point, depending on the scope of the planning, it might be another 4-10 hours at $125, so as much as $1,250 to complete a project.
If you invest a total of $1900 to get a clear view of your financial picture and a plan for meeting your short-term and long-term financial goals, does that seem like too much to pay for the value received?
One way to think of it my case is that clients are paying a $650 premium for being disorganized. However, if that’s what it takes to bring a person from a state of inaction to a solid plan, it seems worth the premium.
Hi- I have recently broken up with a boyfriend who has handled all of my investments for me. He is a CPA and is interested in that type of thing, whereas I am not interested and am in general a very unorganized person. I feel somewhat incapable of taking it over and am considering asking him to still manage it for me for a fee. I am wondering what a fair price to pay him would be? The reasons why I would like him to continue to do it are 1) I know that he is honest 2) He already knows my finances and 3) it is just easier. The amount of money currently in investments is about $100,000.
Hi Kristi.
I tend to think that the most fair, up-front structure is just to agree upon an hourly rate. Find out the hourly rates for other professionals in your area, and go from there.
Here’s a good resource for finding fee-only advisors in your area so that you can compare rates:
http://findanadvisor.napfa.org/
@ Kristi: For your ex to legally accept payment for managing your investments, he’d have to be registered as an investment adviser and follow the appropriate laws. Those laws are designed to protect both of you. Some CPAs are registered, and if he is, he should already have an established compensation structure which is a requirement of registration.
Thanks for the advice Mike and Dylan.
Bleck, paying for fees just doesn’t seem right. There are probably THOUSANDS of personal finance sites out there that can help you with any topic. Why not just use us?
For example, if readers want to know about retiring a multi-millionaire by age 45, just come to Financial Samurai!
FS: Seriously?
Websites/blogs don’t give personal advice. Also, she explicitly stated that she’s “not interested” in the topic. If a person wants to use an advisor, seems to me that the best thing we can do is help them find a good one rather than try to talk them into DIY investing without any background or interest in the topic.
Mike – I’m not commenting in response to Kristi, I’m commenting on the article. But now that I read her comment, I would recommend perhaps finding a new boyfriend. Sorry, but if you have to pay your boyfriend a fee to manage your finances, what’s next?
There is enough out there who, from parents, friends, blogs of official CFP’s to help people make proper financial decisions. But, OF COURSE a good financial planner is worth their weight in gold. A good one may have saved me a boatload of money on certain investments if I had one. But then again, that’s what friends and family are for.
BTW, i provided a link to you in my latest post and asked you a question. Hope you can share your story if you have time.
“I’m not commenting in response to Kristi, I’m commenting on the article. ”
Ah, my mistake. Sorry about that.
FS: “Find a new boyfriend.” Good one, but the reason why I was wondering how much to pay him is because he is my ex boyfriend. He did all of that stuff for free for many years, however now that I have broken up with him I don’t feel that he should still do it for free.
Kristi – Gotcha. Actually, now that he’s your ex-boyfriend, double the reason why he should do your finances for free! He owes you!
Great post! I have learned that I have a passion for helping others with personal finance. At this time I don’t want to become an adivsor, I just want to help others with the basics like organizing thier financial information, pay bills on time, have a plan, make a budget, etc. Any advice on where I should start.