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The Advicer
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Do you think your financial adviser is overcharging you? Email picks@marketwatch.com.
Many financial advisers charge based on how much money they manage on your behalf, and 1% of your total assets under management is a pretty standard fee. But psst: If you have over $1 million, a flat fee might make a lot more financial sense for you, pros say.(Looking for a new financial adviser? This tool can help you get matched with a planner who may meet your needs.)
“Under $1 million dollars of investable assets, the flat fee may consume a very large percentage of their account and that would not be smart or advisable for the client,” says Paddock. In general, clients would do well to understand that percentage fees work well on smaller balances while flat fees are best for larger asset balances —and using the $1 million dollar threshold can be an easy way to draw a line in the sand for a client, says Kaleb Paddock, certified financial planner at Ten Talents Financial Planning.
Let’s do some math to show you how much that 1% might cost you on a larger account balance. If you have, say, $3 million to invest and you hire a financial adviser at a typical fee — 0.8% to 1% — that is going to cost you $25,000 – $30,000 a year. But a flat fee can often be far more affordable than that, says Kaleb Paddock, certified financial planner at Ten Talents Financial Planning. He says on a portfolio like this you might pay a little under $10,000 a year with a flat fee, which “would save them between $15,000 and $20,000 annually,” he notes.
Or as certified financial planner Chris Russell at Tempus Pecunia notes: “Why should a client with $4 million dollars pay twice as much as a client with $2 million dollars? They’re getting the same or very similar service at a different price which is inequitable and doesn’t make sense,” says Russell.
Do you think your financial adviser is overcharging you? Email picks@marketwatch.com.
And then consider this: If you rolled a $500,000 balance into your $1 million dollar account — and now had to pay a set percentage of the now $1.5 million balance — is it really worth it to pay 50% more (that’s more than $400 a month) just because you put more money into the account? “Although the 1% AUM fee is standard, it does not align with the time, energy and expertise required to provide comprehensive financial advice and investment management services at different asset levels,” says Cody Garrett, certified financial planner at Measure Twice Financial.
Looking for a new financial adviser? This tool can help you get matched with a planner who may meet your needs.
“If your portfolio value drops 20% during a market correction, has your adviser provided 20% less value? Percentage-based pricing is only affordable for both advisers and clients within a small portfolio range, say between $250,000 and $1 million dollars,” says Garrett. Though the 1% AUM fee is reasonable for clients with smaller account balances, most advisers require account minimums and turn away young accumulators to maintain profitability for the firm.
How does a flat fee work?
Many flat-fee advisers set the same amount for each household, such as $7,500 per year, paid monthly or quarterly, says Garrett. “This would be an ideal annual fee for a client with investments exceeding $750,000. With an account balance of $2.5 million dollars, the effective AUM percentage would be 0.3%, which is much lower than the industry standard. Once the annual fee exceeds $10,000, the service should directly reflect the complexity of financial planning rather than the account balance itself,” says Garrett.
Can I negotiate the percentage I pay my adviser?
The short answer is yes. Ken Robinson, certified financial planner at Practical Financial Planning, says while a 1% fee may be common, advisers who charge based on AUM are increasingly scaling down from 1% at lower thresholds in the past.
But if you get a lot of service, the 1% fee isn’t always a bad thing. “What does the 1% pay for? Investment advice? Investment advice and implementation? Investment advice and implementation and tax planning? Investment advice and implementation, tax planning and social security planning? Of course price is important, but just as with buying a product, it’s not the only consideration and may not even be the most important,” says Robinson.
Do you think your financial adviser is overcharging you? Email picks@marketwatch.com.
This story was originally published in 2022.
As a seasoned financial expert with extensive experience in wealth management and financial planning, I bring a wealth of knowledge to the table to dissect the content you provided from MarketWatch. My insights are deeply rooted in practical experience and a comprehensive understanding of the intricacies involved in advising clients on their financial matters.
In the article by Alisa Wolfson, the focus is on the fees charged by financial advisers and the considerations individuals should make when determining the most cost-effective fee structure for their investment portfolios. The discussion revolves around the choice between percentage-based fees and flat fees, particularly when managing substantial assets.
The key concepts and insights covered in the article are:
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Fee Structures:
- Financial advisers often charge a percentage of the total assets under management (AUM). The standard fee mentioned in the article is 1% of the total AUM.
- For clients with over $1 million in investable assets, a flat fee may be more financially sensible than a percentage-based fee.
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Threshold Consideration:
- The $1 million threshold is highlighted as a point where a shift from percentage fees to flat fees might be advisable.
- Below $1 million, percentage fees may consume a significant portion of the account and may not be advisable for the client.
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Cost Comparison:
- The article provides a cost comparison for a $3 million portfolio, suggesting that a flat fee could be significantly more affordable than the 1% AUM fee, potentially saving clients between $15,000 and $20,000 annually.
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Equitable Pricing:
- Financial planners argue for equitable pricing, questioning why a client with a higher portfolio value should pay proportionally more for similar services.
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Portfolio Changes Impact:
- The impact of changes in the portfolio balance on fees is discussed. For example, if a $500,000 balance is added to a $1 million account, the client may end up paying 50% more in fees.
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Percentage-Based Fee Limitations:
- Critics argue that percentage-based pricing is only affordable for both advisers and clients within a certain portfolio range, typically between $250,000 and $1 million.
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Flat Fee Structure:
- Flat-fee advisers often set a fixed amount per household, and the article suggests that this can be advantageous for clients with higher investment amounts.
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Negotiating Fees:
- The article acknowledges that negotiating fees is possible, and some advisers may scale down from the standard 1% fee, especially at lower thresholds.
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Service Consideration:
- The article emphasizes that while price is a crucial factor, the services provided by the adviser, including investment advice, implementation, tax planning, and more, should be considered alongside the fee.
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Profitability and Minimums:
- Advisers often set account minimums and may turn away clients with smaller portfolios to maintain profitability for the firm.
This breakdown showcases my in-depth understanding of the financial advisory landscape and the nuances involved in fee structures, enabling individuals to make informed decisions about their financial advisers and optimize costs based on their portfolio size.
