Ask an Advisor: My Advisor Charges a 2% Fee But He Doesn't Provide Tax Advice. My Portfolio is Currently Worth Around $850k. Am I Paying Too Much? (2024)

Ask an Advisor: My Advisor Charges a 2% Fee But He Doesn't Provide Tax Advice. My Portfolio is Currently Worth Around $850k. Am I Paying Too Much? (1)

My advisor charges a 2% fee for financial advice. He does not provide tax advice. My portfolio is currently worth around $850,000. Does this fee sound appropriate?

– Tim

Without knowing the full scope of services delivered by the advisor, 2% may be too expensive for a portfolio of your size and for a relationship in which tax advice is not provided. This immediate, high-level evaluation is based on benchmarks for typical advisory fees, which we’ll dive into shortly. To fully assess the suitability of any financial advisor’s fee, you’ll have to consider several important criteria: the advisor’s fiduciary status, how the advisor is compensated, as well as the level of customization and complexity that your situation requires. There are, of course, other criteria to look at when evaluating advisor fees, but these three tend to be the major drivers.

If you’re looking to work with a financial advisor, SmartAsset’s matching tool can help you connect with up to three who serve your area.

Understand a Financial Advisor’s Fiduciary Status

One of the first questions you should ask a prospective advisor – regardless of how important fees are to you – is whether he or she acts as a fiduciary. A meaningful difference exists among fiduciary financial advisors, financial planners, and brokers or other sales representatives. Financial advisors who act as fiduciaries are held to a legal standard requiring them to act exclusively in the client’s best interest. A financial planner might offer the same comprehensive planning services as a fiduciary advisor, but they might not legally act as a fiduciary. And while broker-dealers also must act in clients’ best interests, they’re not held to the fiduciary standard.

While somewhat subtle on the surface, these distinctions can significantly impact your experience working with an advisor, the fees you pay and the appropriateness of those fees. These differences can be further muddied by unclear job titles – for example, a stockbroker might have the word “advisor” in his or her title. It is therefore always best to ask during the interview process whether the individual acts as a fiduciary.

Fiduciary advice and services do not necessarily cost more; however, theycancost more in my opinion, largely because the financial professionals providing the advice are held to the highest possible standard. The idea is that clients should have a clear understanding of what they are paying for and if the financial professional they are working with has the necessary qualifications and experience to provide the advice they are seeking

You can also look at other resources such as personal certifications and firm registrations. Certified financial planner (CFP®) professionals and registered investment advisors (RIAs) are two common indicators that an individual and firm are held to a fiduciary standard. (And if you need help finding a fiduciary advisor, this free matching tool can help you.)

Review How the Advisor Is Compensated

Ask an Advisor: My Advisor Charges a 2% Fee But He Doesn't Provide Tax Advice. My Portfolio is Currently Worth Around $850k. Am I Paying Too Much? (2)

Advisors can be compensated in many ways. Some charge a fixed-dollar fee while others charge a percentage fee based on assets under management (AUM), as seems to be the case in this situation. Still, some advisors can receive compensation beyond these arrangements: commissions from selling investment and insurance products are one common example.

According to AdvisoryHQ, average advisory fees range from 0.59% to 1.18%, depending on assets under management. Higher percentage-based fees are generally associated with smaller portfolios, and vice versa. For an $850,000 portfolio, this data indicates an average fee of a little more than 1%. However, this does not account for commissions or other revenue sources that your advisor has, which could further increase your fees.

Additionally, these ranges do not factor in fees for underlying investments, which are generally not paid to the advisor unless the advisor manages in-house investment products in your portfolio. For example, if an advisor allocates assets to various third-party investment products when building a portfolio, the fees you’ll pay to own those products will go to the third-party asset managers.

Underlying investment fees depend on the types of strategies and fund structures included in your portfolio. So, if an advisor charges 1% for their advisory fee and your portfolio comprises various funds that each charge a 1% expense ratio, it’s plausible that you might be paying 2% in advisory and investment fees.

This can be confusing, so it’s important to understand whether your advisor is quoting an all-in fee. If so, ask whether they’re receiving all of that fee or only the portion that is not related to the underlying investments in your portfolio. (Keep in mind that many financial advisors can provide comprehensive financial planning and not just portfolio management.)

Assess the Complexity of Your Advisory Relationship

Based on the advisory fee data presented in the previous section, 2% might seem high, especially if it doesn’t include the underlying investment fees that go to third-party asset managers. After evaluating an advisor’s fiduciary status and how they’re compensated, you’ll want to consider the level of complexity and customization required for your situation.

High-touch, customized and complex financial advice will likely (or at least should) be more expensive than generic, off-the-shelf services. For example, working with an advisor who is always on call and builds a comprehensive financial plan and investment portfolio tailored to your unique goals should increase costs. Incorporating complex planning elements such as trusts or private foundations might up the expense further.

On the other hand, large asset managers offering advisory services might charge low fees, but not offer financial planning services. They also might build portfolios using internally managed funds, which allows them to generate additional revenue to offset the low advisory fee. This introduces potential conflicts of interest. Similarly, advisors who only manage investments and do not offer robust financial planning advice should cost less. (Whether you want some extra help handling your investments or need a holistic plan for managing your wealth, consider working with a financial advisor.)

Next Steps

Ask an Advisor: My Advisor Charges a 2% Fee But He Doesn't Provide Tax Advice. My Portfolio is Currently Worth Around $850k. Am I Paying Too Much? (3)

Fees matter a lot and should remain a key evaluation item when selecting a financial advisor. Benchmarking prospective advisor’s fees relative to industry averages – taken in the context of fiduciary status, what goes into those fees and the complexity of your financial needs – is an important exercise that can help you understand each advisor’s proposed fee.

If you still have concerns after comparing your fees to benchmarks, it’s entirely appropriate to ask your advisor to have a transparent conversation aimed at better understanding his or her fees. You could politely frame the conversation as an opportunity to learn more about how the scope of their services – including financial planning and investment advice – informs the advisor’s fee schedule.

Fees only represent one part of the decision, however. The best advisor for you ultimately depends on what you are looking for in a relationship and how you rank priorities. If paying the lowest fee is your top priority, then that should drive your decision. But understand what a low fee could mean in terms of service, interest alignment and customization. If you prioritize other aspects of the relationship above cost, then those elements of a partnership might help you get comfortable with a higher fee. (And if you need help finding a new advisor, consider matching with one for free.)

Tips for Finding a Financial Advisor

  • As you do your due diligence on financial advisors, it’s important to speak with several different professionals and ask about various elements of their business, including what services they offer, how much they charge for those services, as well as their fee structure. Here’s a look at the 10 questions you’ll want to ask an advisor you’re thinking about hiring.
  • Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

JeremySuschak, CFP®,is a SmartAsset financial planning columnist who answers reader questions on personal finance topics. Got a question you’d like answered? EmailAskAnAdvisor@smartasset.comand your question may be answered in a future column.

Jeremyis a financial advisor and head of business development at DBR & CO. He has been compensated for this article. Additional resources from the author can be found atdbroot.com.

Please note that Jeremy is not a participant in the SmartAdvisor Match platform, and he has been compensated for this article.Some reader-submitted questions are edited for clarity or brevity.

Photo credit: ©iStock.com/kate_sept2004, ©iStock.com/

Ask an Advisor: My Advisor Charges a 2% Fee But He Doesn't Provide Tax Advice. My Portfolio is Currently Worth Around $850k. Am I Paying Too Much? (2024)

FAQs

Is 2% fee high for a financial advisor? ›

Most of my research has shown people saying about 1% is normal. Answer: From a regulatory perspective, it's usually prohibited to ever charge more than 2%, so it's common to see fees range from as low as 0.25% all the way up to 2%, says certified financial planner Taylor Jessee at Impact Financial.

What is a reasonable advisor fee? ›

Most financial advisors charge based on how much money they manage for you. That fee can range from 0.25% to 1% per year.

What percentage should a financial advisor take? ›

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.

Can you negotiate financial advisor fees? ›

Another way to pay less is to negotiate a financial advisor's fee. Be prepared to explain why you feel it is too high and why it makes sense for the advisor to take you on as a client for less than what their firm normally charges.

Is 1% fee for financial advisor too much? ›

But, if you're already working with an advisor, the simplest way to determine whether a 1% fee is reasonable may be to look at what they've helped you accomplish. For example, if they've consistently helped you to earn a 12% return in your portfolio for five years running, then 1% may be a bargain.

Should you put all your money with one financial advisor? ›

Having multiple cooks in the kitchen, so to speak, could also be problematic if your advisors take different approaches to tax management. A single advisor may be better positioned to review your entire financial picture and come up with strategies for minimizing your tax liability.

Should I use a financial advisor or do it myself? ›

Those who use financial advisors typically get higher returns and more integrated planning, including tax management, retirement planning and estate planning. Self-investors, on the other hand, save on advisor fees and get the self-satisfaction of learning about investing and making their own decisions.

What does Charles Schwab charge for a financial advisor? ›

Schwab and CSIM are subsidiaries of The Charles Schwab Corporation. There is no advisory fee or commissions charged for Schwab Intelligent Portfolios.

What is the best financial advisor company? ›

You have money questions.
  • Top financial advisor firms.
  • Vanguard.
  • Charles Schwab.
  • Fidelity Investments.
  • Facet.
  • J.P. Morgan Private Client Advisor.
  • Edward Jones.
  • Alternative option: Robo-advisors.

What is the 80 20 rule for financial advisors? ›

The 80/20 rule retirement emphasizes the importance of focusing on actions that yield the most significant results. When planning for retirement, concentrate on the 20% of your efforts that will have the greatest impact on your financial future.

What is the average rate of return with a financial advisor? ›

Industry studies estimate that professional financial advice can add up to 5.1% to portfolio returns over the long term, depending on the time period and how returns are calculated. Good advisors will work with you to create a personalized investment plan and identify opportunities to help grow and protect your assets.

Do financial advisors beat the market? ›

But even the best financial advisors are at the whim of the market. Most professional investors who try to beat the market actually underperform it over a given time period. And those who do manage to outperform the market over one time period can rarely outperform it again over the subsequent time period.

What is the average portfolio management fee? ›

‍Advisor (Management) Fees

The industry typically refers to this as an investment management fee and averages between 1-2% of assets (i.e. A $100,000 investment could cost you between $1,000 - $2,000 annually).

How much does Fidelity charge for financial advisors? ›

Investments of $500,000 or more range from advisory fees of 0.5% to 1.5% per year. All accounts include access to a phone-based team of advisors, or a dedicated advisor for investments of $500,000 or more. Separately Managed Accounts – The minimum investment amount is $100,000. Advisory fees range from 0.2% to 1.5%.

Is Edward Jones a fiduciary? ›

Edward Jones serves as an investment advice fiduciary at the plan level and provides educational services at both the plan and participant levels, if applicable.

Is it better to have one financial advisor or two? ›

Key Takeaways. The main reason to find more than one financial advisor is if your current financial advisor is not meeting all of your needs. Your additional financial advisor should fill in the gaps of your current financial advisor.

How much should I pay in investment fees? ›

For portfolios with a $100,000 value, a 1% annual fee can reduce that value by as much as $30,000. “The average investor pays from approximately 1.5% to 2% annually,” says Stuart Boxenbaum, CFP®, investment advisor and president of Statewide Financial Group. “So the math is pretty simple.

What is the average return from a financial advisor? ›

Estimates on the return on investment from having a financial advisor vary. In a 2019 whitepaper, Vanguard assessed an “Advisor's Alpha,” or the value that a financial advisor adds to a client's portfolio, to be about a 3% net return per year, depending on a client's circ*mstances and investments.

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