Financial advisors aren’t always the most upfront about how exactly they’re getting paid or what they’re charging for their services. If you’re paying a hefty sum to your financial advisor, don’t you want to know exactly where your hard-earned cash is going?
It’s important to hold your financial advisor accountable, and to accomplish that, you need to understand the fees you pay them.
In most cases, your advisor is compensated by a monthly deduction from your account. This is calculated as a percentage of the account balance. As your account increases, so does your advisor’s compensation. If you lose money, so does your advisor. Fees vary between advisors, so you can’t safely assume that what (and how) you pay for your portfolio with one advisor will be the same with another.
Some advisors also charge additional fees for things like plan maintenance or account set-up. Unscrupulous financial advisors may end up charging you even more as they collect trails from mutual funds and other products.
To protect yourself, you should be sure to request a written summary of your account expenses. Always ask your advisor to lay out in writing the services provided for those fees; and, if they can’t provide you with documentation proving the fees are in line with the market, then the fees are probably unreasonable. An even better solution is to meet with a competitor and get a proposal so that you can compare fees directly. Just like when you’re shopping for insurance, you can get a better idea of the average going rate for particular services by comparing quotes.
Breaking It Down
If your advisor hasn’t provided a schedule of fees or if you just want to verify the numbers on your own, you can still figure out approximately what you’re paying—or, at least, what you should be paying.
Looking at a $1mm portfolio, the typical breakdown of fees with the average financial advisor is going to look something like this:
Funds Fees: $7,500 (0.75%)
Financial Advisor Fees: $10,000 (1.00%)
Total Fees: $17,000 (1.70%)
That’s a huge number, especially if you don’t feel like you are getting much value. But here’s an important point. Your needs are likely different than most other people, which means getting value from your advisor is in the eye of the beholder. Some preparing for retirement want to focus almost entirely on income and expenses and how their assets can generate income. People well into retirement may only care about making sure they don’t run out of money, and couples in their mid-career might be most interested in finding ways to save enough to retire by 70. Each priority has a high value depending on the individual, but the services provided by the advisor are quite different.
What You Pay Matters
You’ve already guessed that whatever you’re spending in fees, whether it’s $17,000 or not, benefits you more in your own pocket—not in someone else’s. But there’s more. The fees you’re paying can adversely affect your portfolio’s growth.
Suppose the example $1mm portfolio is a globally diversified one, with both stocks and bonds. Assuming the account grows at 6% over 10 years or more, then the net growth rate for this portfolio is actually 4.3% once the 1.7% in fees has been factored in. Inflation must then be considered; if it averages around 2% per year, the portfolio has realized only 2.3% growth per year—and that’s assuming that the bond side of the portfolio delivers a meaningful portion of growth. In an ultra-low interest environment, like the current situation, that’s probably over-optimistic. The bottom line? Your portfolio isn’t growing nearly as much as you think it is, which is why paying attention to fees and the services you receive for those fees is so important.
The picture here is crystal clear: you need to know exactly how much you’re paying your advisor. Not only could you be paying too much for the kind of service you’re getting, you might also be jeopardizing your retirement by allowing high fees to erode your portfolio’s growth.