Fees matter. Even though they might seem small and insignificant, like 1.25% of your account value, high investment fees pose a real and present danger to your retirement. When you’re counting on your investment returns to help fund your retirement, you could be in for a harsh surprise when you realize exactly how much you’ve paid in investment management fees and advisor fees, and how these costshave affectedthe growth of your retirement savings.
An equally good question is “What do I get for all of these fees?” The fact is that some financial advisors overcharge, while others under deliver by providing poor or limited services beyond managing your money.
You certainly cannot control the stock market, but you can control how much you pay an advisor and what you get in return. By understanding exactly what you’re paying your financial advisor to do and matching those services to your own retirement planning needs, you can be more confident that you will reach many or even most of your retirement goals. Here are some things to look out for.
How Financial Advisors Overcharge
The majority of financial advisors get paid by charging a percentage of total assets managed. However, there is a wide disparity in the rates that advisors charge—some grossly overcharge.
In 2010, the average advisor fee was 1.32%. Larger clients tend to pay a lower fee. The average fee for clients with $1 million to $2 million in assets was 1.17%, while clients with an average of $5 million or more were only 0.6% on average. Even when taking client size out of the equation, though, there is disparity in fees. For clients with assets between $250,000 and $500,000, some advisors charged a whopping 2.98%, while others in the least-expensive quartile only charged an average of 0.81%.
It’s important to know how much you’re paying your financial advisor and whether it is fair.But it is equally important to understand what’s covered under the fee as well, which leads us to the next section.
How Financial Advisors Under Deliver
Not all financial advisors are alike; in fact, you might say that no two are the same. They all offer different services, charge different fees, get paid in different ways, and recommend differentplanning strategies. And some will simply under deliver by providing poor or limited planning advice.
Our advice is to think through what you need and expect from your financial advisor and match that to the actual services you receive.Do you need someone to help budget for retirement and match that figure up with an after tax income strategy? This is called retirement income planning.Do you want to leave a legacy to your children and need to know how to best make this happen?What can you do to manage health care in retirement?Are you interested in strategies that deliver tax-free income in retirement? Worried about college tuition? Struggling with too much debt? Or do you want to know the best time to take Social Security? Hint: the answer is usually not wait as long as you can or wait until age 70.These are all questions your advisor can and should be addressing for you and doing so pro-actively.Sadly, many advisors either lack the expertise or interest in addressing many of these critical planning topics, and families suffer as a result.
If you believe that you’re being overcharged or not receiving the advice you need to prepare for retirement—or both—then it might be time to break up with your financial advisor.