question: I am 63 years old and semi-retired. I collect Social Security and a pension, have $1.2 million in investments, and $1.2 million in equity in my home. I currently have a fiduciary financial manager who manages my portfolio for a certain percentage of my accounts. I’m happy with the manager, but I don’t like the cost. How do I find a manager for a paid service? Will this help resolve the issue?
answer: Congratulations on being semi-retired and having a nice savings. And the very short answer is that you’ll probably pay less for your advisor. (Looking for a financial advisor? This free tool matches you with fiduciary financial advisors who may meet your needs).
To help you get an idea of what costs look like under different models, here are some of the most common payment methods for advisors and typical fees under each contract.
- Percentage of assets under management: Typical fees are approximately 1% of assets under management.
- Flat rate: Typical rates range from $2,500 to $10,000
- Hourly: Typical rates range from $150 to $500 per hour
- One-time planning engagement: Typical price is $4,000 to $5,000
Note that if you have more than $1 million in investments, it may make more sense not to use the AUM structure. In general, percentage fees are suitable for small balances, while fixed fees are best for large asset balances. To see how the calculations are done, this MarketWatch Picks article focuses on AUM and flat fee arrangements.
If you have a small amount of assets, the AUM schedule is more cost-effective than paying a flat fee because you only pay about 1% of the small amount. If you have more than $1 million in assets, a fixed-fee arrangement may be advantageous because it essentially caps the amount you pay your advisor, regardless of how much money you have in your portfolio. If you don’t need ongoing advice but have specific questions or simply need to create a financial plan, hourly engagement is the most economical choice. However, if you find yourself needing handholding on an ongoing basis, the hourly rate can add up significantly and far exceed what you would pay for an AUM or flat rate planner. (Looking for a financial advisor? This free tool matches you with fiduciary financial advisors who may meet your needs).
That being said, there are things to consider when moving away from the AUM model. A purely fee-based advisor who works on an hourly basis may have a harder time understanding you than an advisor with an established practice with a steady income stream. Moving away from an AUM relationship may also make your advisor less likely to encourage you to invest, since he or she will not be able to profit from the amount you invest. If you have an AUM relationship, your advisor typically receives a fee from your investments, but with a flat-fee arrangement, you have to pay the money up front yourself.
Another thing to consider is the value of the behavioral guidance an advisor brings, such as giving you confidence in a bad market, says Mark Struthers, a certified financial planner (CFP) with Sona Wealth Advisors. “If you choose hourly pricing, also known as pay-as-you-go, you’re only paying for what you use, but you’re not being proactive, which can have negative outcomes for your clients,” says Struthers. .
Another option? “If you have $500,000 or more, you can pay Vanguard 0.3% of your assets for access to a CFP that will be your fiduciary and hold your significant financial planning designation,” says TGS Financia’s CFP says Jim Hemphill. “This advisor is on the young and inexperienced side, but that’s the absolute entry-level cost of an ongoing relationship with a CFP that doesn’t sell anything. The portfolio will be primarily managed by yourself. “And you need to understand that your advisor will not try to convince you not to make investment mistakes, whether you buy at the top, chase performance, or sell at the bottom.”
Similarly, Struthers said: “If you don’t need a lot of financial planning, you might consider a robo-advisor company like Betterment. They have a CFP in their call center who might be able to help.”
Also note that while there is no perfect fee schedule, the AUM model may work for some people. “It puts you on the same side as your advisor. You’ll do well, and they’ll do well,” Struthers says. “However, many advisors and robo-advisors charge high fees for what they get. 1% to 1.5% is not outrageous if the advisor does careful financial and tax planning The problem is that many advisors do very little financial planning because financial and tax planning is very labor intensive and not scalable. Investment management, even with customized portfolios, is highly scalable. There is a gender.”
Be careful to choose an advisor who is not only cheap but also good. “You can find a lower cost person, and you may be able to find a lower cost person who holds a CFP designation and works by the hour, but professionals are trained and You have to understand that you’re not trying to get a license and cover the costs of starting a practice because you won’t be able to maintain your professional income and lifestyle,” Hemphill says.
Ultimately, if you want to pay less, you could potentially be paying less in the form of “less experienced advisors, people who are in the early stages of establishing their advisory practice, and who are willing to discount their fees to attract clients.” , he says. Hemphill.
You can find advisors who work for an hourly rate, flat fee, or annual fee on the National Association of Personal Financial Advisors website or at XYPlanningNetwork.com. “But be sure to be clear about your advisor’s service model and what is and isn’t included. It’s unlikely that an hourly advisor will manage your investments for you, so you need to be comfortable doing it yourself.” ,” says her CFP, Cristina Guglielmetti, of Future Perfect Planning.
Regardless of which payment model you choose, consider asking your prospective advisor these eight questions to gain a solid understanding of the services they provide and your future relationship.
