question: If a financial planner deducts 1% from a person’s highest annual investment in a company, and not only does the client not receive a profit, but actually loses a lot of money, then the financial planner will have to pay elsewhere. Is it time to go?
answer: While 1% of assets under management is a fairly standard fee in the industry, it’s not always worth paying. Besides, it’s frustrating to pay it when you’re losing money. First, let’s consider when 1% is valuable and when it isn’t. So what happens if you suffer a loss? And finally, whether or not to hire a new advisor — This tool from SmartAsset helps match you with an advisor who meets your needs. — If you suffer a loss.
Is it worth paying a 1% fee to a financial advisor even if you lose money?
First, know that investment management typically charges a maximum fee of 1% on the first $1 million, and is typically decoupled from investment performance. “The price of a new BMW sedan is likely to be much higher than a Toyota sedan, but that doesn’t mean you should expect BMW to have fewer accidents or cheaper repairs than Toyota. With BMW, you get a luxury car that will eventually need repairs, and you get a relationship for a 1% fee, but there’s no performance guarantee.” , explains Patrick Whalen, a certified financial planner with Whalen Financial Planning.
Having a problem with your financial advisor or looking for a new one? Email picks@marketwatch.com.
Without a doubt, 1% adds up and hurts, especially if your portfolio goes down. The first thing to consider is what you’re getting for 1%, explains Eric Presonia, a certified financial planner with One Up Financial. “If it’s just investment management and you’ve been losing money for several years even though the market is going up, that’s a red flag,” Presonia says.
If the 1% fee includes financial planning, retirement planning, behavioral coaching, and a host of other financial services in addition to investment management, you should also consider the value of those services, Presonia says. . “There is value in holding on to customers in a 25% down market and preventing them from selling for cash. Quantifying that value with an investment statement that shows large short-term unrealized losses is It’s difficult,” he says.
In fact, if you’re only looking at a short period of time, such as the 2022 calendar year, when stocks and bonds declined significantly, the losses are likely a result of the poor market conditions that most people have endured. For reference, the S&P 500 fell about 19% in 2022, but if your losses were much higher and your portfolio consists primarily of these stocks, it might be time to get a second opinion. yeah.
A loss by itself is not necessarily a good reason to move on to a new financial planner, unless the loss is a symptom of a larger problem. “I think your financial planner’s biggest mistake was not setting the right expectations, or perhaps putting you in a more aggressive portfolio than you were actually comfortable with.” says Whalen.
This raises the following questions: Is your communication with your advisor at the right level? Does he think 1% is fair even in a down market? Do you understand your advisor’s strategy? If you answered “no” to these questions, It may be time to move on to someone else. This tool helps match you with an advisor who meets your needs.
Advisors don’t usually beat the market by a lot, and there are always down years, so some people may never feel like 1% is enough value. If your advisor creates a comprehensive, holistic financial plan and helps you address tax planning, estate planning, budgeting, wealth management, and more, even paying just 1% is worth the service. maybe. If you already know a lot about these topics and personally want to take a more practical approach to investing, he may not need to pay someone a 1% fee for something he can accomplish himself. not.
How to find a new financial advisor
You may want to look for a qualified advisor, such as a CFP or CFA, who has undergone extensive coursework and training and acts as a fiduciary with the client’s best interests at heart. Consider working with a fee-only advisor who only receives payments from clients and does not receive commissions based on products sold or recommended. When hiring an advisor, refer to this MarketWatch Picks guide to ask the right questions and fully vet potential advisors.
Having a problem with your financial advisor or looking for a new one? Email picks@marketwatch.com.