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Professional Financial Advice: How Much Should Investors Pay?

I recently had email discussions with two different financial advisors regarding how much investors should be willing to pay for financial advice.

  • The first advisor asserted that an annual fee of 1-1.5% is justified because advisors are likely to improve their clients’ investment results by at least that much by helping them build better portfolios and avoid mistakes.
  • The second advisor argued that, based on simple economics, if customers are willing to pay a given fee, that means that his services are worth that amount of money. (In other words, if the market will support a given fee level, it’s justified by definition.)

Those arguments might make sense from the perspective of an advisor trying to set his/her fees. But from the perspective of the investor, the answer is more obvious: Why pay any more than you have to?

The Do-Everything Advisor

Many financial advisors charge annual fees of 1% (or more) of your portfolio balance per year. In exchange, they provide portfolio management services as well as ongoing financial planning advice.

Such an arrangement can make sense if you need both services. Otherwise, it’s often less expensive to break the services out and pay for them separately.

Help Building a Portfolio

If all you need is help with putting together a portfolio, it’s hard to beat Vanguard’s financial planning service. If you have more than $500,000 in assets with Vanguard, the service is free once per year. If you have $50,000-$500,000, it costs just $250.

If you have less than $50,000, it costs $1,000. At that level, I think that most people who don’t want to build a portfolio on their own would probably be better off just using a simple all-in-one fund rather than paying the $1,000 fee.

Hands-Off Portfolio Management

If you don’t need comprehensive financial planning, but you’re looking for a professional to handle the actual management of your portfolio for you (e.g., rebalancing and tax-loss harvesting as necessary), you’ll want to find somebody who offers exactly that service, without charging you for services you don’t need.

For investors with $500,000 or more, I’m not aware of any lower-cost providers than Rick Ferri’s firm Portfolio Solutions, which charges 0.25-0.5% per year depending on account size.

For investors with $100,000-$500,000, Betterment could be a good choice, charging 0.15% per year for their service. (My understanding, however, is that they do not tax-loss harvest, so their service may make less sense for investors who have a significant portion of their portfolio in taxable accounts.)

For most investors desiring a hands-off solution who have portfolios of less than $100,000, my suggestion would again be a simple low-cost all-in-one fund rather than professional portfolio management.

As-Needed Financial Planning

If you’re seeking help with tax planning, estate planning, or retirement planning, but you don’t really desire assistance with the day-to-day management of your portfolio, the least expensive option will typically be to find a professional who provides advice on an hourly or fee-for-project basis. That way you will only be paying for the advice you need, and you’ll only be paying for it in years that you need it. (For example, you probably don’t need to do a thorough estate planning session every single year.)

One good place to look for such professionals is the Garrett Planning Network.

In short, depending on the circumstances, the typical 1-1.5% annual advisor fee may be justified, or it could be a very poor value. When seeking the services of a financial professional, the best way to get a good value for your money is often to determine what service(s) you need, pay a reasonable price for those services, and not pay for any services you won’t need.

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Comments

  1. Paul Williams says:

    Good coverage of the options, Mike! I would add that there are lower cost portfolio managers than Rick Ferri, but I’m sure he does a fine job as well. Unfortunately, I can’t think of the name of the company that I know of with lower fees than Rick’s. Perhaps someone else will know.

  2. Awesome post!

  3. Thanks for doing a thorough job, as usual, summarizing the best value options, Mike!
    I printed a hardcopy for my wife, in case anything happens to me.

    An old friend of mine was fortunate enough to inherit a trust fund of Blue-Chip funds managed by Vanguard [think: Windsor, Wellington, etc.]. A much wealthier relative of theirs sent over his “wealth management” salesman to see if he could “help” [I won’t name the company but they cater to really wealthy folks and have a two first names, like “Jesse James”].

    “Helpful” suggestion number One: Sell everything in their IRA and trust [taxable] fund and give it to “J-J” to manage. Costs: really huge tax bill, MUCH higher cost boutique mutual funds with loads and expense ratios more than TEN times the cost of the Vanguard funds already owned, and last but not least “Assets Under Management” fee of One Percent per QUARTER[!]

    The salesman was glib, dripping with flattery, extremely well dressed, and sent my friend multiple messages and small “gifts”. After a bunch of the usual [“You don’t want to ‘settle’ for average, do you?”] he made his foot-in-the door sale of a small single premium immediate annuity. My friend, who has lived modestly for years on income only, never touching the principle, even during the recent market break, does not need an annuity, and further, was convinced that the annuity was “earning” 6%, even after I explained how annuities work.

    This should really be called wealth manglement!

    After all the fees are deducted by a firm like this they have to steer you into much more risky investments just to overcome the huge drag of the overhead.

    As John Bogle likes to say, in Investing you get what you don’t [over] pay for.

    Happy Postscript: My friend calls me every month or so to tell me that another one of her well-off friends or family have fired their broker and moved everything to Vanguard.

  4. Great article. As Bogle has always said, in investing, you most often get what you DON’T pay for. Having said that, good advice is invaluable but, for passive advisors, the cost of their advice shouldn’t be wrapped into their AUM fee.

    Also, for what it’s worth, there are a number of less expensive options than Rick Ferri/Portolio Solutions for investors with more than $500,000 to invest. Evanson Asset Management (flat fee), Flat Fee Portfolios ($199/mo), Purpose Wealth (25 bps capped at $6,000 I think), and Chesme Capital Management (flat fee currently capped at $2,000) all come to mind. Importantly, these other less costly options also make better use of DFA’s offerings and, in some cases, appear to offer a more robust planning process – two very important consideration for investors with long-term investment time horizons.

  5. Paul Williams says:

    Ah, yes, Evanson was the one I was trying to think of. Thanks for sharing your other suggestions, too, Mike (from investingandretirementinfo.com)!

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