Your financial planner gets paid even if your account loses value, what a deal!
In the past, financial planners, stock brokers and financial advisors used assets under management as a revenue source. It works this way: the client has $500,000 invested with the advisor and even though some of the assets may have been acquired with some level of load (sales charge) the advisor charges a percentage of the account annually. The annual percentage can vary and over the years has shown a decrease but generally between 1% and 2% is still the norm. That translates to a range in our example of between $5,000 and $10,000 a year in fees being subtracted from the account owner’s funds.
Is that fair? I suppose it is, but it would depend on what the assets were invested in and what benefits or services are being provided. In some accounts, a mutual fund could have been selected as an investment choice; mutual funds contain some level of fee. Add that fee to any assets under the management fee, and it adds up. According to Morningstar (a research firm dealing with financial information), the average mutual fund in America has fees of 1.28% (not including sales charges). Add that to any assets under management fee, and it can become a huge drain on future account values.
Deciding whether to “hire” a professional advisor is strictly dependent on what your goals are and at what level of involvement you wish to be. If you are satisfied with your account performance and expenses, then it is a wise choice.
With the introduction of new ways to manage money such as ROBO advisors which are only computers running algorithms, the need for fees can become an important question. Does your advisor know more than the computer? Does your advisor offer you more services, services that are important to you? Once again, it all depends.
If you decide to continue with an advisor who is charging you fees for your assets, questions should be asked, and answers should be considered.
Value: Is your advisor providing you “real” value for the money? There was a time when financial information was difficult to find and understand, now with access to the internet, that information is always available. Consider the information you are obtaining from your advisor and is it worth it. Could you do it yourself? If you reduce your expenses by just 1% a year, think about how much that will be in the future, and make sure you are getting your money’s worth.
Fairness: Suppose you have accumulated funds for retirement by buying and selling assets, now you are entering a time when less volatility is more important. Do you still have to pay the advisor now that you have evolved to a buy-and-hold strategy? What recommendations is the advisor making to you at this stage of your life? Why would you continue to pay the fee for asset management when there is nothing left to manage?
Conflict Recommendations: Your advisor suggests you reposition an asset and by doing so it would create a revenue stream for the advisor. How do you deal with the conflict of interest? How do you know the recommendation is genuine and not an invasion of an intellectual recommendation? Where is the line drawn? When does advice mean advice? How do you know that a recommendation is in your best interest?
Fear of Changes: With the internet, more and more information becomes available. As an example, you can easily find what a low range or a high range of Assets Under Management fees should be. What would you say to your advisor to have him/her lower the fees? Remember, their costs are not declining but in general fees for the managed asset are. Has your advisor suggested a new fee structure that would benefit you? Has the advisor indicated that the fees are now too large and should be lowered?
The Future: Sadly the future is delivering to us a model that will have less and less human interaction. Recently Charles Schwab introduced a next-generation ROBO advisor that they state will substantially lower fees and expenses. Their model will be able to manage any amount of money for anyone at any level simply by understanding your financial situation, your timeline, and your goals. How does that compare to your current situation?
One possibility is to decide to invest in the entirety of the stock market; these are called Indexed Funds. There are numerous choices, and by doing so you are not relying on your broker or his/her advice, you are merely buying the average of the entirety of the market. Does that make sense? Once again it all depends; it depends on your goals and your situation.
My advice? Do a complete evaluation of your invested assets. Next, find out what your entire fee and expense situation is. Compare your assets with your personal timeline and measure that to your desired goals. Sound simple? It does sound simple, but in reality, it is not. It takes time, and it takes insight into your goals. One possible solution is to hire for a few hours a “fee-only” financial advisor who can help you with the right questions and the right direction. Once a plan is made, he would not earn any commission, and you can invest yourself without anion charging you for an asset under management fee. For help finding a financial advisor, visit the National Association of Personal Financial Advisors website.
The important question to ask is this: Are you a fee-based advisor or are you a fee-only advisor? Remember a fee-only advisor charges only for their time.
As a disclosure to all who read this, I am not licensed to sell any form of security; I only deal in fixed-interest annuities.
