Liz Weston: Are you paying too much for financial advice?

AP

Print Article

FILE - This April 2017 file photo provided by NerdWallet shows Liz Weston, a columnist for personal finance website NerdWallet.com. (NerdWallet via AP, File)

Investment management can cost as little as 0.25 percent of a portfolio's value each year. Yet many people still pay 1 percent, or even more, for financial advice.

Whether they're getting a good deal depends on exactly what they get in exchange. Spoiler alert: Many should be getting a lot more, or paying a lot less.

Financial advice can encompass a lot of different services, which fall primarily into two camps:

—Investment management, which includes picking the right mix of stocks, bonds and cash.

—Financial planning, which can include everything from budgeting advice to estate planning.

Comprehensive financial planners have traditionally supplied both investment management and planning services, often charging a percentage of the clients' assets that they manage. A recent survey of nearly 1,000 financial planners by Inside Information, a trade publication, found that the bigger the portfolio, the lower the percentage clients paid. The median annual charge was 1 percent for portfolios of $1 million or less, sliding to 0.5 percent for portfolios of $5 million to $10 million. The survey focused on independent advisers who typically charge fees, rather than brokers or insurance agents who are often paid by commissions.

ROBO-ADVISERS ARE CHEAPER BUT HAVE LIMITS

The investment management part of the equation is what's getting squeezed by robo-advisers , which are automated services that invest according to computer algorithms.

These digital advisers, which include startups Betterment and Wealthfront as well as offerings from Vanguard, Fidelity and Schwab, usually charge about 0.25 percent of the portfolio's value. Some services combine automated investing with access to financial planners. Vanguard Personal Advisor Services, for example, charges 0.3 percent for investment management plus phone access to a human adviser, while Betterment's similar premium service charges 0.4 percent.

Being able to ask questions isn't the same thing as getting full-on financial planning, however.

A comprehensive planner typically interviews clients to discover their financial goals, how much they owe and own (their balance statement), how much they earn and spend (their cash flow) and what needs to be tweaked to increase the odds of success. Comprehensive planners look at multiple areas of their clients' lives, including insurance, taxes, retirement, college savings, employee benefits and estate planning.

If that's what you're getting for your 1 percent, you're getting a pretty good deal — particularly if the adviser is checking in regularly and helping you handle new problems that pop up.

If all you're getting is investment management, though, you're probably paying too much.

DOES YOUR ADVISER EARN HIS OR HER KEEP?

Bob Veres, the Inside Information publisher who conducted the survey and who has tracked the financial planning industry for decades, says any adviser who "merely" provides a well-allocated portfolio and periodic statements is overcharging at anything more than 0.5 percent. On the other hand, anyone who provides full-service financial planning for less than 1 percent of assets under management is underpaid, he says.

Most advisers handling portfolios worth less than $1 million charge between 1 percent and 2 percent of assets under management, Veres found. That may be a reasonable amount, if clients are getting plenty of financial planning services. But some charge more than 2 percent, and a handful charge in excess of 4 percent. It's hard to imagine what might justify those costs.

Advice fees are in addition to whatever the clients pay for the underlying investments, and those investment costs can vary enormously as well. Some exchange-traded funds and index funds charge less than 0.2 percent, while variable annuities can cost 2 percent or more. Costs matter, because they erode how much money a client can accumulate over time.

WHEN YOU DON'T HAVE A 'PORTFOLIO'

Even when fees are reasonable, they may not be affordable.

Comprehensive financial planners who charge a percentage of assets under management often require clients to have six- or even seven-figure portfolios. Those who have retainer or planning fees may charge thousands of dollars a year.

If you're not rich or you're just starting out, consider using an automated approach for your investing — either a robo-adviser or a low-cost target date retirement fund that makes the investment decisions for you. When you need real financial planning help, such as deciding how to tap your savings in retirement or which insurance policy to buy, hire a fee-only financial planner who charges by the hour. The advice won't be cheap — figure on $150 an hour or so — but it may be the best deal you can get.

___________________________________________________

This column was provided to The Associated Press by the personal finance website NerdWallet.

Liz Weston is a columnist at NerdWallet, a certified financial planner and author of "Your Credit Score." Email: lweston@nerdwallet.com. Twitter: @lizweston.

RELATED LINKS:

NerdWallet: What's a robo-adviser?

https://nerd.me/robo-adviser

Print Article

Read More Stocks & Finance

Recalls this week: crib and toddler bed mattresses, tractors

AP

December 15, 2017 at 1:19 pm | More than 20,000 crib and toddler bed mattresses are being recalled this week because they fail to meet flammability standards. Other recalled consumer products include benches and utility tractors. ...

Comments

Read More

California sues over Corinthian student debt relief claims

AP

December 14, 2017 at 2:19 pm | SACRAMENTO, Calif. (AP) — The federal Department of Education is refusing to process debt relief claims from tens of thousands of students who had federal loans to attend Corinthian Colleges, Califor...

Comments

Read More

US 30-year, fixed-rate mortgage rate slips to 3.93 percent

AP

December 14, 2017 at 9:35 am | WASHINGTON (AP) — The rate on 30-year fixed-rate U.S. mortgages slipped to 3.93 percent this week. Mortgage buyer Freddie Mac said Thursday that the benchmark 30-year home loan rate was down from...

Comments

Read More

Splurged on an expensive gift? Don't forget to insure it

AP

December 14, 2017 at 9:16 am | Insurance might be the least exciting thing about surprising your loved one with a valuable gift this holiday — but don't let it fall off your priority list. "Don't sacrifice preparedness for the...

Comments

Read More

Contact Us

(406) 755-7000
727 East Idaho
Kalispell, MT 59901

©2017 Daily Inter Lake Terms of Use Privacy Policy
X
X