Question: I have $1.7 million invested with our financial adviser who I really like, but I’m wondering why we’re paying so many fees on our accounts. Is there a way for us to have similar investments but pay less fees? It looks like January fees are about $1,300, which is about $15,000 a year. I asked my adviser about the various fees I see attributed to my account, which for January include: $202.88 for an asset-based management fee, $102.69 for an asset-based management fee, $387.22 listed as a wrap fee, $324.73 for an asset-based management fee and $305.49 for an asset-based management fee.
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Here was my adviser’s response: “Your asset management fee is 1% and it is billed monthly, meaning that the value on the 15th of the month is multiplied by 1% and then divided by 12 to get the fee for the month. My clients with $500,000 or less in assets pay 1.25%, and 1% in the $500,000 to $5 million asset level (unless there are extenuating circumstances with complexity, but that is not the case for you) and at $5 million and up it goes to 0.75%. I have to charge you a similar fee to what I charge my other clients with a similar situation and the fee that I charge is below the industry average, which is between 1.25% and 1.5%. There is no way to reduce that fee unless you want to move to a brokerage company like E-Trade or Vanguard where you manage the assets yourself and just pay them a small fee per trade.”
Does this seem legitimate? How should I handle this situation?
Answer: You’re not wrong to feel like $15,000 per year is a lot of money, but pros say at a high level your adviser’s fees seem reasonable. “They billed it in a strange way, but the math works out; $15,000 per year is 1% of $1.5 million,” says Robert Persichitte, a certified financial planner (CFP) at Delagify. “It looks like you got what you signed up for, and they probably use billing software that bills a separate line item for each tier.”
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That said, whether 1% is fair or not really depends on what kind of service you get for it,” says Persichitte. “If they just set your asset allocations, 1% is highway robbery. If they are doing in-depth financial and tax planning, loss harvesting and stock analysis, it’s probably a good deal.”
It’s also not unusual for firms to offer tiered pricing. Under a tiered fee structure, firms or individual advisers charge a predetermined percentage at different monetary increments, such as 1.75% on $250,000, 1.50% on $750,000 and 1.25% on $1 million or more. This can be beneficial for investors with larger account balances as they’ll pay a smaller percentage of AUM even though they have bigger portfolios.
So what exactly are all the fees you’re getting charged? Asset-based management fees are based on a percentage of assets under management (AUM), and they can fluctuate as your portfolio balance increases and decreases. These fees are often charged by a financial adviser for their broad range of services. These are different from fees associated with securities like mutual funds or ETFs or wrap fees, which are predetermined fees that cover trading fees, account management and other related expenses.
It’s also typical to charge on a monthly or quarterly basis, pros say — and the monthly charging might actually benefit you. “The 1% annual fee, which is then broken up periodically by monthly or quarterly assessments, means the client is paying less in down markets and more in up markets,” says David Maurice, a CFP at WorthWhile Wealth Council. That’s because, when paying monthly, the percentage you’re paying is based on a shorter, more specific timeframe, so if your portfolio dips, you’ll pay a fee based on that new, lower, portfolio balance versus an average over a year-long period.
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What are your other options?
All that said, there are other options, says Matt Bacon, a CFP at Carmichael Hill & Associations. “Another adviser may offer similar services at a lower cost,” says Bacon. “You could also seek out a flat-fee adviser that doesn’t charge based on the size of your account, or seek out a robo-adviser that will manage your account for a fraction of the cost of a human being.”
And Marguerita Cheng, a CFP at Blue Ocean Global Wealth says: “This is not the only method to pay for investment advisory services. You can consider working with a firm that offers investment advisory services without tiered pricing or services for a flat annual fee.”
There are also advisers who will work on an hourly subscription or retainer-type basis, adds Mark Struthers, a CFP at Sona Wealth Advisors. “They would not have custody of the assets but they could help you allocate and monitor investments and provide financial planning,” Struthers says. “But again, at your asset level, it would be challenging to find someone to provide ongoing support for less than $7,000 to $8,000 per year if financial and tax planning are included.”
Moving ahead, Bacon recommends checking out the adviser’s form ADV II. “It’s publicly available on the SEC’s Investment Adviser Public Disclosure page and it will list out how the adviser charges and whether fees are negotiable,” says Bacon. “Bargain with your adviser and ask them to bring down the fee if the disclosure document says they’re willing to play ball. The ‘no way to reduce the fee’ line may be their personal stance as opposed to a regulatory issue.”
It’s also critical to determine whether your adviser is fee-only or fee-based. “Internal portfolio expenses are critical,” says Ted Halpern, an accredited investment fiduciary (AIF) at Halpern Financial. Will they participate in commissions, 12b-1 fees or trading account fees? If they’re fee-only, they will not, but if they’re fee-based, they likely will to some degree.
“If they’re primarily mutual funds and ETFs, be sure to see what the annual expenses are. If using a WRAP or TAMP or other outsourced money manager, then you must be prepared for those fees in addition to the adviser fees, which can range a great deal, but 1% to 2% of additional fees are not uncommon,” says Halpern.
If you’re serious about saving fees, certified financial planner Elyse Foster at Harbor Wealth Management says, “Shop around to see what you can find. It’s also important that you like your current adviser. I’d suggest calculating the savings and then ask, is it worth changing advisers to save this much in fees. Consider frequency of meetings, thoroughness of explanations, added value around other topics such as the inclusion of financial planning items, education opportunities, how promptly they respond and any other characteristics that are important to you in evaluating your current adviser.”
To search for advisers, visit the National Association of Personal Financial Advisors (NAPFA) or the CFP Board’s Let’s Make a Plan website.
Like any industry, some firms charge too much for what they deliver. “With any decision, you need to be aware of the pros and cons of any fee model and that hiring any professional will cost money,” says Struthers. “The question to ask is, ‘do you receive value for the service?’ If the answer is no, then self-management may be the best option.”
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Questions edited for brevity and clarity.