By Cecilia T. Williams, CFP®, AIF®, Director of Investment Operations/CCO at Halbert Hargrove
The best things in life are free, right? So why does it seem at times that it is so expensive (and confusing) to pay for advice? As Chief Compliance Officer at Halbert Hargrove, my day to day is tasked with trying to ensure we are disclosing the right information to help our clients make informed decisions. As a consumer outside of Halbert Hargrove, I also understand that what advisors (and many service providers in general) think they are clearly disclosing may not be clear at all to the end client.
This blog is aimed at providing some basics about how fees are determined. If you are in the market for an advisor, my hope is that this information will help you get started – and offer some insights that can help you decide just how much you should pay for their services. My focus here is on advisors regulated by the SEC. Brokers operate in a very different universe, with dramatically different roles and ways of getting paid.
First things first, the best way to start to answer the question posed by my title is by reframing it. In my opinion, the key question with advisors is not what you should pay, but what you should pay for. And that answer is pretty simple. You should pay advisors to help you get peace of mind, a sense of security, and confidence in your financial future. Yes, financial advisors provide investment advice, but if you are looking to hire one solely to get the hottest stock tips or look at only a portion of your investments in a vacuum, you aren’t getting true value for all they can do. Car aficionados would equate this to buying a Ferrari but never shifting out of second gear.
At HH, we think value is provided not only by investment advice, but true planning. Helping you plan and navigate life events, exploring alternatives and action plans that keep you going towards your goals. Or helping you adjust your goals and approaches to securing them completely as your needs/wants change. Advisors can help coordinate between your other trusted advisors, like CPAs, estate planners and insurance providers as well – again, with your peace of mind and best interests at heart.
So now that you know what you should be paying for, here are some things to consider.
First Decision: Fee-Only or Fee-Based?
Fee-only and fee-based advisors may sound similar, but the differences in how you pay can vary considerably. Fee-only advisors can only be compensated by you, the client. Fee-based advisors can be compensated in different ways, which may include commissions on the products they can sell to you. This creates an inherent conflict of interest for them, as these advisors may have difficulty putting your interests above their own.
The most important thing to ask potential advisors: Are you fee-only or fee-based? They should have a very straightforward answer. A red flag? If their answer is convoluted and confusing. Keep pushing for clarification until you feel comfortable. You would not make any other large financial purchase without understanding your true bottom line. Financial advice should be no different.
Ways Fee-Only Advisors Can Charge for Their Services
Generally, fee-only advisors charge their fee in one of the following ways:
AUM (Assets Under Management) Based
This means being paid a fixed percentage of the assets you invest with them. Within the advisor industry, it is pretty common practice to charge around 1% on assets around $1 Million, equating to about $10,000 a year per $1 Million invested. As your asset level rises, advisors typically build in “tiers” that reduce your percentage fee. Likewise, at lower asset levels (below $1 Mil), we’ve seen advisors increase the percentage they charge.
Flat Fee
Some advisors allow engagement through a flat fee model – meaning you pay a set dollar amount to them (usually monthly or quarterly), regardless of how much you invest with them. This typically makes sense for younger clients with smaller account balances. If $500k or $1M seems like too steep of an investment to make, a flat fee option allows you access to the same advice and service, at a lower entry point. We see these flat fee arrangements begin around $5,000 per year, increasing in amount as the scope of services expands. With this type of engagement, it’s critical to ensure that the services the advisor will provide are clearly outlined in your agreement.
Hourly Fee
If you choose to engage on a limited scope with an advisor – say, to have an advisor run a one-time financial plan for you – you should expect to pay at least $2,500 to start the engagement. We typically see clients engage in this way only if they need a quick “check up” but plan on executing and monitoring everything themselves.
What’s Likely Not Included in the Fee
- The expenses of the underlying securities you are invested in. And that’s ok! It’s just something to ask about.
- Transaction Costs. While this is a pretty minimal expense (large brokerages like Fidelity and Charles Schwab have $0 equity commissions), it’s always important to ask how much you’ll be charged for individual security trades.
Helpful Hint: There’s a useful document called Form ADV – the Advisor Disclosure Brochure – that registered advisors are required to file and make public. Take a look at it. IAPD – Investment Adviser Public Disclosure – Homepage (sec.gov). Although lengthy, it does give you a nice starting ground for reviewing fees (and other pertinent information about an advisor). ADVs are broken up into disclosure “Items.” Item 5 (as of 2021) is entitled Fees and Compensation. Do you understand it? If not, ask questions.
Evaluation Process – The Rule of Three
So to answer the original question, how much should you pay for financial advice? It really does depend. If you’re looking for an advisor, as with any professional you’re hiring, it’s always best to talk to at least three, to get their different perspectives and compare and contrast. Fees – and what you are getting in exchange for those fees – are very important, but they’re not everything. You want to make sure you have the right personality fit. And the advisor should truly understand your goals.
How do you balance having the life you want to enjoy today with what you’re going to need in the future? Are you doing what it takes to enter your dream retirement? TAKE OUR QUIZ to find out.
Sources:
Bob Veres 2020 Inside Information: Fee Survey
AdvisoryHQ: Average Financial Advisor Fees in 2020-2021 | Everything You Need to Know
