Excessive fees have become an obsession for many investors, and rightly so: Over time, an extra 1 percent or 2 percent a year can take a big bite out of a portfolio.
It’s not always easy to know how much you’re paying, however. Even if you can decipher your quarterly statements, clients might not realize their “advisors” have an incentive to steer them into particular funds or recommend expensive insurance products.
The good news is that the market for financial advice is getting more competitive. Fees on many investments are falling, including those on some of the priciest products, such as hedge funds. Revenue for the asset management industry dropped last year, the first annual decline since 2008.
But how do clients know if they are getting a good deal? A new survey of almost 1,000 financial advisors sheds light on what U.S. investors are actually paying and what they’re getting in return. Inside Information, an advisor newsletter, asked advisors about a variety of costs to clients, including investment fees, trading costs, and financial planning fees. The sample was limited almost entirely to independent advisors, who tend to charge more transparent fees than brokers or insurance agents paid on commission.
The traditional rule of thumb is that a financial advisor costs 1 percent per year. That’s only partly right. The survey found that the median cost of hiring a financial advisor is 1 percent only for clients with $1 million or less in assets.
The more money you have, the less you typically pay. The median cost of a financial advisor for portfolios worth $5 million to $10 million is just 0.5 percent per year.
In one sense, the rich are getting a better deal. But in another sense, they’re getting hosed. An investor with $500,000 paying a 1 percent fee is handing over $5,000 a year to his advisor. An investor with $5 million paying a 0.5 percent fee is being charged $25,000 for more or less the same service.
Looking solely at the median cost of hiring an advisor can be deceiving. Bob Veres, the editor and publisher of Inside Information, was surprised by the wide variety of fees that financial advisors charge. “There are people charging 2 percent or more,” he said. “I don’t know how they get away with it.”
For the smallest portfolios, more than 1 in 5 advisors charge 1.5 percent or more per year. High fees are rarer for wealthier clients, but not unheard of; 1 in 8 advisors charge 1 percent or more to clients with $2 million to $3 million in assets.
These numbers are just the cost of hiring an advisor, and don’t take into account other fees that investors pay. The biggest are fees on mutual funds and other investments. The typical advisor picks investments costing 0.5 percent a year in expense ratios, the survey found.