If you add up all the costs paid by investors, including trading costs and platform fees, the total is a lot higher than 1 percent.
While a majority of clients pay from 1 percent to 2 percent, there are plenty of outliers. For clients with $1 million to $2 million, 18 percent of advisors end up charging 2 percent or more.
There’s nothing wrong with paying 1.5 percent a year—if your advisor is providing real value for that money. A good financial planner can help with far more than just managing your investments. Planners’ services can include, among other things, tax planning, retirement planning, estate planning, and advice on insurance, budgeting, maximizing Social Security, and making charitable gifts.
Many advisors are adding these services to prove their value to cost-conscious customers. “The core of what a financial advisor does to earn their fees is changing,” financial planner Michael Kitces wrote in a review of the survey results. However, “there’s no clear consensus on how to value [financial planning services] effectively.”
In the meantime, advisors and customers are questioning the traditional ways financial advice is delivered. Many brokers are switching from charging commissions to charging fees based on the assets under management. The Inside Information survey shows some independent advisors are beginning to shift to other kinds of charges, such as hourly rates and retainer fees. Only a third of advisors surveyed charge only AUM fees.
Lawyers tend to charge by the hour, and doctors based on the services they deliver. It’s strange that advisors still charge based on the quantity of assets they handle, not the actual work they do, Veres said.
“If financial planning is going to be a profession,” he said, “there’s going to be a need to be a tighter match between what you charge and the service you provide.”
This article was provided by Bloomberg News.