Today’s post comes from an Investment News article entitled “Pressure Mounts on Advisers to Lower Fees.” The article goes into how clients are now asking their advisers for more transparency. They want to know what exactly they’re financial adviser fees are and asking their advisers to reduce the cost. First and foremost, I believe that transparency should be of utmost importance between an adviser and a client. People should know exactly what they are paying for and they shouldn’t have to dig through pages to find it. Even when you buy a car from a used car salesman, you know exactly how much you paid. You might not know exactly what you got but you know how much you wrote out that check for. In my opinion, this is the way many advisers have conducted business and I am happy to see that clients want to be more aware of what they are paying for and if the value is worth it.
What Do You Pay For?
Advisers come in all different shapes and sizes. Financial adviser fees can be in many different forms from an upfront fee, hourly fee, a percentage to manage your investments, or take a commission from the investments they recommend or insurance products they sell. If you think you’re not paying your adviser then you are wrong. Your payment is probably buried in some kind of product you purchased. I have my own opinion on how financial adviser fees should be structured but the discussion should be more about what you get in return for your payment. Let’s go into different titles and what you might get.
Investment Adviser (aka Financial Adviser, Financial Planner) – In my experience this is someone that you will pay a percentage of asset fee. They will manage your investments and may or may not advise on your other financial concerns. For example, when you meet with him/her they will review your performance maybe tell you that there is some rebalancing to do and tell you their concerns about the stock market over the next year or so. Some investment advisers won’t go into a discussion about how much you need to be putting away for retirement or college for your son or daughter i.e. other financial concerns. Typical financial adviser fee is about 1% which means if the portfolio is $1,000,000 then the financial adviser fee each year will be around $10,000.
- My opinion – if all you are getting is investment advice than 1% is high. You can get a managed investment account at Betterment starting at 0.35%
Insurance Salesman (aka Financial Adviser, Financial Planner) – These advisers will come at you with a product of some kind whether that be an insurance product, annuity, or investment product. They are trying to solve a single problem with the sale of a product. In most cases these advisers do not charge financial adviser fees but earn a commissions on the products they sell. Their paycheck is tied to the advice they give. I have never seen an adviser offer advice on other financial planning topics.
- My opinion – what might seem like the cheaper way to go may actually cost you more money. Let’s say you gave $100,000 to an insurance salesman to purchase an annuity and let’s say that the annuity cost 4% (which is actually on the lower end of the spectrum). That is $4,000 to purchase a product that may or may not be in your best interest and you may not see him/her for another 5 years.
Financial Planner (aka Financial Adviser) – Now here’s the confusing part. These advisers could be anyone of the other two above but they can also be a true financial planner. Financial planners are able to give comprehensive advice which means they will give recommendations in all areas of your financial life. Have goals and objectives? Well these type of planners will work with you to get there. Their compensation structure can vary in anyone of the ways mentioned above but they can also charge an upfront fee.
- My opinion – if you need help with things other than investments then this might be the type of adviser you should consider. It may sound expense upfront but if they steer you away from making bad decisions (as humans our emotions hurt our investment decision making) then it could actually be very inexpensive.
The world of financial advice is confusing. Advisers can call themselves whatever they want to. When looking for an adviser keep in mind what they will offer you for the financial adviser fees you will pay. It’s never a bad thing to know what you’re paying and you’re getting in return.