I am 66 years old, still working and have very good health insurance. My company does not have a 401(k). I have an individual retirement account (IRA) with about $120,000 invested. I contribute $272 per month, but my program cost is $136 per month. That’s 50% of my contribution. Am I flattered?
-Garry
There are two points to address with your question. The first is about understanding how your compensation is calculated. The second is to assess whether you feel the service you receive is worth the fee you pay.
These are very important points. After you’ve done your research, you may decide you want to make a change. But the bottom line is: I wouldn’t say you’ll be wiped out. (Looking for a new advisor? This tool can help you match with potential advisors.)
Calculation of the compensation
It is good that you check your bank statement and pay attention to the costs. Just like any other service you use, you need to know what you’re paying for it.
Although you can see the amount clearly, it may not be clear to you how the amount was determined. Your advisor should have reported this to you when you became a client. Take a look at the papers you received. Unless something is missing, it will be described in detail. Or just call and ask.
Knowing (and understanding) your fee is good information. But I also bring this up because of how you relate your monthly contribution to your monthly contribution amount. This is almost not how your fee is determined. (Looking for a new advisor? This tool can help you match with potential advisors.)
Different types of compensation
You can calculate the amount you pay to an advisor in various ways. At a high level, consultants may be paid through commission or honoraria. Sometimes they are paid both ways.
Commissions. As your advisor receives commissions of the investment products they place you in, these are based on the amount of your monthly contribution. But these are rarely above 10% and are often much lower. It is very unlikely that this is the arrangement you have.
Cost. If your advisor does not receive a commission, you will pay it in the form of fees. There are several ways in which fees can be calculated. It can be based on the assets they manage for you, hourly, a fixed annual fee or a monthly subscription.
It appears that your advisor charges fees based on the amount of assets he manages for you. It is usually shown as an annual percentage of your account balance.
I think this is partly because this is the most popular method of calculating fees. It also matches what my experience tells me: a typical fee for the financial service provider you use, which you have shared privately. If I had to guess, I’d say your fee is probably 1.35%, and you’ll find that the monthly fees vary based on the value of your account. But again, this is verified by checking the paperwork or asking the advisor. (Looking for a new advisor? This tool can help you match with potential advisors.)
Am I cursed?
Then there is the question of whether you are getting enough value for that fee. That depends on what the advisor does for you and how much it is worth to you.
In the world of percentage fees, 1% is often considered the benchmark. This would make 1.35% relatively high in comparison and people – myself included – would often scoff at it.
In practice, however, 1% normally applies to larger accounts than €120,000. If you get full financial planning and sufficient communication from your advisor for about $1,600 per year, you’re getting a good deal. If it’s just investment management and you never hear from them, you can probably get a similar service elsewhere for less. (Looking for a new advisor? This tool can help you match with potential advisors.)
Next steps
Of course, it is not about how the advisor feels, but about how you feel. I recommend that you have a frank conversation with your advisor. After all, this doesn’t have to be a big mystery. The advisor must articulate what he does for you and you must assess that value and compare it to what you pay. If you like what you hear and feel like you’re getting your money’s worth and don’t need to change anything, that’s fine, at least you know. If not, you can continue looking for something that suits you better.
Brandon Renfro, CFP®, is a financial planning columnist at SmartAsset, answering reader questions about personal finance and tax topics. Do you have a question that you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not a participant in the SmartAdvisor Match platform and has received compensation for this article.
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The post Ask an advisor: ‘Am I being bullied?’ I’m 66, contribute $272 per month to an IRA and pay $136 per month in fees. That’s 50% of My contribution first appeared on SmartAsset Blog.
