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I invested $2.2 million with my advisor, who charges a 1% fee. Am I paying too much?

When it comes to advisor fees, there are two numbers to consider: 1% and 0.02%.

The first is the average fee that financial advisors typically charge. If you are looking for comprehensive financial management, you should generally expect around 1%. The second is a representative fee for a well-indexed S&P 500 fund. If you are just looking for investment management, someone to grow your portfolio, this is the number they have to compete with.

Let’s assume you have $2.2 million in assets. Your financial advisor manages all of this and charges a 1% fee. That could be a good, if not great, price, depending on what you’re looking for.

To learn how a financial advisor can help you, speak with a fiduciary advisor for free.

How are advisors’ fees structured?

As an industry, financial advisors have four main fee structures. Most advisors use a combination, charging different fee structures for different services.

Fixed amount

This is a fee-for-service model. The financial advisor will charge you a fixed amount for working on a specific project. For example, they may charge you a flat fee to do your taxes.

Hourly rate

Here the financial advisor invoices for every hour worked. Most will measure their work in six-minute increments, the standard for professional services in the United States. For example, they may charge you an hourly rate for general financial planning services.

Hourly rates can also be structured on a retainer model, where you pay a fixed amount upfront and then receive services billed on that first payment.

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Commissions and performance

Under a commission structure, the financial advisor receives a payment every time he carries out a financial transaction on your behalf. Typically this is measured as a percentage of that transaction.

With a performance structure, the financial advisor receives additional compensation if he meets a specific financial benchmark. For example, they can receive a performance fee if they beat the returns of the S&P 500 in a given year.

Commissions in particular represent an increasingly unfavorable compensation structure.

Assets under management (AUM)

This is very common and that’s what people mean when they say they pay “X%” to their financial advisor. The advisor charges a percentage of the assets that he holds and manages on your behalf.

Normally this is charged on an annual basis. For example, suppose your financial advisor charges 1% and manages $100,000 on your behalf. That year they would charge you $1,000.

Ultimately, advisor fees are at the discretion of the advisor, their company and you. You and your advisor should understand your objectives and personal circumstances, and then you can negotiate the fee structure. If you are considering hiring a financial advisor, you can speak to one for free.

What do you have to pay?

So how much should you pay for financial services? Specifically: is a 1% management fee too high for someone with more than €2 million in deposits?

It depends.

The simple answer to this question is more or less: no. Given the size of this account, you may be able to shop at a discount. But in general, a 1% management fee is right in line with market averages. Typical financial advisors may charge between about 0.5% on the low end and 2% on the high end, but 1% is not unusual.

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The more complicated issue is: are you getting your money’s worth?

As the SEC notes on this topic, management fees may seem small, but they can add up quickly over time. To put this into perspective, let’s say you put your $2.2 million money into an average return of about 8%. Over a 10-year period, with 1% AUM, you would pay a total of approximately $250,000 in management fees.

It’s possible that this fee will eventually pay for itself with active portfolio management if your advisor can outperform the market. On the other hand, you can buy an S&P 500 index fund. These typically cost about 0.02% per year. The advantage is that it is cheaper. The downside is that you may miss out on professional insight and management that could benefit your portfolio and beyond.

If your financial advisor is just investing on your behalf and not actively managing your portfolio, chances are your 1% fee isn’t really worth it. However, a good financial planner is not limited to investment management, depending on the scope of your agreement, and can provide value elsewhere as well.

Look at the other services your financial advisor offers. Do they help with long-term planning? Do they give you advice for building both general and targeted wealth? Do they offer tax services, estate planning and other advice? In short, do they offer anything other than investing on your behalf?

This is the crucial question when it comes to whether your 1% rate is too high. Compensation differences rarely lead to better portfolio returns, because it’s quite rare for professionals to ever beat the market. So instead, look at what you want to get out of this relationship in total. If you feel you have received sound advice on a wide range of financial planning, security and services, then this sounds like a strong professional relationship at a fair price.

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If not, you might be better off with an index fund and a copy of TurboTax.

Speak to a financial advisor for free to understand how they can help you achieve your goals.

What services do financial advisors provide?

A financial advisor is someone who helps you manage your money and other assets. A financial advisor can help clients with, among other things:

  • Investment or portfolio management

  • Long-term financial planning

  • Tax advice and preparation

  • Budgeting and financial goals

The exact nature of your relationship with a financial advisor will depend on their services and your needs. For example, some literally only work in the capacity of advisor. In this case, the financial advisor does not help you with the actual transactions, but only advises you on what to do.

Other advisors may work on a more comprehensive basis. For example, they may offer accounting services and tax preparation. Or they offer portfolio and asset management, actively hold your money in account and make investment decisions on your behalf.

When looking for a financial advisor, it is important to find someone who suits you. You don’t want to pay for unnecessary services; For example, most households have simple taxes and do not require professional preparation. On the other hand, you don’t want a relationship that doesn’t achieve all your goals.

It comes down to

A 1% management fee is well within the average of most financial advisors, who typically charge around 0.5% to 2% for their services. The bigger question, however, is whether you feel like you’re getting what you pay for, because those management fees, even at small percentages, aren’t cheap.

Tips for finding a good financial advisor

Photo credit: ©iStock.com/trilocks

The post I invested $2.2 million with my advisor who charges a 1% fee. Am I paying too much? first appeared on SmartReads by SmartAsset.

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