Financial Planning & Investment Advisory Fees

What is reasonable?

From what I’ve seen, fee-based advisory firms, my own included, generally charge an annual fee which ranges from .75% to 1.75% of assets under management. Generally, the larger your account balance, the more likely you are to receive a lower fee. In fact, fee schedules are often tiered such that the initial 250K is billed at a higher rate which scales down at varying thresholds such as 500K and 1M. There may, however, be other methods of determining an advisory fee beyond simply the size of the account. For example, some firms are more active (tactical) than others. Those firms would likely charge a slightly higher fee than a firm which is more passive and investing strictly in products which mirror indexes such as the S&P 500 and the Dow Jones. Firms with passive investment strategies may still charge fees over 1% if they are including valuable services such as financial planning, estate planning, tax planning, etc. What is included in the fee amount (above and beyond investment management) should be discussed in clear detail at an initial consultation.

While the internal debate about fees may have various tentacles, fees as an overall compensation structure is generally understood to be superior to the commission-based system which was the standard not that long ago. With commission-only business, an advisor is often looking for the next piece of business which they can find. Logically, that method of doing business is very sales oriented (or transaction focused) and requires constant sourcing. The fee system does seem to better align a client and advisor’s interests in that as the account value grows, the fee is worth more. So I do recommend locating a fee-based or fee-only advisor when interviewing or filtering through financial advisors.

In terms of financial planning fees, some people prefer to pay flat rates for portfolio reviews or hourly fees for financial planning services and portfolio consulting. This type of investor may prefer to manage their assets themselves through discount online brokerages. For people with a more do-it-yourself mentality, this system is fine as well. What an advisor charges per hour will typically vary from $150-$300. Some may bill per consultation or per plan, rather than per hour. It generally will depend on the amount and scope of work and research to be done. I’ve seen some advisors charge a flat $1,000 for a financial plan that involves one or two meetings and a written plan. I’ve also seen some advisors include a full plan as part of the advisory fee which they are charging on a portfolio.

The bottom line is that you want your fee schedule with your advisor to feel reasonable. The annual fee based on assets under management is very popular and seems to be working at the moment. Hourly fees for consulting and flat fees for services such as financial plans work as well, but I think a bit more obscure, probably because it’s hard for an advisor to make a good living charging just consulting fees and one-time financial planning fees. What you want to look out for are transaction-based or commission-only arrangements where advisors may be pushing products rather than really getting to know the clients.

As always, feel free to contact me with any questions or comments.

Russell Bailyn

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