I listen to the Marketplace Money program on public radio every week via their podcast. It’s a great program.
Occasionally, I disagree with the answers given. Some time ago a caller Sue asked about finding a financial advisor after she inherited $1 million. She said she’d like to get some professional help because she and her husband were not familiar with investing. She contacted a financial advisor through referral from NAPFA but she was scared by the 1% fee the advisor charges.
When the host asked whether Sue would be comfortable implementing a plan herself if she gets a plan from a fee-only advisor, she said yes and she would like to do annual checkups with the advisor. The host told Sue she will have to pay some fees and that 1% fee is normal.
It’s not. Paying 1% fee every year ($1 million * 1% = $10,000) for investing $1 million is outrageous. If Sue invests her $1 million with Vanguard, she gets Flagship Services immediately. She can get a financial plan, annual checkups, and telephone consultation from a Certified Financial Planner at Vanguard for FREE.
I’m always puzzled by why financial advisors charge their fees by the amount of money their clients have. It’s based on the client’s ability to pay, not on the time and effort to serve that client. No other professions I know of charge fees this way. Does it really take twice the time and effort to serve a client with $2 million versus a client with $1 million? I don’t think so. And why should advisors get an automatic raise at the rate of portfolio growth, which is usually much higher than inflation?
I understand the need for a financial advisor. Not everybody is interested in or good at managing their money. It’s just like my hiring a gardener to maintain my yard while many others mow their lawn themselves. As the saying goes, in managing our money, the worst enemy is often ourselves. I’ve inflicted plenty of damage to my own finance in the past. I wish I had an advisor telling me no to my crazy ideas.
Good financial advisors do add value and they do need to get paid for their work. But paying 1% on a $1 million portfolio is way too high. If I were Sue, I’d use the free service from Vanguard or pay a fee-only advisor no more than $3,000 for an initial plan and no more than $1,000 a year thereafter for checkups and answering questions.