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.
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If you are paying an advisor a percentage of your assets, you are paying 5-10x too much. Learn how to find an independent advisor, pay for advice, and only the advice.
I’ve often thought the same thing about tipping in restaurants.
It seems to be an industry wide standard to charge based on the amount invested. Aren’t Mutual funds set up this way also? The management fee is a percentage of your assets in the fund. The more money you have invested the more you pay.
Doesn’t there need to be a definition of what “professional help” a “financial adviser” will provide for 1% before we determine if 1% is too much?
I assume at a minimum this includes account set-up, risk tolerance evaluation, income need evaluation, asset allocation, asset distribution and annual evaluations.
The questionable part in my mind, and probably the caller’s because she needs it, is does this include other valuable services like estate advice and planning, tax advice and preparation, and limited legal advice regarding the inheritance?
Michael Edmonson says
“No other professions I know of charge fees this way.”
How about Realtors(R)?
Harry Sit says
Kristin – While you are in no position to negotiate with the mutual funds, you can choose how you pay your advisor, especially when free or flat-fee service is available from Vanguard. I think one of the biggest challenge in hiring an advisor is knowing whom to trust. When you go with Vanguard, you greatly reduce the risk of falling prey to someone who sells you equity index annuities, variable universal life, illiquid limited partnerships, and all sorts of junk. Free or flat fee makes it even better.
Ted – From the conversation between Sue and Tess and Chris, I’m pretty confident she will be well served if she takes the financial planning service from Vanguard’s Flagship service. She will get all the services you identified as the minimum. If she needs her tax prepared and estate planned, her advisor can identify the need and she can go to specialists for those. CFPs typically don’t do tax returns and wills/trusts themselves anyway unless they are also a CPA or attorney.
Michael – You are right. Realtors also use a pricing model that doesn’t make much sense. If you sell a 3 bedroom house and your brother sells a 5 bedroom house worth much more money, how do the required skills and time and effort differ?
I have heard several mention that Vanguard Flagship services are not that high quality. You are steered toward Vanguard products, which while are very good in general, aren’t always the best option for particular asset classes. They also only advocate market cap based portfolios (i.e., hold everything in proportion to how it is weighted in the market), and many academic studies suggest that this might not render the best risk-adjusted returns over the long run.
In my research, I have found that reputable fee-only advisors (e.g., those with access to DFA funds) charge 0.25-1.00% of assets. There is some difference on the basis – some do it on all investable assets not just those under their management (e.g., 401k).
I chose to forgo the % of assets route and found someone who would do a one time plan and basically educate me. Cost was just over $1k and the knowledge and associated discipline that comes with that knowledge will last me forever.
Harry Sit says
Anonymous – I’m glad you were able to pay a low fee for a good plan and a good education. You just proved my point — a flat fee service beats paying 1% of your asset year after year. As to Vanguard’s planning service, if you know enough to be able tell a good advisor from a bad advisor, you can do better. For the no-so-experienced investor, like Sue who called the radio program, Vanguard’s service can be good enough. Good enough gets the job done. If she were to pick a random advisor, even from fee-only NAPFA referrals, she wouldn’t necessarily do better than going with Vanguard Flagship. I’m not saying all advisors are crooks, but there are certainly many crooks calling themselves advisors out there. Just read this Q&A for example.
Kirk Mickelson says
Your making a lot of assumptions. If you are talking about just drawing up a financial plan I agree. I have charged clients 1% in the past and basically felt like I was giving the financial plan away for free. For 1% I have to monitor the clients portfolio 24/7 365 days a year, and in this market money well spent. A client would spend much more in commissions or even fully invested in mutual funds at 4 or 5%. Also I wish you journalist types would quit bringing up Vanguard would you rather pay 1% for an actively managed portfolio or be down 40%?
I successfully avoided an Ameriprise guy who tried to get me into the VUL path. I tried my own thing after a year or so after that, but frankly, I just lack the clarify and discipline to steer the boat in the right direction. I am trying out an adviser from Ed Jones, who has just recommended some funds with 5.75% front-load.I have a portfolio of ~150K. Will I be able to get better financial advise and monitoring elsewhere? I don’t mind learning the ropes for a year or two and then trying it out myself.
Harry Sit says
SV – If you invest at least $100k with Vanguard, you qualify for their Voyager Service. You can get a financial plan from them for $250. I think it’s a very good deal if you want some help.
Hmm.. I should’ve mentioned that out of the 150K, about 100K is in my 401K account with Fidelity. So I cannot move it out of Fidelity, atleast for now.
Harry Sit says
SV – Although I haven’t used them myself, I’ve seen other people recommending the Garrett Financial Planning Network. Members of that network are fee-only advisors who are not supposed to sell you anything except their time.
philip b says
I accidently came across your website and feel compelled to reply.
As a quick note, I just returned from the Morningstar conference in Chicago and I got a chance to meet and speak with Jack Boggle. He sat next to me in a breakout session discussing Modern Porfolio Theory.
Anyway your article is good but obviously you do not have much real world experience in dealing with HNW clients. They often require a lot more attention than just allocating 1 million dollars to amoungst 6 or 8 low cost index funds. When you get to investible assets of 1mil+ generally the complexity of the HNW needs go well beyound this simple task. The cost, as far as the fee I charge is really immaterial versus what they are getting for that fee. I have had several clients over the years tell me they really do not care what they are paying(within reason of course) as long as their expectations are met. The expectations, at least in my practice, are laid out in the IPS statement and the contractual agreement the client signs. Real world Financial Planning and investment management done at a high level with HNW families(1million of investible assets+), demand much more than a plan created over the phone and assets managed by someone they have never met, been around, been referred to, can call at home, would consider a trustee or steward of their financial affairs if something tragic were to happen to them, etc. If financial planning were really as simple as you think that it is, everyone would be at Vanguard. Just like every millionare would be driving a Toyota or whatever car you feel has the best value for the buck in your one size fits all utopia.
Harry Sit says
philip b – I do not doubt that you provide good service and value to your clients who need it. My post is specifically about this Sue who called the public radio. Listen to the call and tell me what you think. I don’t think the kind of HNW clients you describe would call public radio with their complexity.
Otherwise preoccupied says
I’m working with an Independent Financial Planner and much prefer that to the big firm I was using previously. He stated it very well when he told me “people may lack the desire, skill or time to manage their portfolio to the optimal level”. That is very true as I have the skill as a CFO but I certainly do not have the desire or time. I would much rather be developing my company plans or spending time with my family. For me 1% is money well spent!
Steve Stanganelli, CFP(R) Professional says
While these are good comments, I just want to say that Vanguard’s programs ONLY address investing and saving. I started my firm because financial planning is MORE than just investing. The kinds of questions that I get from consumers (not just as investors) involves college planning, divorce, elder care, real estate investing and taxes.
To reply to some of the other posts here, other professionals do also have “value pricing” for their services. Ask any attorney who charges for an estate plan or other advice. Some of it is canned – just like some financial plans have boilerplate. But it is advice in the context of the individual.
I’m reminded of a story about the plumber who charged someone $1000 to do something that took 15 minutes. The homeowner demanded a detailed invoice: $10 for tool, $990 knowing where to use it. The same is for financial planning.
I cannot simply give away years of knowledge in a plan that addresses all the complex areas of a person’s like for $200. There is the investment of my time in the client and the time to have acquired the training, knowledge and tools to do the job.
For my clients I will NOT invest without having a financial plan. Without the road map, you’ll never know when you get to your destination.
For those who feel 1% is too much, what about lawyers who charge 33% for a contingency case?
In my case I offer individuals the choice: an assets under management fee based on a declining percentage or a retainer fee to cover the time for research, reviews and some implementation. I even offer a flat fee regardless of assets but counting all assets – discretionary or non-discretionary – and it includes updating the financial plan, tax preparation, investment research, monitoring and implementation. And I’m acting as a fee-only fiduciary.
You’re NOT going to get that with any Flagship Service.
Ellie McAlonen says
My husband passede away a few months ago. We had both our IRA’s and an annuity invested thrugh a financial advisor.
When my husband passed I was told to come and see them for advice and for transferring these accounts.
It took several visits even though all of the accounts were in both names.
The financial advisor never informed me of the price I would be paying. I just received a bill for $715.00 for services regarding his and my estate and for another $150.00 for tax return research .
I was totaly surprised by these fee’s.
Steve Stanganelli CFP (R) says
Please accept my sympathies for your loss.
I will say that anyone working with a Registered Investment Adviser has to abide by certain rules and requirements. If they are a CERTIFIED FINANCIAL PLANNER (TM) Professional (like me – full disclosure), they have even more rules and ethical requirements that go along with the designation.
At the very least, the adviser and client need to understand the scope of the planning services engaged as well as the compensation method. This is typically outlined in a written agreement. Most states require that you have the right to cancel that agreement within five business days.
It sounds like your adviser charged you on some sort of hourly basis (it works the same for a flat fee basis as well).
You may find that there may have been a service agreement on file that your husband may have signed. You may also find that the firm forwarded annual copies of their Firm Brochure (Form ADV) describing their services and billing practices. A notice indicating that it is available on request may have been sent annually in lieu of this.
If your husband was dealing with all these particulars you may not recall seeing all these agreements and disclosures. So it sounds as though the adviser has a legitimate business practice. But to your point, even if there was a signed agreement with your husband, they should have disclosed all this to you and maybe have a new agreement put on file with you directly.
I’ve said before and I’ll say again that the problem we have is the mistaken view promoted by the media and the Internet that financial planning and investment management are one in the same. They are not. One if part of the other and both rely on each other. So to be completely transparent, firms need to clearly explain how they charge and what it covers (not everything is covered by investment management).
But it is reasonable for professionals to get paid for services. Unfortunately, advisers hide their planning services in their investment management and consumers persist in the belief that these services are free. That does an injustice to consumers who need help in a dire time of need. When you need help, you should get it and advisers should not be afraid to charge for it. Nor should consumers refuse to pay it. That’s how it is with attorneys, accountants and tradespeople of all sorts.
Steve – There’s a good [business] reason advisers hide their planning services in their investment management, as evidenced by Ellie’s report. If an adviser breaks out the fee and gives an estimate before charging, as an auto mechanic is required to do, the client may have a sticker shock and refuse the service. When Ellie’s adviser surprised her with a bill after the fact, it created tension. If the adviser hid the fee in investment management, the adviser could be charging three times as much and the client would never know.
Ellie – It’s actually better to have an explicit bill as opposed to being charged inflated fees on investment management. You should ask the advisor to provide a complete fee disclosure and then decide whether you still need the service or whether the fees charged are fair relative to the services provided.
Steve Stanganelli CFP (R) says
I understand the business reason you cited. But there is a law that also requires the investment adviser to provide it in writing just like the mechanic. And if the investment adviser is a CFP(R) Professional, there is an additional requirement for something in writing upfront that describes the fee and scope of plan services.
So, there seems to be something missing in this post. We don’t know if the adviser is a CFP(R) Professional. If he/she is then there is recourse to the CFP Board of Standards for an ethics violation. If this adviser is only supervised by a Broker-Dealer or another Registered Investment Adviser model, then there are other arbitration routes to follow.
BTW, these are generally the same rules followed by big and small firms alike, whether a Vanguard or a fee only Registered Investment Adviser firm like mine.
I’m a financial advisor who charges a fairly typical AUM fee. If find your articles very thought provoking, and they’ve caused me to take a hard look at what I’m doing. However, I’m wondering what you think about client acquisition costs and how they affect advisor fees. All things considered, it takes a lot of time/effort/advertising to convince someone to turn over their life savings to you. The argument is: if it were less expensive to acquire clients, advisors could charge less. If firms could profitably acquire clients while charging lower fees, wouldn’t more advisors do it and, therefore, drive industry prices down? Otherwise, it seems like we have to believe in a mass conspiracy to keep fees inflated instead of a competitive economy.
Harry Sit says
Not competing on price is a legit business strategy for selling luxury goods. Think high priced cars, handbags, jewelry, private schools, … They prefer a higher price at lower quantity to a lower price at higher quantity. The price itself becomes a signal. Only successful people can afford our service. You want to be part of the successful. When prices are equally high everywhere, they can play up other factors: you know me from church, I manage money for your business partner, …
Harry Sit says
Some advisors have seen the light. They don’t spend a lot of time/effort/advertising to convince someone to turn over their life savings to them. They just focus on giving advice. It becomes a much easier conversation. I help people find this type of advisors. Learn more at adviceonlyfinancial.com.
Thank you for your thoughtful reply, Harry. Once again, you have got me thinking. I plan to give a more thoughtful reply in the coming days. I appreciate the challenge you have given me about my business. I hope that what I’m about to say comes across in the same spirit. I appreciate the need to generate revenue, and with all due respect, why the ads here for things like a beginner’s guide to options trading? Doesn’t that fly in the face of the ideas your espousing? Aren’t there more appropriate ads that could be chosen?
Harry Sit says
If you are talking about Google ads, I don’t choose them. Google chooses them in part on the content of this page, in part on each visitor’s own browsing history. For example I don’t see beginner’s guide to options trading. If enough people use my service to find Advice-Only financial advisors I’d be happy to get rid of the ads.