Good question! The answer may depend on who you ask. We are going to attempt to pull back the curtain.
First, “Financial Advisors” or “Wealth Managers” come in many varieties. They can be:
- Stock brokers
- Insurance agents
- Registered Investment Advisors (RIA).
Second, it is important to remember that the title, “Financial Advisor”, implies nothing and does not insure any standard of care.
Shoreline Financial Advisors is an RIA. An RIA is a legally obligated fiduciary. This is very important (shameless plug).
Third, a “financial advisor”, depending on who they work for, is going to suggest a solution based on what they are allowed to sell. Yes, most “advisors” are restricted, and this impacts the cost of advice.
- An insurance agent is probably going to sell you variable annuities (VA) – very expensive. VAs have a restricted list of securities that is usually the most expensive share classes. There are also layers of fees including program fees, M&E fees and various riders.
- A stock broker is going to sell you products from a restricted list determined by their employer. These lists generally exclude lower cost mutual funds and exchange traded funds (limited choice and usually more expensive). For example, many of the big brokers are not allowed to use Vanguard.
- An RIA is the only one that probably has an open platform, one where they can use any investment vehicle, even low-cost ones.
In another shameless plug, SFA operates an open platform, including Vanguard, DFA, iShares, et cetera. Further, we use the lowest cost institutional shares classes available.
Does this matter?
Absolutely! Your “net” return (investment return – expenses) will be higher if fees are lower.
There is no magic solution. There is no product that offers high returns with low risk.
If your advisor works at a firm with higher fee solutions (i.e. a brokerage firm or insurance company), they may recommend a higher percentage of riskier investments (CLOs, CDOs, high yield, emerging markets) to offset the higher costs. In a bull market, where stocks are rising, you may not notice.
So…. are RIAs the least expensive solution? Not necessarily. We have seen RIAs who charge up to 3%! Plus, the expenses of the investment vehicles.
Unfortunately, you have to do your homework.
What Should You Pay?
It is probably best to divide the cost into 2 parts:
- The amount you pay to your advisor as their compensation for services. This should include investment advisory and financial planning.
- The amount you pay for all other costs and services (see below).
In our view, if you have investment assets totaling $500,000, you should pay no more than 1% of assets to your advisor and 0.4% for all other costs. What does “other” include? Everything!
- Investment management fees (mutual fund, ETF and separately managed account expenses)
- Account fees (annual IRA and account fees, etc.)
- Trading fees (commissions and ticket charges)
- Platform fees. (VA products)
- M&E Insurance (VA products)
- Riders (VA products)
An annual meeting to review your portfolio and update/revisit your financial plan should also be included. If you have assets totaling:
- $1,000,000, you should pay no more than 0.9% to your advisor and 0.4% for all other costs.
- $2,000,000, you should pay no more than 0.8% and 0.4% respectively.
- $3,000,000, you should pay no more than 0.65% and 0.4% respectively.
- $5,000,000, you should pay no more than 0.5% and 0.4% respectively.
At SFA, “other” expenses range between 0.2% and 0.35%. This amount depends on asset allocation (bonds are less expensive than stocks) and sector weights within asset classes (large cap funds tend to be less expensive than small cap funds).
What Are You Paying?
Another good question!
- Best answer: Ask your advisor.
- Better: Ask them to put it in writing.
- Further: Make sure they include all fees (particularly third-party fees) and they attest to the fact that it is all-inclusive in writing. See above for a list of potential fees.
If they won’t put it in writing, there might be more going on.