SOME FAMILY members recently asked me to help them find a financial advisor. As luck would have it, soon after, Barron’s published a perfectly timed article, “America’s Best RIA Firms,” which listed 100 highly ranked registered investment advisors (RIAs). Similar lists are available from CNBC and the Financial Times.
It was time for me to get to work. Who wouldn’t want to recommend a “top” firm to his or her family?
The Barron’s article provided four pieces of information for each firm: the number of clients, advisors and offices, as well as the number of states where those offices are located. This allowed me to calculate the client-to-advisor ratio, which ranged from five to 3,855 clients per advisor. My family neither required nor could afford the attention of 20% of an advisor’s time, but they also needed more support than an advisor who was handling thousands of clients.
Some web research indicated that the typical number of clients per advisor is around 150. As few as 50 higher net worth clients is often sufficient for an advisor to generate a decent income. Assuming 2,000 working hours per year, an advisor with 150 clients can devote about one hour per month to each client, but that would include time handling paperwork, developing financial plans, following markets, and keeping up with tax and regulatory changes.
In other words, the advisor might be able to chat with a client for 30 or 40 minutes per month. (In practice, advisors typically talk to clients less frequently, but for longer.) Several articles suggested that, if an advisor wants to maintain a good relationship with his or her clients, the maximum number of clients should be even less—perhaps just 100. That means an important first question to ask any potential new advisor is, how many clients are you currently serving?
This leads to a related question: What’s your average client account balance? I came across several RIAs that had clients with average account balances in excess of $30 million. One RIA required $20 million to open an account. Relatively few RIAs manage average account balances in the low hundreds of thousands. Clearly, many of these firms were working with folks who are in a different league from my family.
My family also wanted to understand the costs involved. From scouring the web, it seems RIA fees range from 2.5% of an account’s value each year to 0.75%, though that lower fee was often only available for larger accounts. That said, many firms don’t openly advertise their fees and nearly all the fine print indicates that the fees are “negotiable.”
Whether a fee is reasonable depends on the services involved. An advisory firm could provide portfolio management only or it could offer full-on financial, retirement, insurance, portfolio, tax and estate planning. It’s also important to find out whether the firm is fee-only or whether it also collects commissions, and whether it operates as a fiduciary, meaning it’s legally obligated to act in the best interest of clients. I found that a financial advisor providing the sort of guidance my family was seeking would likely cost about 1% of their account value each year.
A quick analysis suggested the Barron’s RIAs were not ideal for my family’s situation because the required minimums were too high. Time for Plan B. A number of websites match clients and advisors based on an array of inputs. These include NAPFA.org, PlannerSearch.org and SmartAsset.com. I forwarded these links to my family. Robo-advisors were also an option, but my family needed more support than robos typically offer.
In addition, I encouraged my family to check out the major low-cost brokerage and fund firms. Vanguard Group, Fidelity Investments and Charles Schwab, among others, offer relatively inexpensive advisory services. Vanguard’s fee is just 0.3% a year, with a minimum account size of $50,000. Fidelity’s fee is 0.5%, with an even more modest minimum of $25,000. Likewise, Schwab has a $25,000 minimum, but is significantly more expensive for smaller accounts. Like almost all advisors, these major financial firms will provide a free initial free consultation. They also offer lower-cost—and sometimes free—online alternatives.
My family still hasn’t decided which route to go. But if they opt for an individual investment advisor, rather than one of the large financial firms, I’ve suggested they ensure the advisor has a conservative, low-cost investment philosophy, which would be a good match for their limited investment experience. I’ve also recommended they check out potential advisors through FINRA, the Financial Industry Regulatory Authority. There may be additional information on the Securities and Exchange Commission’s website.
John Yeigh is an engineer with an MBA in finance. He retired in 2017 after 40 years in the oil industry, where he helped negotiate financial details for multi-billion-dollar international projects. His previous articles include While We’re Waiting, Bankrolling Roth and Losing My Balance.