Advice at a Price

Richard Connor

THE PREDOMINANT WAY financial planners get paid is by charging a fee based on the amount of money they’re managing. The typical industry fee I’ve seen is 1%, and it’s been that way for years. Under this model, a financial planner managing a client’s $1 million portfolio would charge $10,000 a year.

Charley Ellis’s recent article explained how this approach came into being. His article also demonstrated how a seemingly innocuous 1% fee can actually consume a large portion of a portfolio’s return. This drag on performance compounds over time.

The positive side of the model: A financial planner’s interests are aligned with the client’s. If the portfolio’s value climbs, both are better off. If it falls, the planner also makes less. An additional benefit: Clients know roughly what they’ll pay for the planner’s services in any given year.

Many planners provide a full suite of services for this 1% fee, including tax planning and preparation, estate planning, insurance planning, retirement planning and hand-holding during rough financial times. In the percent-of-assets model, clients feel as if they’ve already paid for these services and so are more likely to use them.

Still, there are other ways a planner could be paid. These include paying an hourly rate—typically a few hundred dollars per hour—for specific services. There are subscription services, with a fixed cost per month. Some companies also offer certain services or products for a fixed fee. Finally, some planners sell products, like mutual funds and insurance products, that earn them a commission.

Some of the largest names in the financial planning industry have gotten involved in the planning side of money management. Vanguard Group’s Personal Advisor Services charges a maximum 0.3% of asset per year. One of the country’s largest financial planning firms, Edelman Financial Engines, has a “wrap fee” program with a sliding scale for new clients. It starts at 1.75% on the first $400,000 and drops to 0.5% on $10 million to $25 million.

I know a planner who primarily has percent-of-assets clients but also charges by the hour for consultations with clients who aren’t ready to hand over the reins of their portfolio. I’ve wondered if a hybrid model—percent-of-assets plus by-the-hour charges—would work. If you want portfolio management, you’d pay a small percentage of assets. For the other items, you’d pay an hourly fee. The total bill would be based on how complicated your situation is and the services you request.

But I can also see drawbacks with a hybrid model: If we had to pay individually for each additional service, how many of us would opt for the exciting part—setting up and managing an investment portfolio—and skip the boring parts, such as insurance planning? Indeed, the first article I ever wrote for HumbleDollar was on a related topic: I noted that too many of us equate financial planning with investment management. That problem, alas, still exists.

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Steve Berns
Steve Berns
1 year ago

With respect to fees, I was wondering the additional value provided by the financial planners. For example, for a $1 million portfolio, the financial planner charges 1% or $10,000. For a $2 million portfolio the fees are $15,000. Now the financial planner provides the same services whether the portfolio is $1 million or $2 million. So my question is what additional value does the financial planner provide for the extra $5000 in fees? I have never received a decent answer from any financial planner. Thanks

1 year ago

Good piece, Richard. As you point out, there are pros and cons with different fee structures. The most valuable services advisors provide have little to do with managing investments: having clients write an investment policy statement, “stay the course” in turbulent markets, save more for retirement, manage debt, wisely apply for Social Security benefits, consider low cost income annuities, and so forth. Whatever the fee structure, transparency and honesty are paramount.

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