Am I overpaying my financial advisor?

May 14

There are hundreds of thousands of financial advisors out there. There are some exceptions, but for the most part all financial advisors do pretty much the same thing.

Nobody is worth paying above industry average for. In this blog we’ll discuss how to know if you are overpaying your financial advisor, how much a financial advisor should charge, and some ways to reduce a financial advisor’s fees.

But first, a little background.

Hello, I’m Michael Hart, an advice-only financial planner serving Princeton, New Jersey and clients nationwide. My goal is to help individuals and families make informed financial decisions without product sales, commissions, or asset-based fees.

That means my recommendations are designed around your best interests—not around selling investments or insurance products.

And also…

Here are some blogs we’ve written on the subject of financial advice, which you may wish to read.

When 1% is not 1%

Buying a House Probably isn’t a Good Investment

Financial advisor vs. Financial planner

Now let’s get on with it!

And now for the feature presentation – what are the best websites to find a fiduciary financial advisor. Let’s get into it!

How much should a financial advisor charge?

There are a bunch of ways that financial advisors charge:

AUM fee advisors charge a percentage of your assets, usually 1%.
A flat fee advisor is a financial advisor who charges one set, flat fee for services rendered over a certain period of time as stipulated by a contract, usually a year.
An hourly financial planner is someone who provides financial advisor for a set hourly rate.
Advice-only financial planning is fee-only comprehensive financial planning without the expectation or even the option to manage any client investments. Advice-only financial planners charge a flat or an hourly fee.
Some financial advisors charge commissions. This is highly conflicted; don’t work with someone who charges commissions, if you can avoid it.

How do you know if you are overpaying for your financial advice?

Here you go, real talk: if a financial advisor charges more than 0.75% of your assets or 3% of your income, it’s high fees. Avoid high fee financial advisors.

This is expensive financial advice. Do not pay for expensive financial advice.

You can find a financial advisor who will do a great job and make you very happy without paying them more than 0.75% of your assets or 3% of your income. Financial advisors often exaggerate the depth of work required in order to command higher fees. Don’t believe anyone’s slick pitch about how their high fees are worth paying! Just run away.

How do I avoid paying too much for financial advice?

Okay so you just figured out that advice you are getting from your financial advisor is too expensive. Here’s what to do if you want to reduce those high financial advisor fees.

First thing: know what all the fees are. Ask the advisor for a written list of all charges you will be expected to pay, not just to them – but to every single entity involved in servicing you.

For example:

Are there account opening or closing fees charged by the custodian?
What types of securities does the advisor typically invest in?
What are the expenses associated with those vehicles, and with the transactions made involving them?

You can find this information in the financial advisor’s ADV Part 2, Item 5 “Fees and Compensation.” Visit the IAPD website and enter their name.

Get a total picture of all the fees involved, not just the advisor’s fee itself.

Ask yourself if you really need everything the advisor offers. Advisors work with clients different ways. For example, can you make the trades yourself? Can you manage the money yourself, if the advisor provides an initial investment allocation and rebalancing instructions? If so, an advice-only planner may be the right fit.

Try to predict what your needs are likely to be over time. Many times, after the initial work is done (usually in the first year) there is only minimal maintenance work until you have a major life transition. You may be better off paying a higher amount in the beginning of the relationship, if the work required if likely to decrease after the initial “clean up” is done.

Some advisors charge on an hourly basis. It may make sense to hire an hourly or flat fee advisor who works on a one-time or project basis rather than paying a “retainer” that automatically renews each month. This way you aren’t overpaying if the work required is dramatically lower after the initial work is completed.

Are they just going to be “monitoring” after the first year? If so, it is worth what they are asking you to chalk up or could it be done in a less expensive way? The advisor is going to try to sell you a relationship in perpetuity – make sure if you are going to agree to that, it’s something you truly need.

Be aware that some payment methods obscure the true cost. Pay attention to how you are actually paying the fee. If your advisor is managing your assets, usually the fee is debited out of your account at the custodian without you having to manually perform the action of paying the bill. This is an ingenious way to obscure the amount you are actually paying.

Some advisors, such as hourly planner or advice only planners, will get paid via check or electronic transfer, instead of just having the money come out of your account (which you may or may not pay that much attention to). Don’t balk at it just because you have to write a check manually which forces you to embrace the full knowledge of the amount you are paying. Look at the actual amount you are paying; don’t overlook what it is actually costing you if your assets are being debited automatically (even though you never had to write the check because your portfolio paid the bill).

Look at minimum of five advisors to see what they charge and compare what you are getting for that. If you don’t understand what each service entails, ask. Make a spreadsheet and compare each one. Don’t just take one referral from a friend at the golf club.

Putting it all together

‍Thanks for reading this blog clarifying what to do if your financial advisor’s fees are too high.

If you are seeking to work with someone like me, here’s more about how I help people.

As an advice only planner, we don’t earn a fee based on the amount of assets you have with us. Instead we charge a (flat fee, hourly fee) that is based on the amount of resources and time required to serve you. This is very different from how most other advisors operate. If you’d like to discuss us helping you with your finances, let us know.

If you're searching for a:

Fee-only advisor in Princeton, New Jersey

Flat-fee planner near Princeton, NJ
Retirement planner in Princeton NJ
Fiduciary financial advisor in Mercer County
Advice-only financial planner in Princeton, NJ

…I’d be happy to help.

Thanks for reading!

— Michael

P.S.

We are fee-only, flat fee advisors in Princeton, NJ who help mid-career professionals build wealth. If you’d like to meet with us to discuss retiring in New Jersey, how to create a financial plan for retirement, or any other topics related to your wealth, please set up a time.

Disclaimer

Advice Only, Public Benefit Corporation, dba Open Book Financial Planning, is an investment adviser registered with the Securities and Exchange Commission (CRD# 334039 / SEC File No. 801-135290). Our current disclosures, including Form ADV Part 2 and Form CRS, are available on our website at www.adviceonly.com