If you’re like many people who are considering hiring a
fee-only fiduciary investment adviser, you might be wondering what does
“fee-only” really mean, and why is it important? How much are these fees? What
are they based on? What do they pay for, and how do I pay them?
You may have already started the conversation with an
adviser but found yourself trying to make your needs fit their fees, rather
than the other way around. But people are more curious now about how advisers
charge and they’re asking for fee flexibility and accountability. They often
know what they want: an adviser to help them figure out how to balance their
monthly cash flows. How to save effectively for retirement and college. How to
reduce their tax liability. How to protect the value of their assets. People
who are about to retire often seek out advice from a fiduciary to help make
sure they won’t run out of money during retirement, or learn how to shield as
much as the wealth they pass onto their children (or charitable causes) as
possible from Uncle Sam.
Fee-only investment advisers have been slow to adjust their
fee structures, but the demand is moving many to relax their assets under
management requirements. Fee-only advisers provide holistic, comprehensive
financial planning services. Sometimes they offer them as stand-alone
offerings. Sometimes they offer flexible fee arrangements as part of the
overall suite of services they provide for their investment management clients.
And, as savvy consumers demand to know exactly what they’re paying for,
fee-only advisers have been gradually shifting to more flexible fee payment
arrangements to provide a higher level of transparency.
But before we discuss these evolving fee structures, let’s
make sure we’re all on the same page as to what “fee-only” means — and why it’s
so much better than the alternatives.
Fee-only is about your interests, all the time
When you hire a fee-only fiduciary investment adviser to
manage your investments, develop a financial plan, or both, you alone are
paying a financial professional who is legally and professionally committed to
acting solely in your best interests — otherwise known as the fiduciary
standard. They don’t get paid by investment or insurance companies to sell
their products.
Compare them to registered representatives, or brokers, who
earn their living on commissions they receive for trading stocks or selling you
expensive mutual funds, annuities and insurance. Because they’re legally
allowed to recommend products that offer them highest payouts, brokers can’t
honestly claim to be fiduciaries.
And don’t confuse fee-only advisers with fee-based advisers,
who are registered as both investment advisers and brokers. Why is this
distinction important? Because fee-based advisers can earn commissions for
selling life insurance or annuities to the same clients who pay them a fee for
investment management services. The potential conflicts of interest in this
model prevent them acting as genuine fiduciaries.
OK, so, now that we’ve established what “fee-only” means,
let’s talk some more about those fees.
Financial planning fees
Financial planning fees are based on complexity and time
spent to develop a detailed plan. You can expect a fee-only adviser to analyze
your current and projected income and expenses (cash flow needs), and your
short- and long-term financial goals and recommend ways to balance saving and
spending, shrink your debts, reduce your tax bill, protect your assets and
optimize your investments. Most of these advisers are CERTIFIED FINANCIAL
PLANNERTM (CFP®) professionals.
The fee for an adviser to set up a financial plan starts at
around $1,500. More complicated plans that involve estate and tax planning can
run $15,000 or more. Once you have the plan, you can then implement the
investment recommendations yourself or ask the adviser to execute and manage
your portfolio. Many advisers waive the cost of a financial plan if you hire
them to manage your assets.
Investment management fees
Investment advisers tend to charge an annual fee based on
the value of the assets they manage for you — known as assets under management
(AUM)-based fees.
These fees pay for a variety of tasks the adviser carries
out on your behalf, including:
Recommending a targeted mix of stock and bond investments
based on your financial objectives and risk tolerance.
Researching and selecting investment options for your
portfolio.
Placing trades.
Monitoring and reporting performance.
Periodically rebalancing your account to its original
investment mix.
They’ll also help minimize the tax consequences of any
withdrawals you make from your account and calculate annual required minimum
distributions (RMDs) from your IRA.
For these services most advisers charge AUM-based fees
between 1.08%-1.15% for portfolios of $500,000 or less to just under 1% for
portfolios of $1 million, with additional discounts (known as breakpoints) for
larger portfolios. Ideally, these fees should never remain static: As your
portfolio increases in value, your adviser should lower their fee percentage
accordingly, since they shouldn’t be charging more money if they’re not
changing the way they manage your wealth.
You’ll pay the adviser fees from your bank or from a
separate cash or money market account your adviser sets up for you. No
responsible adviser will ever sell any of your invested assets to pay for their
fees unless you specifically ask them to.
Blended fee structures
In response to consumers’ increasing demands for customized
packages of financial planning that include investment management, advisers are
offering more flexible fee arrangements, particularly for clients whose assets
they’re not directly managing. Some are charging hourly fees, which range from
$150-$500 per hour or higher. Others are charging an annual retainer of
anywhere from $2,000-$100,000 a year to provide financial planning.
Advisers are becoming even more fee-flexible when clients
hire them for financial planning and investment management. According to a
recent Wealthramp survey of 100 fee-only advisers, 57% said they now give their
clients the option of paying flat fees or annual retainers or AUM-based fees —
or, in many cases, a combination of both.
John Swee, CFP®, a fee-only investment adviser at Gryphon
Advisers in Evanston, Ill., offers a unique hybrid approach where both
financial planning and investment management fees are based on assets under
management. Recognizing that addressing his clients’ complex financial
challenges takes more time and effort than managing their portfolios, he’ll
often charge a higher retainer fee for financial planning and a deeply
discounted investment management fee.
“For example, for a client with $5 million in assets
invested in a standard mix of index funds who has a complex set of yearly tax,
retirement income, estate and insurance planning needs, I might charge 0.50%
($25,000) a year for financial planning services and 0.25% ($12,500) a year for
investment management. While I give them the choice of whether they want to pay
these fees at once or in quarterly installments, I always invoice these fees
separately so they know exactly what they’re paying,” says Swee.
Clients who want their fee-only investment adviser to offer
both financial planning and investment management should ask if they offer
fixed retainers or hourly fees as an alternative to AUM-based fees. They may be
more flexible if you’re willing to let them invest your money following a
standard asset allocation model. If you want them to build a customized
portfolio of stocks, bonds, real estate and alternative investments they may
only offer the AUM-based fee model since these portfolios require a higher
level of fiduciary oversight.
While paying an adviser thousands of dollars for these
services may seem expensive, these fees may often pay for themselves if the
adviser saves you tens of thousands of dollars in hidden investment costs by
moving your money into lower-cost mutual funds and ETFs or if their guidance on
exercising stock options or taking distributions from your retirement accounts
helps you avoid taking a huge tax hit.
Additional expenses
Remember, you’re only paying the adviser for their advice.
But since your stocks, bonds, ETFs and cash are held at an outside custodian,
such as Fidelity or Schwab, that custodian will charge annual account
maintenance fees as well as one-time fees for trades, wire and electronic funds
transfers, check-writing and other transactions. Fortunately, advisers get deep
discounts on these fees that they’re able to pass on to their clients. In any
case, you’ll see all of these fees listed on your account statements.
What won’t be listed are investment management fees charged
by mutual funds and ETFs in your account. That’s why part of a fee-only
fiduciary adviser’s role is to research and recommend fund options that offer
strong performance at reasonable costs.
Finding fee facts
All investment advisers are required to disclose their fees
in Part 2 of their firm’s Form ADV, a registration document that must be filed
with the SEC and provided to all clients and prospects. You can also download
it from their firm’s listing on https://adviserinfo.sec.gov/.
Any trustworthy fee-only adviser will answer your questions
about their fees in a straightforward manner. And remember that you don’t
necessarily have to accept their quote at face value. If they want to have you
as a client, you may be in the driver’s seat to negotiate a fee arrangement
that meets you where you want to be.
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