Are Financial Advisor Fees Worth It?
Who has received service from an accountant or an attorney in the past year? Was the cost worth it to you? The answer should depend on the value you received from the interaction. For example, if an accountant charges $5,000 and does not save you any money when you file your taxes, that service was probably not worth the cost. However, if you only spent $2,000 and the accountant saved you $5,000, you probably walked away quite pleased you sought out help. In summary, whether a service is expensive or cheap should depend on the value you receive during your interaction. Working with a financial advisor (or a financial planner) is no different. Paying $3,000 for generic financial advice from a salesperson that manages 300 clients is a waste of money. Having said that, working with a knowledgeable advisor that manages no more than 70 clients who charges $6,000 might end up saving you multiples of the cost via behavioral coaching and tax planning alone. In fact, both Vanguard’s and Morningstar’s research estimate that good advisors generate an additional 1.5% – 3% annual return when compared to clients who invest alone. This means that even after accounting for a 1% annual investment management fee, the financial advice can still have a significant positive impact on a client’s financial future. Download the pieces below:
Does that mean a higher cost implicitly means a higher value? Not necessarily. There are plenty of advisors who promise a personalized, high touch service but in reality provide generic asset allocation implementation that a robo-advisor can do for a fraction of the cost. That’s why it’s important to do the due diligence up front!
Paying advisory fees should be a small price to pay for behavioral coaching, vigilance, and peace of mind that a great advisor provides each of his or her clients.
The broader benefits of working with a financial advisor are in the comprehensive planning, personalized portfolio construction, behavioral coaching, and day-to-day wealth management services – all of which should be based on your specific goals and risk tolerance. In addition to the advisor’s alpha, the time you will save and stress you will avoid should not be underestimated. Sure, they are tougher to quantify, but they make a huge impact on a client’s personal happiness and fulfilment.
Where to Find Your Financial Advisor’s Fees
Advisors must itemize all financial advisor fees on the Form ADV paperwork filed with the SEC. You will find a brief overview in Section 5 of Part I, and greater detail in Part II. To keep overall costs low, you may consider working with a fee-only financial advisor where there are more transparent fee structures and fewer possible conflicts of interest. Don’t be afraid to ask questions!