“I finally woke up to reality.” I’ve been paying a percentage of my investments to a financial advisor for years, but I don’t think it’s worth it. Is a 1% fee really fair?

Does your financial advisor charge you a fair fee

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We recently received this note from a reader that we think is worth investigating, as we get many questions from readers about whether the advisor’s fee is worth it:

“After too many years of paying for oversight, I’ve finally come to realize that it can’t be in the best interest of the investor as long as the manager is rewarded for assets under management.”

Is this reader right? Well, first of all, the AUM model – which represents assets under management and often represents a fixed rate of 1% of its assets – is not without controversy. And the answer to whether it’s worth it or not isn’t clear – and depends on what they do for you, what they charge, and how much work you want to do yourself. -even, among others. Here are the pros and cons. (Looking for a new financial advisor? This tool can help you find an advisor who might meet your needs.)

Some say AUM is never a truly fair model – and instead say that most financial advisors should charge on an hourly or per project basis. “I am passionately opposed to the uncapped nature of the AUM model. It doesn’t make sense to pay higher and higher fees just because your investments have grown,” says David Barfield, Certified Financial Planner at Datapoint Financial Planning.

If you have a $1 million portfolio and pay 1% AUM fees, you will pay around $10,000 per year for the services of an advisor. If that $1 million increases to $1.5 million, your costs will increase by about $5,000 per year to $15,000 per year.

Have a question or comment about your financial advisor? Email [email protected] for advice.

And Shawn Ballinger, certified financial planner at Columbus Street Financial Planning, says true fiduciary advisor compensation shouldn’t be tied to market performance. “Advisor compensation over time will increase given historical market performance. The Assets Under Management (AUM) model has inherent conflicts, especially when a client asks if they should pay off their mortgage with investments held by the advisor charging an AUM fee,” says Ballinger. (Looking for a new financial advisor? This tool can help you find an advisor who might meet your needs.)

Also, he says, the industry has become accustomed to meeting with a client once a year, giving them an update on the economy and their portfolio, taking them out to dinner, and charging 1% to manage its investments. “It just doesn’t work anymore and people are starting to realize that,” Presogna says. And it’s also important to note that those with a smaller portfolio may have a harder time finding an AUM-based advisor. This Marketwatch Picks guide highlights when you shouldn’t pay a 1% AUM fee and consider a flat-rate advisor instead.

That said, AUM advisors are often worth what you pay them. The amount of fees and the value delivered are worth considering, according to Certified Financial Planner Eric Presogna of One Up Financial. “$10,000 per year fixed fee or 1% AUM to manage $1 million lifetime savings, build, monitor and update financial plan, provide tax planning and preparation, estate planning, insurance, financial education for their children and more, all of which is of added value to the client could be a given. I think it comes down to transparency in the fees charged and the services offered,” says Presogna (Looking for a new financial advisor? This tool can help you find an advisor who might meet your needs.)

And Lynn Dunston, Certified Financial Planner at Moneta, says there is significant misunderstanding among consumers about asset-based advisory fees. “I am a fee-only planner and work in a fiduciary capacity 100% of the time, and I can tell you that there are definitely circumstances where assets under management are not only appropriate, but actually better for the client” , says Dunton. If someone has very complicated finances that require a lot of time and work on behalf of an advisor, hourly fees can add up quickly and create a barrier between client and advisor, especially if the client feels the need to limit the advisor’s time to reach a certain cost.

James Kinney, Certified Financial Planner at Financial Pathway Advisors, recommends considering whether an hourly-paid advisor has their interests more aligned than an AUM-paid advisor. “In my experience, no. What I find is that my hourly clients tend to act first and seek advice second. I think there’s an inherent disincentive to asking for advice when you know it’s going to cost you several hundred dollars per hour. On the other hand, if an AUM advisor’s portfolio drops 10%, their income also drops by 10%. It’s a powerful incentive to manage risk and return in a way that broadly aligns with the interests of their clients,” says Kinney.

Ultimately, there is no single answer – some people, like those who tend to be more experienced, knowledgeable, and disciplined, might work better with an hourly counselor, while others would. probably better to have a professional in mind from the store. (Looking for a new financial advisor? This tool can help you find an advisor who might meet your needs.)

Have a question or comment about your financial advisor? Email [email protected] for advice.

* Questions edited for brevity and clarity.

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