Is this my adviser charging a fair rate?
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Question: If one’s financial planner takes 1% off the top of what one invests annually with his firm and not only makes no money for the client, but actually loses a substantial amount, is it time to go elsewhere?
Answer: The 1% of assets under management is a pretty standard fee in the industry, but it doesn’t mean it’s always worth paying it. And on top of that, it’s maddening to pay it when you’re losing money. So first, let’s look at when 1% might be worth it, and not; then what happens when you sustain losses; and finally whether you should get a new adviser — this tool can help match you with an adviser who may meet your needs — if you do sustain losses.
Is a 1% fee to your financial adviser worth it, even when there are losses?
First, know that a 1% fee off the top is common for the first million dollars under investment management and is typically separated from investment performance. “A new BMW sedan will likely cost much more than a Toyota sedan, but that doesn’t mean that we should expect the BMW to be in fewer accidents or cost less to repair than a Toyota. With a BMW you receive a luxury car that will eventually need repairs — and with your 1% fee you receive a relationship with a person but not a guarantee of performance,” explains certified financial planner Patrick Whalen of Whalen Financial Planning.
Have an issue with your financial adviser or looking for a new one? Email picks@marketwatch.com.
No doubt, the 1% adds up — and especially hurts when your portfolio is down. The first thing to consider is what you are getting for the 1%, explains certified financial planner Eric Presogna at One Up Financial. “If it’s just investment management and the losses have occurred for several years despite the market being up, this would be a red flag,” Presogna says.
If the 1% fee includes financial planning, retirement planning, behavioral coaching and a host of other financial services on top of investment management, the value of those services should also be taken into consideration, says Presogna. “There’s value in hand-holding a client through a 25% down market and preventing them from selling and going to cash. That value is hard to quantify on an investment statement that shows large unrealized short-term losses,” he says.
Indeed, if you’re only looking at a short period of time, like the 2022 calendar year when stocks and bonds were down substantially, then the losses may be a result of poor market conditions that most everyone sustained. For reference, during 2022, the S&P 500 fell approximately 19%, but if your loss was much more significant and your portfolio was mainly composed of these stocks, it might be time to seek a second opinion.
A loss by itself is not always a good reason to move to a new financial planner unless the losses are a symptom of greater problems. “My guess is that your financial planner’s biggest failing was not setting proper expectations or perhaps putting you in a portfolio that was more aggressive than what you were actually comfortable with,” says Whalen.
So that brings up questions: Do you have the right level of communication with your adviser? Do you feel that the 1% is fair even in down markets? Do you understand your adviser’s strategies? If you answered no to those questions, it may be time to move on to someone else — and this tool can help match you with an adviser who may meet your needs.
Some folks may simply never feel like 1% is going to give them enough value — as advisers aren’t typically vastly beating the market and will always have down years. If your adviser has created a comprehensive, holistic financial plan and helps you tackle tax planning, estate planning, budgeting, managing assets and more, paying 1% may be worth their services. If you already know a lot about these topics and prefer to personally have a more hands-on approach with your investments, you may not need to pay someone that 1% fee for something you can achieve on your own.
How to find a new financial adviser
You’ll want to look for a credentialed adviser, like a CFP or CFA who has undergone extensive coursework and training and who works as a fiduciary, meaning they put their client’s best interests first. Consider working with a fee-only adviser who is only paid by the client, and doesn’t receive commissions based on products sold or recommended. When hiring an adviser, consult this MarketWatch Picks guide to be sure you ask appropriate questions and adequately vet prospective advisers.
Have an issue with your financial adviser or looking for a new one? Email picks@marketwatch.com.
This story originally appeared on Marketwatch
