For most individuals, the benefits of working with a financial advisor are clear. They include better financial outcomes, time savings, and peace of mind knowing that you are working with a trusted professional. But how about the costs? Because costs can be difficult to decipher, we present a primer on the price of advice.
A lack of transparency around fees and expenses can be frustrating if you are shopping for advice. And it can be costly if you getting advice but unsure of how you are charged. The price you pay for financial advice can have a real impact on your personal bottom line. In addition to cost, it is critical to understand the quality of the advice you are receiving. We addressed the ‘quality’ topic in our blog post on the Fiduciary Rule earlier this month. Below we explain several cost categories and provide some insight into how different types of advisors charge their clients for advice.
Understanding how - and how much - advisors charge helps you become a better buyer of financial advice. As we see it, the price of financial advice can be broken down into four main cost categories: Commissions, Sales Charges, Expense Ratios, and Advisor Fees.
Commissions. This is the charge you are assessed by a broker for buying or selling a security. For stocks and exchange traded funds, commissions typically run between $5 and $15 per trade. Mutual funds can be traded with no commission if the broker has previously negotiated an arrangement with the fund. Otherwise, the cost to trade a fund can run between $25 and $50 per transaction.
Sales Charges. When a broker recommends a fund, annuity, or other investment product, there can be another charge that comes right out of your pocket. The up-front sales charge of a load mutual fund, for example, can be as high as 5% of your initial investment. For annuities, charges paid through mortality and expense fees and rider charges can easily run above 5%.
Expense Ratios. This is the annual fee that a mutual fund or exchange traded fund (ETF) manager charges its shareholders. It’s expressed as the percentage of assets deducted each year to cover the costs associated with operating the fund, including paying the portfolio manager. For funds that track the performance of an index (passive funds) fees can be 0.1% or lower. Average fees for equity funds that try to beat a benchmark through active management were 0.8% in 2017, according to ICI Research.
Advisor Fees. These are the charges that you pay your advisor for their expertise in financial planning, asset allocation, money management and guidance related to personal finance issues. The standard model is to charge clients a percentage of assets under management, or AUM. The three main types of advisors are: Wirehouse Firms, Registered Investment Advisers (RIAs) and Digital Advisors.
Wirehouse Firms. Typically large businesses, which combine financial advice with brokerage. They often charge 1.5% of AUM or more. A recent Wall Street Journal article stated that Morgan Stanley lowered the maximum fee that their advisors charge to 2%. Voya Financial Advisors charge their clients around 1.5% of AUM. Advisors that are affiliated with broker dealers also can charge their clients sales charges on specific products that they recommend.
Registered Investment Advisers. Often independently owned, smaller-sized businesses that are not affiliated with a broker. Importantly, RIAs are fee-based, do not assess sale charges, and act as fiduciaries – placing the needs of their clients first. In a recent study entitled Seven Surprising Insights About Advisory Fees, blogger Bob Veres surveyed nearly 1,000 advisors about fees. While responses were ‘all over the lot’, he found that the median cost for financial advice for clients with $1-2 million to invest was 0.85% of AUM.
Digital Advisors. Also known as robo-advisors. They use technology to allocate, invest and rebalance your portfolio. You interact with the technology (not a real person). Expect to pay 0.25% - 0.50% for this type of service. According to the WSJ article mentioned above, Vanguard charges 0.3% for digital advice. We recommend that investors think about digital options as low-cost portfolio management. But it likely will fall short of comprehensive financial advice required by those with more complex situations.
At Laurentide, we’ve observed that educated consumers are more confident about their financial lives. When shopping for financial advice, make sure you are clear about what you’ll pay in fees. As you review your relationship with your current financial advisor, ask for an update on their fee structure.
Do you have more questions about what you’re paying for financial advice? We can help with a cost analysis. Contact us.
Rob Kania is Principal and Co-Founder of Laurentide Advisory