By Karen Lynch | American Express Credit Intel Freelance Contributor
6 Min Read | August 13, 2020 in Money
Good financial advice can help make you wealthier, reduce your debt, or cushion your retirement. But it can also cost you more than you think. And bad financial advice can be even costlier. That’s why it’s important to choose your financial advisor carefully and understand the tradeoff between what you’re paying and what you’re getting in return. To paint the big picture of financial advisor costs, this article lays out the fees, benefits, and risks.
If you’re confused about what financial advisors cost – or even who they are and what they do – so are most people. According to recent research, “Over the past two decades, technology advances have created greater transparency into how financial services firms behave, the value they offer, and the fees they charge. Unfortunately, too many Americans still don’t have a good understanding of how much they pay their advisors.”1 Check out these findings:
There’s good cause for confusion and ambivalence about financial advisors’ fees. While some fees are clearly stated, others are buried, and many may seem too insignificant to bother with. But your financial advisor’s costs can actually have a big impact on your finances.
How big? Literally tens of thousands of dollars, over time. In the chart below, the Securities and Exchange Commission (SEC) compared a 1% and 0.25% ongoing fee on a sample investment portfolio. Over 20 years, the higher fee (green line) would reduce the portfolio’s value by nearly $30,000 compared with the lower fee (blue line).6
Portfolio Value from Investing $100,000 Over 20 Years
How could that be? Saving and investing are percentage games. Every fraction of a percent that you gain really counts, as it is reinvested and “compounds” over time, accelerating your investments’ growth by delivering returns on your returns. Financial advisory fees have the opposite effect, since they reduce the amount that you are reinvesting and compounding over time.
One way to break down the types of financial advisors is to look at licensing, registration, and certifications.
All that said, it’s not uncommon to see hybrids of all four of the above, going by names including money managers, wealth managers, private bankers, and others. There are also big, medium, and small advisory firms, including giant low-cost mutual fund companies and online fintechs as well as local boutique outfits.
“Advisors offer a range of services and fee structures, and a lot of clients can feel intimidated by both the jargon and the concepts,” the Wall Street Journal reports. “But if people don’t get the relationship with an adviser right at the beginning, the mistake could be compounded over years – and that can end up costing them hundreds of thousands of dollars over a lifetime.”13
Of course, people can save and invest without financial advisors, who neither guarantee that they will outperform the market nor that you will achieve your financial goals. Still, a financial planner can be worth far more than their costs, helping you look at the big picture and guiding you through budgeting, tax issues, retirement planning – and through major life events like paying for college, getting married, and starting a family. Investment advisors can improve your returns on investment, with advice on sensible asset allocations, low-fee options, and steady strategies during volatile markets.14
Bad financial advice is a different story. For instance, fees and commissions can pose potential conflicts of interest between an advisor and a client. “Annual losses from conflicted investment advice range from $24.2 million in Wyoming to $205.3 million in Iowa to just over a billion in Texas and to nearly $1.9 billion in California,” according to a 2017 report from the Economic Policy Institute.15 The federal government recently loosened the regulation of fiduciary standards, which require financial advisors to put their clients’ interests ahead of their own, and some professional and advocacy groups are stepping in with their own codes.16,17
Ultimately, one of the best ways to measure your financial advisor’s worth is to track your portfolio’s return on investment and compare it to the overall market’s growth. After all, if you’re paying someone a fee to provide financial advice, they should be able to get you a better return than the market average, which you can obtain at lower cost via a passive index fund. Online statements usually include portfolio returns minus fees, along with the capability to see how much your investments have grown over the past month, quarter, year, or other time period of your choice.
To cut through the confusion, here are questions to ask when hiring a financial advisor, from the SEC18 and Wall Street Journal:19
Financial advisor costs can be difficult to fathom, but understanding them is key to achieving your financial planning and investment goals. As the SEC says, “over time, even ongoing fees that are small can have a big impact on your investment portfolio.”
1 Hidden Beneath the Surface: What Americans are Paying in Advisory Fees, Personal Capital
2 Investors in the United States, FINRA Investor Education Foundation
3 “2019 RIA Industry Study: Average Investment Advisory Fee is 0.96%,” RIA in a Box
4 “Six Questions to Ask a Financial Adviser About Fees,” Wall Street Journal
5 Hidden Beneath the Surface: What Americans are Paying in Advisory Fees, Personal Capital
6 “How Fees and Expenses Affect Your Investment Portfolio,” Securities and Exchange Commission
7 “Chartered Financial Analyst,” Investopedia
8 “Investment Advisor Public Disclosure,” Securities and Exchange Commission
9 “How Much Does a Financial Advisor Cost?,” SmartAsset
10 “Find a CFP Professional,” Certified Financial Planner Board of Standards
11 “BrokerCheck,” Financial Industry Regulatory Authority
12 “What is a Robo-Advisor?,” Investopedia
13 “Six Questions to Ask a Financial Adviser About Fees,” Wall Street Journal
14 “Are Financial Advisors Worth It?,” Motley Fool
15 “Here Is What’s at Stake with the Conflict of Interest (‘Fiduciary’) Rule,” Economic Policy Institute
16 “Summary and Video Series to Understand the New Code of Ethics and Standards of Conduct,” Certified Financial Planner Board of Standards
17 “Fiduciary Oath,” The Committee for Fiduciary Standard
18 “Understanding Fees,” Securities and Exchange Commission
19 “How to Choose a Financial Planner,” Wall Street Journal