Why Pay 1% To A Financial Advisor?
By Russell W. Hall, CFP®, CPWA®
If you’re reading this article, chances are you fall into one of two camps:
1. You think financial advisors that charge 1% for their services are a rip-off. You can do what they do just as well…and for free! You’re hoping that this article is an insider’s confirmation that you don’t need to pay someone to help with your financial planning.
2. You’re already working with a financial advisor - likely Eclectic - and you are anticipating that this will be a (somewhat self-serving) confirmation that you should keep your advisor.
We hope this article presents a realistic view that falls somewhere in the middle. We also should clarify that by “pay 1%”, we mean a fee-only financial advisor who charges an annual fee starting at 1% of the amount they are managing. We don’t mean brokers or commission-based advisors who get paid from sales and transactions.
What does 1% get you?
Let’s run through a few benefits from working with a fee-only advisor:
1. Dedicated, live service. You’re hiring an advisor and their team who will meet face-to-face, will answer the phone when you call, and will respond to emails in a timely manner. You’re not communicating with a service desk or a large company where it’s difficult to get a live person on the phone.
2. Personalized financial plan. Much like a doctor wouldn’t write blanket prescriptions without having knowledge of their patients, a good financial advisor won’t just dole out investment advice. They take the time to get to know you and create a plan that fits your situation, but is also adaptable as life changes.
3. Reporting and reviews. Financial advisors will take all of your assets into consideration and will provide straightforward reporting that lets you know exactly what you own, how those investments are performing, and whether your goals are being met. They will conduct regular reviews and update meetings. Equally important, they will communicate exactly what fees you are paying and how you are being charged.
4. Planning – retirement, tax, estate, college. Financial advisors often have expertise in these areas, even if they aren’t attorneys or CPAs. For instance, we’ve found that tax preparers are usually too busy to do much more than just file the current tax return, when often more advanced tax planning would really help clients. And unlike attorneys and CPAs, a good financial advisor has helped hundreds of clients navigate their retirement.
5. Other benefits. These aren’t always obvious, but advisors can also provide help to their clients’ family members who wouldn’t otherwise qualify as clients at many firms. Also, fee-only financial advisors usually have a network of professionals that they can refer their clients to. Because there are no referral fees or kick-backs, the referrals tend to be to someone the advisor trusts and thinks will be good for their client - because their reputation is on the line as well!
You’ll note that we only briefly addressed investment returns in this benefit list. Obviously, hiring a professional to make investment decisions can be very beneficial, especially if you have limited expertise in that area. But constructing an investment allocation is only a piece of the financial planning process, not the whole thing (despite what some large companies tell you in their commercials). Many times we feel that a significant part of our value is helping clients avoid those bad investing mistakes that would really damage their financial plan.
When is it not worth it?
All that said, are there times when you should not need to pay an advisor 1%? We think so.
1. If you have the expertise yourself - and someone who can act as a good sounding board for your ideas - then you might be fine to self-manage your own financial plan. Notice that we didn’t just say “manage your own investments”, since we’ve established that financial planning is more than that.
2. If you are the type of person who is not willing to take advice from experts that you’ve hired, then frankly don’t hire them! That may sound strange, but you’d be surprised at the number of times we’ve dealt with clients who ignore all of our advice and then are upset when things don’t turn out how they envisioned.
We hope this is a helpful overview of the financial advisor/client relationship. If you’d like to know more, please contact us.
We are grateful to Bryce Sanders for his in-depth article on this subject.