Are you Overpaying Your Financial Advisor?

Financial advisors can help make or break your portfolio. These advisors are responsible for managing your finances, which entails everything from financial planning to budgeting and retirement planning to allocating your funds in different investments as per your risk appetite. Traditionally, comprehensive financial planners have been offering a mix of investment management services and planning advice. The fees a client pays are normally based on the services they opt for. Different financial planners charge differently either on an hourly basis, per project, a retainer model, a commission on selling financial products or services, or as a percentage of total assets managed known as Assets Under Management (AUM). Do inquire about how the advisor charges their fee at the time of interviewing prospects. If you wish to learn more about different fee models that advisors use to charge a fee, ask a financial advisor at the time of engaging their services.

Some investors are often worried that a financial advisor may not justify the fees they charge and if it is worth paying a financial advisor. In this article, we will discuss different signs to identify if you are overpaying your financial advisor and how you can navigate such situations.

What are the signs that you are overpaying your advisor?

The cost of hiring an advisor depends on several factors like the advisor’s experience, portfolio size, services, and more. However, a hefty price tag is not a guarantee of good management or investment advice.

Investors who pay a certain percentage of their portfolio value as financial advisor fees may pay as low as 0.25% or as high as 1% of their portfolio value.

Whether you are overpaying your financial advisor or not is a bit more complex than just going over raw numbers. Paying 1% may be a better deal than 0.25% if the advice yields better returns. While 0.25%-1% may not seem huge, it is a significant amount depending on the size of the portfolio. Also, clients need to pay investment costs apart from advice fees. These costs vary based on the investment instrument. For instance, ETFs and index funds charge less than 0.2%, but variable annuities can go over 2%.

It also depends on the services included under the financial advice. Robo advisors or other digital tools typically charge a lower fee compared to human financial advisors. So, pick an advisor who you are more comfortable with and suits your needs.

Wondering if you are overpaying your advisor? Here are some signs:

1. Your financial advisor doesn’t have the right credentials

Many financial advisors boast vast experience in serving clients but may lack real certifications and qualifications. While skills and experiences are important, the absence of credentials can be a deal-breaker. This is because you can assess their expertise based on their qualifications. Certifications work as an assurance that you are paying a premium for your advisor’s knowledge. In their absence, you could be overpaying for ill-informed advice.

2. Your advisor does not customize their solutions for you

A one size fits allapproach doesn’t work in financial management. Whether you avail services of an investment advisor or a comprehensive financial planner, they must tailor their strategy based on your financial goals and needs. They must work closely with you to understand your financial goals, assets, earnings, and current and future expenditure. A ‘cookie-cutter’ approach that doesn’t take into account parameters like insurance, taxes, employment benefits, inheritance, etc., would be deemed insufficient and overpriced no matter the cost.

Investment management services that offer a well-diversified portfolio along with periodic statements may demand premium payment. For instance, if you are paying 1% and getting a customized solution, it may be a good deal. In these cases, the advisor will help you organize your financial life, check with you regularly and proactively manage any issues. Most comprehensive financial planners charge 0.5-1% for assets under $1 million, but some charge as high as 2% too.

3. The advisor does not revisit or refresh the financial strategies they suggest for you

Some comprehensive financial planners may interview you at the beginning and design a plan based on your goals. While that may be the way to go, some of them continue with the same portfolio strategy which they observe to reap positive returns.

However, your goals may not remain the same over time. A good financial advisor maintains communication with you and keeps rebalancing the portfolio based on your needs, goals, and portfolio performance. If you observe this to not be the case, you may be overpaying.

4. The advisor earns from sales and commissions

If your advisor says that there is a fund that they exclusively sell, then he may probably be making more money than the profit you earn. Also, some advisors may not charge a fee but earn from commissions. In such cases, they will sell you products that offer more commissions irrespective of their growth potential. Not only is this risky, but you may also end up overspending and overpaying your advisor.

Hence, understanding how the financial advisor earns his fee can help you assess if you are paying more than the fair amount.

5. The advisor is charging a higher than average fee and it increases steadily

Some financial planners increase their fees yearly without offering any additional services. If this fee is higher than the average fee charged by advisors, you may be overpaying. It is a good idea to enquire about the fees of other advisors and the various services they offer to make an informed decision.

6. The advisor is charging a significant sum of money for rebalancing your portfolio

Rebalancing fees should be typically lower than the complete cost of financial management. The complete package involves rebalancing, estate management, rebalancing, tax mitigation, income and expense management, etc. Paying as much as the cost of a comprehensive package just for rebalancing can be an indicator that you are overpaying.

7. Your advisor charges a high fee even when you do not have a sizable portfolio

Even reasonable fees may feel burdensome when your portfolio size isn’t significant. For instance, if you choose a fee-only planner who may charge handsome fees to the tune of thousands of dollars annually, it may reduce your small portfolio considerably. Also, those that charge a percentage-wise fee may require you to have at least a million dollar portfolio.

What to do if you are short on money

When you are struggling to make ends meet, it may seem counterproductive to pay financial management fees. However, it may also be a phase of your life where good financial wisdom may make all the difference. Good financial advice can help you sail through this rough patch and make the best of what you have. Whether an advisor is good or not may become clearer in challenging times. During good times, they can help you stay prepared for unforeseen circumstances, and during tough times, they can recommend risk-mitigating strategies to make better financial decisions.

Tips to assess if your financial advisor is overbilling you

  • Check your quarterly and annual statements for a description of advisor fees and check if it matches the amount quoted.
  • If there are some charges you cannot decipher, do not hesitate to ask them for clarification. If they seem to be uncomfortable or dodge your questions, it is a red flag.
  • If they are promising returns that are too good to be true, they are probably camouflaging a larger than average fee.

A financial advisor is a great investment. But it is always wise to be wary of hidden charges and fees that may be ripping you off. Staying updated with the industry's prevalent rates and asking your advisor the right questions can go a long way to ensure that you are not overpaying.

To conclude

Choosing the right financial advisor is paramount for the good health of your finances. However, you need to carefully consider the compensation they demand in return for their services. If you observe any of the above-mentioned pointers in your advisor, there may be a high chance that you are overpaying your advisors. To avoid such scenarios, have a clear conversation with your advisors about their payment structures and the services you seek. Understand how fee-based and fee-only advisors work and only then hire an advisor you are comfortable with.

Use the free advisor match tool to match with experienced and certified financial advisors who can help you attain your financial goals and secure your financial future. Give us basic details about yourself, and the free match service will connect you with 1-3 professional financial fiduciaries that may be suited to help you.

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The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice.
A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.