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What Fee Should You Pay A Financial Advisor? Thumbnail

What Fee Should You Pay A Financial Advisor?

I'm in several Facebook groups that discuss retirement and taxes (I know - super exciting!), and I see a recurring theme in many of the posts by members in the group.

"My financial advisor charges 1% of my portfolio. Is he ripping me off?"

"My advisor charges 1.5%. I can save that money and manage the portfolio myself."

"You should just use a robo advisor, they only charge 0.5%," and on and on. 

That all sounds reasonable on the surface but....

What fee should you pay a financial advisor?

Should you focus on price alone? Or maybe should you focus on the value that an advisor actually brings to you?

What if I told you:

  •  managing investments/portfolios is not the reason you should pay any advisor

  • an advisor's greatest value is keeping you from making financial mistakes from which you can't recover

  • without an advisor you basically stand no chance statistically from making one of those mistakes

Would that make you look at the fee differently? Maybe it's not a fee at all...maybe it's more like an insurance policy protecting one of the largest assets you own.

A true financial advisor fee is much more like an insurance policy.

Why do we buy insurance on anything? We buy insurance to protect the asset and to transfer the risk from us to the insurance company. A financial advisor fee is the same thing. It's insurance. You're transferring the risk of protecting your assets to an advisor who has the knowledge and resources to do just that.

Would you quit paying insurance on your home because it cost too much? Or would you instead shop insurance companies to find a rate you felt comfortable paying and that you felt protected your home also? 

We buy insurance to protect something we own in hopes we never need to use that insurance and cheaper doesn't mean better. It means cheaper.

What does a financial advisor charge?

It depends on the type of advisor (here's my blog about that) but if you are working with a Fiduciary Financial Advisor/Planner like 80/20 Financial, they will typically charge a percent of the assets they manage for you. That fee is referred to in the industry as AUM or Assets Under Management. If they manage one million dollars for you and their fee is 1% you will pay $10,000 per year for their services. ($1,000,000 x 1% = $10,000). The industry standard is around 1% but it can be from 0.5% to 2.5%, depending on the advisor. 

Is that too much money? It depends on your personal situation and how much risk you are willing to take in managing your own investments. I would ask you these questions:

  • Does it seem likely to you that working with us might cause your long-term investment return to be at least 1% more per year than you might obtain on your own?

  • Does it seem likely to you that we will save you at least 1% per year in the costs of mistakes you might make on your own?

  • Does it seem likely that we will save you at least 1% percent per year in time, energy, worry and record keeping?

At 80/20 Financial you can find our prices here.

Next time you pay a financial advisor fee or even shop for a financial advisor based on fees, think about your house. Would you sleep well at night knowing your house had no insurance or was underinsured? Or would you sleep a little better knowing you had some insurance?

Many mainstream investment companies treat client accounts valued at $200,000 and $1,000,000 the same, but they can be and usually are incredibly different. Going back to the home analogy...does it cost more to insure a $200,000 or a $1,000,000 house?

As your advisor we are a walking talking insurance plan hired to protect one of the largest assets you own, your retirement nest egg. The difference is that unlike most insurance plans we protect you before a disaster strikes, not after the damage has been done.

You need a plan

A goal of retiring - without a plan - is simply a plan to run out of money. At 80/20 Financial Services we specialize in helping cooperative employees plan their retirement. We can show you how to turn your 401k and your R&S lump sum into a stream of income just like when you were working while also helping you achieve your desired financial outcomes in retirement.

The consultation is free and without obligation. Contact us to set up a consultation.

For more articles about retirement planning and investing click here. 

Brian Coleman/Electric Cooperative Retirement Specialist

80/20 Financial Services is an Independent Registered Investment Advisory Firm.

We help electric cooperative employees create their retirement income and investment plans.

Photo by Jp Valery on Unsplash