Broker Check

Should you pay an advisor more than 0.25%?

| March 24, 2014

Some firms charge only 0.25% -- ¼ of 1% -- for (pure) investment management.

Many couples and individuals require or desire retirement planning and advice, not just investment advice.

Recently I read an article about a firm that charges 0.25%.  That’s ¼ of 1%.  Because of how this firm operates, that 0.25% might be the only cost the clients pay – no other “management fees,” transaction fees, internal expenses, etc. etc.

Is this a “good deal?’  Maybe . . .

In the case of this particular firm, the fee mentioned was paid by a large institutional (pension fund) client.

In all probability, what the firm is charging for is investment management . . . period.

It’s also possible that such a firm has a minimum account size that is larger (maybe much larger) than many readers of this post have available to invest.

More importantly, this fee structure brings to mind what a personal financial advisor could or might do for an individual client.

In my professional opinion, a financial advisor who advises an individual client (couple, single, divorced, widowed, etc) (i.e. not an institutional client) has or should have a fiduciary duty and responsibility to understand that client’s complete situation.

I often read and personally experienced that many people who use personal financial advisors use multiple advisors.  The purpose of this note is not to discuss that practice.  However, I will simply state that I don’t feel that I can make any specific recommendations to anyone without understanding their complete situation, including a thorough document review.  (All investment statements, retirement statements, insurances, tax returns, wills & trusts, etc.)

The careful reader at this point might notice that the institutional money manager charging 0.25% with a minimum account size of, let’s just say, 10 million dollars is still receiving an annual fee of $25,000.

Could I do a thorough review of a client’s complete situation, including documents, and “advise the client” (as opposed to “manage the client’s money”) for $25,000 per year.  Yes.

But what if they have $500,000.  Could I do all that work for a fee of $1,250?  No.  Not unless I want to go out of business quickly.

 Summary:  Currently it would not be uncommon for a client to pay a 1% advisory fee.  There might be other internal expenses of perhaps an additional 0.50% - 1.50%.  Is a total expense of 1.5% worth it?  How about 2.5%?  The answer clearly depends on what you are seeking, and ultimately, how the advisor does for you.

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