Is this my advisor who charges a fair rate?
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Ask: If someone’s financial planner takes 1% off what they invest annually at their firm and not only doesn’t make any money for the client, but actually loses a substantial amount, is it time to go elsewhere?
Answer: The 1% of assets under management is a fairly standard fee in the industry, but that doesn’t mean it’s always worth paying. And besides, it’s crazy to have to pay it while losing money. So let’s first look at when 1% might be worth it, and when it might not; then what happens if you suffer losses; and finally, whether you should find a new advisor – this tool can help you find an advisor who may meet your needs – if you are experiencing losses.
Is a 1% fee to your financial advisor worth it, even if there are losses?
First, know that a 1% cap fee is common for the first million dollars under investment management and is generally unrelated to investment performance. “A new BMW sedan will probably cost a lot more than a Toyota sedan, but that doesn’t mean we can expect the BMW to cause fewer accidents or have lower repair costs than a Toyota. With a BMW you receive a luxury car that will eventually need repairs – and with your 1% fee you get a relationship with a person, but no guarantee of performance,” explains certified financial planner Patrick Whalen of Whalen Financial Planning.
Do you have a problem with your financial advisor or are you looking for a new one? Email picks@marketwatch.com.
That 1% undoubtedly adds up – and is especially painful if your portfolio declines in value. The first thing to consider is what you get for that 1%, explains certified financial planner Eric Presogna of One Up Financial. “If it is just about investment management and the losses have been happening for several years even though the market is rising, this would be a red flag,” says Presogna.
If the 1% fee includes financial planning, retirement planning, behavioral coaching and a host of other financial services beyond investment management, the value of those services should also be taken into account, Presogna says. “There is value in keeping a client in check during a 25% market downturn and preventing them from selling and cashing out. That value is difficult to quantify on an investment statement that shows large unrealized short-term losses,” he says.
If you only look at a short period, such as the 2022 calendar year, when stocks and bonds fell substantially, the losses could be a result of the poor market conditions that almost everyone has suffered. For reference, in 2022 the S&P 500 fell about 19%, but if your loss was much greater and your portfolio consisted mainly of these stocks, it might be time to get a second opinion.
A loss in itself is not always a good reason to switch to a new financial planner, unless the losses are a symptom of larger problems. “My guess is that your financial planner’s biggest mistake was not setting the right expectations or perhaps putting you in a portfolio that was more aggressive than you were actually comfortable with,” says Whalen.
So that raises questions: Do you have the right level of communication with your advisor? Do you believe that the 1% is fair even in declining markets? Do you understand your advisor’s strategies? If you answered no to these questions, it may be time to move on to someone else. This tool can help you find an advisor who may meet your needs.
Some people may never feel that 1% will provide them with enough value, as advisors typically don’t gain hugely from the market and will always have bad years. If your advisor has created a comprehensive, holistic financial plan and helps you tackle tax planning, estate planning, budgeting, managing assets and more, paying 1% may be worth their services. If you already know a lot about these topics and prefer to personally take a more hands-on approach to your investments, you may not need to pay someone that 1% fee for something you can accomplish yourself.
How do you find a new financial advisor?
You will want to look for a licensed advisor, such as a CFP or CFA, who has extensive courses and training and who works as a fiduciary, meaning they have their client’s best interests at heart. Consider working with an advisor who is paid only by the client and does not receive a commission based on products sold or recommended. When hiring an advisor, refer to this MarketWatch Picks guide to ensure you ask the right questions and adequately vet potential advisors.
Do you have a problem with your financial advisor or are you looking for a new one? Email picks@marketwatch.com.