How Much Should Advisors Charge You?
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What are Advisor Fee Structures?
Value is in the eye of the beholder. But what about when you, as the beholder, have no idea how to value something? The uncertainty involved in hiring a wealth planner makes it unsettling to pull the trigger. However, you’re investing in yourself and your future, so you shouldn’t overpay.
If you’ve never worked with a wealth planner before, understanding how they get paid may be confusing. The advisor fee system can be vague and complicated, and you might be surprised by what it may cost.
In simple terms, advisors charge based on the scope of service and complexity of the work involved. Every advisor has their own way of charging, and most likely, the amount varies from client to client. You should only be paying what’s fair for you and your unique situation.
To shed some light on the options and averages, Zoe Network Advisors charge in two primary ways: Flat Fee or Assets Under Management (AUM.) Based on the type of fee they charge, there are specific questions that you should ask your advisor to make sure your best interests are considered. Let’s discuss the various costs of each category and the relevant questions you should ask your advisor.
The Two Main Ways Zoe Advisors Get Paid
Assets Under Management (AUM)
Another way to think about fees is a percentage based on the total market value of your investments. While calculated as a percentage of your assets, an AUM fee differs from commissions. Whereas commissions are service charges based on a transaction (e.g., buying or selling mutual funds or stocks), AUM fees are a percentage based on the value of your investments. The benefit of this structure is that you and the advisor sit on the same side of the table; the fees you pay will fluctuate based on how your account performs. When your account value increases, so do the cost. When the value of your account goes down, the fee reflects this decrease. For example:
$500,000 * 1% = $5,000
$400,000 * 1% = $4,000 OR $600,000 * 1% = $6,000
With the AUM structure, there are also ‘breakpoints’ where your fee decreases as the value of your account increases. As you add more money to your account, your fee is reduced. So if you started at 1% for $500,000, your payment might decrease to 0.90% if your account surpasses the breakpoint at $1,000,000. For example:
$0-$500,000 = 1.25%
$500,000 – $1M = 1%
$1M – $2M = 0.90%
Over $2M = 0.80%
Advisors post their AUM fee schedule publicly in their firms’ Form ADV, and the advisor can calculate the rate in one of two ways:
- Flat Percentage Tiers: Advisors can charge a flat percentage based on the total value of your investments. Every dollar you invest is charged at the same rate. If you have $850,000 to invest, using the fee schedule above, your fee would be 1% * $850,000 = $8,500
- Graded Percentage Tiers: Advisors can charge a blended rate on the value of your investments, so the more money you add, the smaller the percentage is. However, the catch is that the lower rate doesn’t apply to all dollars. If you have $850,000 to invest, using the fee schedule above your fee would be (1.25% * $500,000) + (1% * $350,000) = $9,750. The effective net fee would be a blended 1.147%.
With this method, it’s essential to ask your advisor what the effective fee would be. This structure is similar to how tax brackets work; the first dollars you invest will likely be charged a higher rate.
A flat fee is a fixed cost you pay for the service versus a fixed percentage. The advisor charges a fee based on the complexity, time, and scope of the work, not the sale of a product. Flat fees come in different forms; here are the most common ones:
- Hourly – $150-$350 per hour is the average range. This structure is easy to explain, as it’s by the number of hours spent on your financial plan multiplied by the advisor’s hourly rate. The downside? You may not know the time required to build your plan upfront. As such, the final bill may come as a surprise.
Questions for the Advisor:What is the least amount of hours you’ve billed? What is the most? What is the average amount of time it takes to build a financial plan? What should I expect in terms of total cost?
- One Time Project – The average range is $1,500 – $7,500 per engagement. To help avoid any sticker shock, choosing a project-based service provides transparency regarding the upfront cost. This financial planning service will be limited in scope, including creating a plan and developing recommendations. However, this offering does not typically include the plan’s implementation or ongoing monitoring. Meaning you will get your financial plan but must execute and monitor it independently.
Questions for the Advisor:What is the expected timeframe for this project to be completed? Can I come to you with questions after our engagement has ended?
- Subscription Model – $200-$600 per month is the average range. Think of this as a more expensive yet more meaningful Netflix or gym membership. You may have a monthly or quarterly subscription fee, providing you ongoing access to your advisor as much as needed. This structure typically includes creating a financial plan and the continuous monitoring and implementation of this plan.
Questions for the Advisor: How often should I expect proactive communication (e.g., monthly, quarterly)? What do you envision the first year working together to look like? Does the rate change over time or stay the same?
- Annual Retainer – $2,500 – $10,000 per year is the average range. Think of the annual retainer as a combination of project and subscription models. You get a plan similar to project-based work for a stated rate, but you also get access to the advisor for a full year to help with questions, updates, and guidance around implementation. So you pay a one-time project fee upfront and a subscription fee moving forward.
Questions for the Advisor:Do most clients continue this service after the 1st year? Does this fee change over time? How often will we be in communication regarding the plan’s performance?
How To Choose The Advisor Fee Model That Works For You
Every individual is unique and has a distinctive financial situation. Basing your fee model on someone else’s experience could end up being less advantageous than you think. Your advisor search should focus on finding the advisor who best fits your needs, and this includes accomodating your preferences when it comes to your fee structure.
There are many fee structures advisors can offer, and ultimately, the one they choose can reveal a lot about their intentions. If you aren’t sure which fee arrangement is the best for you, find an advisor that offers multiple fee structures (AUM and Flat Fee). Then, ask for their professional opinion on which one they recommend based on their experience servicing clients in a similar situation as you.
When you hire an advisor, you need to trust them to give you advice, so asking for their recommendation on the best fee structure for your needs is a great first step.
Lastly, you need to understand the quoted fees in dollar terms rather than solely percentages to make an informed decision. For example, if your quote is 1% of the investable assets, calculate what that translates to (1% * $500,000 = $5,000), so you know what you will owe. Similarly, if your quote is $400 per month, what percentage of your income will that be ($400 per month / $250,000 annual income = 1.92%)?
Remember, the ideal advisor for you will always put you first. There are models available to them where they’d earn a commission from your investments (not your portfolio’s overall value), which ultimately translates to them making more money. But if they have your back, they will choose the more transparent model that gives you comfort and peace of mind. We believe the wealth management industry is perceived as deceptive because many advisors prioritize themselves before their clients.
We vet our advisors to ensure that their fees are transparent and unbiased, and you should always ask questions.
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