The Truth About Financial Advisor Fees
Fees. This is the elephant in the room when it comes to financial advice...
As the saying goes, you get what you pay for... so quality advice isn't cheap. But here's what many people miss – the fee itself doesn't matter. What matters is the value you receive.
Let’s say I charge 1.5% of assets under management (AUM); this seems like a lot of money at first glance. But, would you rather pay $300 and get $900 worth of value, or would you rather pay $15,000 and get $45,000 worth of value? In the first case, you have an extra $600; in the second, you have an extra $30,000! If you are like my other clients, you understand the math is far more favorable in the second scenario.
Why Hourly Billing Creates the Wrong Dynamic
I talk with many prospective clients who want the cheapest advice they can get. And they believe paying an hourly rate is best. But here is why I don’t charge by the hour… Think about the last time you took a taxi in an unfamiliar city. Remember that nagging feeling, wondering if you were being taken on the "scenic route"? Or what about that time you met with an attorney who charged by the hour? Every question about your family or personal life came with a ticking meter and an increase in cost.
Financial planning shouldn't feel that way. Your advisor needs to know your finances and personal life to give good advice. When you watch the clock, you might hesitate to share key info or ask your important questions. That's why I don't charge by the hour. Building trust is key to successful financial planning. Hourly planning does not create trust.
Understanding Fee-Only and Fiduciary: Concepts That Have Significant Depth Beyond Buzzwords
A common misconception is that "fee-only" refers to hourly billing. Let me clear this up:
Fee-only means I get paid only by you, the client. I get no kickbacks, commissions, or hidden fees from product sales.
Fiduciary means I'm legally bound to act in your best interest, putting your needs before my own.
Why I Charge a Percentage of Assets Under Management
Some critics argue that percentage-based fees are problematic. But consider this: If I charged a flat $10,000 fee, regardless of your returns, what incentive would I have to grow your wealth? As Charlie Munger said, "Don't you dare pay attention to anything that's not incentives."
When I charge a percentage of assets:
My success is directly tied to your success.
I feel the impact of market downturns alongside you.
I'm incentivized to help your portfolio grow.
Our interests remain aligned.
The True Cost of "Cheap" Financial Advice
Many advisors offer discounted rates. Or, they take on many clients to offset lower fees. Many of the advisors I know have several hundred clients. I work with under 100 households on an ongoing basis. Other advisors must have a large number of households because they don't trust their advice. So, they discount their fee. To run a business, they need more clients. This downward spiral often means:
Less personal attention. You are a number in the system.
Limited access to your advisor.
Cookie-cutter solutions rather than personalized strategies.
According to Vanguard's Advisor Alpha study, working with the right advisor can add up to 3% in net returns. This value comes through:
Comprehensive financial planning.
Behavioral coaching during market volatility.
Strategic tax planning.
Personalized investment strategies.
But it is very difficult to receive this type of value if you are just a number in the system.
Is hiring an advisor too expensive?
So, the real question isn't "How much does it cost?" but rather "What value am I receiving?" If fees are your main concern, consider discount brokers or "free" financial advisors. But, if you're looking for:
A true financial partnership.
Unlimited access to your advisor.
Customized strategies for your unique situation.
A fiduciary who puts your interests first.
Then let's have a conversation about how we can work together to achieve your financial goals.
Note: For more information about the value a qualified advisor can provide, see Vanguard's Advisor Alpha study: Advisor Alpha Study