Am I Being Taken Advantage Of? I'm Paying 50% of My IRA Contribution in Fees

Ask an Advisor: ‘Am I Getting Fleeced?’ I’m 66, Contributing $272 Per Month to an IRA and Paying $136 Monthly in Fees. That’s 50% of My Contribution

I am 66 years old, still working and with very good health insurance. My company does not have a 401(k). I do have an individual retirement account (IRA) with approximately $120,000 invested. I contribute $272 per month, yet my program fee is $136 per month. That’s 50% of my contribution. Am I getting fleeced?

-Garry

There are two points to address here with your question. The first is about understanding the way your fee is calculated. The second is to assess whether you feel that the service you are receiving is worth the fee you are paying.

These are very important points. After digging in, you may decide that you want to make a change. But bottom line: I wouldn’t say you are getting fleeced. (Looking for a new advisor? This tool can help match you with potential advisors.)

Calculating the Fee

Ask an Advisor: 'Am I Getting Fleeced?' I'm 66, Contributing $272 Per Month to an IRA and Paying $136 Monthly in Fees. That's 50% of My Contribution — Ask an Advisor: ‘Am I Getting Fleeced?’ I’m 66, Contributing $272 Per Month to an IRA and Paying $136 Monthly in Fees. That’s 50% of My Contribution

It’s good that you check your account statement and pay attention to the fee. Like any other service you use, you should know what you’re paying for it.

While you can clearly see the amount, it may not be as obvious to you how the amount was determined. Your advisor would have been required to disclose this to you at the time you became a client. Take a look at the paperwork you were given. Unless something is missing, it will be spelled out in detail. Or just call and ask.

It’s good information to know (and understand) your fee. But I also bring this up because of how you relate your monthly fee to your monthly contribution amount. This is almost not how your fee is determined. (Looking for a new advisor? This tool can help match you with potential advisors.)

Different Types of Fees

The amount you pay an advisor can be calculated in several different ways. At a high level, advisors might be paid either by commission or through fees. Sometimes they’re paid both ways.

Commissions. If your advisor receives commissions from the investment products in which they place you, these would be based on the amount of your monthly contribution. But these are rarely above 10% and are often much lower. It’s highly improbable that this is the arrangement you have.

Fees. If your advisor doesn’t receive commissions, you pay them in the form of fees. There are several ways that fees can be calculated. It could be based on the assets they manage for you, by the hour, a flat annual fee or a monthly subscription.

It looks like your advisor charges based on the amount of assets they manage for you. It’s usually stated as an annual percentage of your account balance.

I think that partially because it’s the most popular method of calculating fees. It also lines up with what my experience tells me is a common fee for the financial services firm you are using, which you shared privately. If I had to bet, I’d say your fee is probably 1.35%, and that you’ll notice the monthly fee fluctuates based on the value of your account. Again, though, this is verified by either checking the paperwork or asking the advisor. (Looking for a new advisor? This tool can help match you with potential advisors.)

Am I Getting Fleeced?

Next, there’s the question of whether or not you are getting enough value for that fee. That depends on what the advisor does for you and how much it’s worth to you.

In the world of percentage fees, 1% is often considered the benchmark. This would make 1.35% relatively high in comparison and people – myself included – would often scoff at it.

As a practical matter, however, 1% is normally for larger accounts than $120,000. If you are receiving full financial planning and plenty of communication from your advisor for about $1,600 per year, you are getting a great deal. If it’s just investment management, and you never hear from them, you can probably get a comparable service somewhere else for less. (Looking for a new advisor? This tool can help match you with potential advisors.)

Next Steps

Of course, it’s also not about how the advisor feels, but how you feel. I recommend you have a candid discussion with your advisor. After all, this shouldn’t be a big mystery. The advisor should articulate what they do for you and you should assess that value and compare it to what you are paying. If you are satisfied with what you hear and feel that you are getting a good value and don’t need to change anything, then great, at least you’d know. If not, then you can continue looking for something that suits you better.

Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email [email protected] and your question may be answered in a future column.

Please note that Brandon is not a participant in the SmartAsset AMP platform, nor is he an employee of SmartAsset, and he has been compensated for this article.

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