An advisor fee of 0.75% of assets under management (AUM) is not outside the range of normal. That doesn’t necessarily mean you are getting your money’s worth, however. To further evaluate your advisor, you can take a step back and decide whether you’re getting the right value out of them and whether you’re a good fit.
A couple of ways you can do this include compare your portfolio’s performance against benchmarks, taking care to consider your stated risk tolerance when doing so. Also ask yourself whether your advisor’s communications practices are in line with your preferences and whether the advisor is keeping you up to date on tax changes, market news and other matters of interest. If you haven’t already done so, assess your advisor’s professional credentials. Finally, consider whether the general fit seems good, for instance, if the advisor is more focused on planning or performance, and how that accords with what you want. Finally, you can consider using this free tool to match with up to three fiduciary advisors and find a good fit.
Evaluating Financial Advisors
There is more to assessing a financial advisor than comparing cost with performance. Your relationship with your advisor encompasses a range of services and features, including how well and how often the advisor communicates, whether you feel your risk preferences are being adequately accounted for and how much of the investment management job you want to handle yourself. Here are some things to keep in mind:
Fees
While fees aren’t always the most important consideration, they definitely represent a significant factor. And, since that’s the initial concern you expressed, it makes sense to address them first. With that in mind, an annual fee of 0.75% of assets under management (AUM) is about in the middle of what you can expect to pay. Robo-advisors, often the least costly among financial advisor options, may charge 0.25% to 0.5%. A financial advisor may charge up to 2%, but for accounts of the size you are talking about 1% is more typical. Financial advisors generally offer a wide expanse of services beyond investment advice, including retirement account strategies, estate planning, tax planning and more.
Performance
Another question is whether you are getting your money’s worth. One way to look at this is to determine whether the portfolio performance is meeting your expectations. You can evaluate performance by comparing your portfolio’s return to a suitable benchmark. The concept of suitability is important. You’ll want to compare the portfolio’s annual return with a benchmark that fits your investment style. If you’re neither particularly conservative nor particularly aggressive, the return on the S&P 500 might be a good one for you. A suitable financial advisor can help you determine your risk profile based on your goals and preferences.
Performance can also take many other forms other than investment gains. For instance, implementing the right tax or retirement strategy, including account types and transaction timing, can potentially yield tens — or even hundreds — of thousands of dollars to your lifetime bottom line. Navigating new financial legislation and adjusting the financial plan accordingly may also yield a lot of potential value to the right client. Ultimately, each person’s financial needs will be different, and an advisor has myriad potential ways to add value in the relationship.
Communication
Good returns are important, but so is the communication with your advisor. Communication preferences can largely be a matter of individual inclination. Some people want frequent updates, while others prefer to be contacted only once or twice a year or if there is some unusual event, such as a significantly down market that calls for a consultation. At the least, you are likely to want to hear from your advisor around tax return filing season and at the end of the year, when tax-loss harvesting and rebalancing are likely to be on the agenda. But many good advisors check in more frequently with their clients, to see if there are changes in their circumstances or goals, or to keep them apprised of any changes on the legislative or technology end of personal finance.
Fit
A less hard-and-fast metric is how well you fit with your advisor. Part of this is purely personal and depends on the level of confidence and comfort you have with the way your advisor talks to you and treats you. You may also want to examine more objective measures, such as whether the advisor’s particular style fits your own. For instance, if you would prefer to buy and hold investments without much buying and selling, then frequent suggestions from your advisor to consider trading opportunities might signal a poor fit.
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An Advisor Assessment Example
An advisor fee of 0.75% applied to a $2 million portfolio comes to $15,000. Assuming there are no other fees, such as commissions, this is what your advisor is costing you each year. On the surface, if your portfolio is generating more than $15,000 in gains each year, this might appear to be a reasonable deal because your advisor is making you more than you’re paying. You’ll want to compare your actual gains with benchmarks similar to your risk tolerance. You’ll also want to weigh the value in other, less tangible, services that your advisor provides you.
Consider the full picture when evaluating your advisor’s worth. Are you comfortable with how often your advisor communicates with you? Do you feel you can communicate openly with them? Are you getting value from them in all areas of your financial life? Would you prefer fewer contacts or perhaps more and longer discussions? This largely up to you, but it’s no less important. The quality and content of communications is another concern. Is your advisor keeping you up to date on changes in tax law? Is your plan being updated regularly or when your circumstances change?
There are hundreds of thousands of financial advisors in the United States. While it doesn’t make sense to change advisors needlessly, if you’re not pleased with the one you have, you can readily find another who may be a better fit.
Bottom Line
You can evaluate your financial advisor by comparing fees charged by other advisors, investment performance versus benchmarks, how well communication practices fit your requirements and other factors. When it comes to fees, larger portfolios usually pay smaller percentages. Select benchmarks with an eye to matching your risk profile. Communication frequency may be mostly a matter of personal preference, but at least occasional contacts from your advisor are probably essential. You’ll generally want an advisor who is aware of your needs and circumstances, and is able to suggest appropriate responses when things change.
Tips
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Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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SmartAsset’s Investment Calculator can tell you how much your portfolio will be worth in the future given your starting point and estimated annual returns.
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Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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The post I Am Paying My Advisor 0.75% of My $2M Portfolio. How Do I Know If I’m Getting My Money’s Worth? appeared first on SmartReads by SmartAsset.
