Author: Mike
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In the realm of financial planning, advisors are often encouraged to use “value-based” pricing — and to determine the value of their services by comparing the results the client would get with those services to the results the client would get without those services. For example, an annual advisory fee equal to 1% of your assets under management is reasonable if the financial planning and portfolio management services provided for that fee can collectively improve your results by more than that amount. (And Vanguard’s “Advisor Alpha” research or David Blanchett and Paul Kaplan’s “Gamma” research is often used to make this case.)
But that only makes sense if this financial professional is the only financial professional with whom you could work.
If you’re at the Toyota dealership, considering purchasing a RAV4, the decision you’re making isn’t “Toyota RAV4 as compared to walking everywhere.” You’re evaluating the RAV4 against other vehicles.
It does make sense to first ask the question: do I want to buy a vehicle? Depending on your mobility, where you live, and so on, you may be able to save a lot of money by walking, biking, and using public transportation. Similarly, not paying for financial advice can be perfectly prudent for lots of people in various stages of their lives.
But for a particular vehicle to be the right one to purchase, it has to not only improve your life relative to no vehicle, it has to improve your life relative to the other vehicles you could purchase.
The same goes for financial advice. Even if a financial professional could, for example, improve your results by $20,000 per year relative to not working with a financial professional (and that’s a tall order to fill), that doesn’t mean that any price less than $20,000 per year is a good deal. You might be able to find an equally qualified professional who can provide the same service for less.
There Are Substitutes
Since starting this blog in 2008, I have had the pleasure of meeting and corresponding with lots of super smart financial professionals. But I have never met a single one whom I thought to be the only person who could handle a particular financial planning situation.
And to be clear, that’s 100% true for me as well. I’m fairly knowledgeable about retirement tax planning, Social Security, and a few other topics. But Jim Blankenship, for example, knows at least as much about those topics as I do. And so do plenty of other professionals who don’t happen to write a blog or books.
Many parts of financial planning are complicated. But they’re not that complicated. There’s nothing for which you need a one-in-a-million genius-level IQ. No matter which area(s) of financial planning you want help with, there are more than a few people qualified to help.
What Services Do You Want?
When considering working with a financial professional, the first step should be to ask yourself what services you want.
A critical question here is whether you want advice (i.e., financial planning), portfolio management (i.e., somebody who will actually place the buy/sell orders for you, to keep your portfolio at its intended allocation), or both.
If all you want is portfolio management, you can get it very cheaply through Vanguard or other robo-advisors. (Or you can get a very basic version by simply using an all-in-one fund.)
If all you want is advice, you would likely appreciate working with an “advice-only” professional (i.e., one who does not even provide portfolio management, and who will therefore not be trying to sell you such services).
If you want both advice and portfolio management, that’s where the financial planning firms that charge based on assets under management might be a good fit. But even then, not necessarily. There are flat-fee firms as well (e.g., Bason Asset Management, which charges a flat $5,100 per year as of this writing). And depending on the size of your portfolio, a flat fee could be a lot less than an asset-based fee.
Typical Costs
For advisors charging hourly, a 2020 Kitces Research survey found that the median cost for hourly financial planning was $250. A 2020 survey from Envestnet/MoneyGuide found the hourly average was $257. (I’ll be interested to see the extent to which these fees change in the next iteration of the surveys, given the inflation over the course of 2021.)
For firms charging a flat retainer fee, the Kitces Research survey found that the median annual amount was $4,000.
As far as asset-based fees for financial planning combined with portfolio management, the Kitces Research survey found that “median fees were 1.0% of [assets under management] up to $1 million. The median fee then dropped to roughly 0.9% at $2 million and 0.8% at $5 million.” The Envestnet/MoneyGuide survey found a mean asset-based fee of 1.04%.
More Than Just Costs
The point here isn’t to automatically choose the advisor who can provide the rock-bottom cost. You want to be aware of costs — and check to see if there’s an equally-good option that costs much less. But in many cases the advisor who turns out to be the best fit for your needs will not be the very least expensive option.
It’s important to determine whether this particular advisor has the particular expertise you’re seeking. Do they often work with people in circumstances similar to yours? For instance, Jon Luskin works with DIY investors. Meg Bartelt focuses on working with women in tech. Cody Garrett works with families with “FIRE” goals. Sotirios Keros works especially with healthcare professionals.
And there are other questions about the firm that could be important. For instance, some people may prefer to work with a solo advisor, while others may prefer to work with a larger team, such as the hourly-only firm Timothy Financial. A team can likely provide deep expertise on a broader range of topics than an individual can. In addition, a team can provide better accessibility. (If a solo advisor is on vacation, the firm is on vacation. If one person in a team firm is on vacation, the team is still operating.)
And there are subjective considerations as well: does this person/team feel like a good fit? Do you trust them? Do they communicate in a way that makes sense to you, or does it feel like they’re speaking another language?
What is the Best Age to Claim Social Security?
Read the answers to this question and several other Social Security questions in my latest book:
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Social Security Made Simple: Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less |
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