Broker Check

Practical Planning Tip: How to Choose A Financial Advisor - Thoughts On Fee and Performance

May 30, 2024

Today’s Practical Planning Tip(s) by ParkBridge Wealth Management will discuss “How to find a good financial advisor that is right for your family?”

Today we will discuss the importance of taking fees and performance metrics with a grain of salt: So, I grouped fees and performance together because they are typically the only criteria investors ask about. They are also frequently misunderstood and, consequently, can lead folks to hiring the wrong person. Here is some perspective.

While there are different fee arrangements, a percentage of assets under management is the most popular, so we will use that as a point of discussion. One of the most robust studies on fees was conducted by Kitces.com in 2021. It found that financial advisors charged between 1.0 and 1.5% of assets under management at $1 million in assets. The fees drop at the $2 million threshold to a range of 0.9% to 1.3% and decrease further at $5 million to between 0.8% and 1%.

It’s tempting for clients to want their fees to be the lowest possible. However, working with someone just because their fees undercut the competition may be shortsighted. As with any other professionals, it’s prudent to hire someone who can provide the most value with reasonable fees. If you are interviewing an advisor whose fees are within the above ranges, then that’s a great start. Fees that are significantly higher or lower should give you pause. Elevated fees may be justified if the advisor brings additional services, skills, or expertise to the table and if you have a very out of the box and complicated situation. Lower than average fees may signal someone new to the field or an advisor facing internal pressure from their company to bring in more business. It may also mean that they only offer a cookie cutter approach for all their clients with no real customization based on a client’s individual needs.

It’s also important to be mindful that advisor fees are just one component of the overall fee picture. There are a myriad of other costs associated with your financial advisory relationship of which you should be aware. This includes investment product fees, which can range widely from a few basis points to several percentage points or higher. Alternative investments, like hedge funds and private equity, have layers of fees such as assets under management fee, performance fees, and placement fees. Annuities and permanent life insurance can be extremely expensive as well. Furthermore, there are trading and administrative costs that need to be considered. It’s also worth noting that some advisors charge additional fees for financial planning, while others bundle it together with their portfolio management services. The key is to understand all the fees associated with the relationship and what level of service and expertise you can expect to get for those fees you are paying.

Performance is even trickier. Financial advisors typically don’t have audited performance numbers on their client portfolios. Therefore, there are no reports to support the returns they are claiming. Additionally, many prospective clients will ask what returns they can expect to receive in the future. They’ll compare one advisor’s claim against another and pick the highest. This is the wrong approach. An advisor’s honest answer when it comes to future returns should be “I don’t know”, followed by a discussion of risk vs return and the historical performance of various asset classes. Any answer that indicates that an investor should expect to achieve double digit returns, without the above caveats, should be a red flag.

Understanding this background on fees and performance numbers is imperative!


You can WATCH the full video here.