Paying a 1% annual fee to a financial advisor for managing a $2 million investment portfolio is pretty typical, but that doesn’t necessarily mean it’s the right amount for every investor. Even small-sounding financial advisor fees can seriously erode long-term returns when compounded over years or decades. A 1% annual fee on a $2 million portfolio earning 7% could cost you more than $375,000 over 10 years. You may be able to get better performance by choosing a less costly advisor or otherwise finding a lower fee rate. The key is to identify specific services you are receiving in exchange for those fees and carefully evaluate whether your portfolio’s performance and advisor relationship justify the costs from a mathematical and personal perspective.
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Understanding Financial Advisor Fees
According to a 2021 study by Advisory HQ, the average financial advisor fee is 1.02% for $1 million in assets under management (AUM) as an annual fee. Advisors and firms all have their own fee schedules, though, so these can vary. This type of fee usually covers investment management, portfolio monitoring and performance reporting services, hence why they’re usually based on asset tiers. For things like financial planning and other services, hourly and fixed fees are more common, though percentage-based fees can still apply.
Advisors with more years of experience, advanced expertise or special certifications like certified financial planner (CFP) can sometimes charge higher fees. The exact fee percentage can also typically differ depending on the overall account size and specific mix of services provided.
For example, an advisor may offer a tiered fee schedule where the percentage rate decreases as asset amounts rise. In other words, on the first $1 million in a portfolio, the annual fee may be 1.2%, while assets above $2 million are charged at a rate of just 0.8%. This structure allows firms to serve clients across the wealth spectrum, while still being incentivized to help those clients continue accumulating assets.
Some advisors also customize service offerings and related fees to match a client’s needs. An advisor may charge a lower percentage fee, but exclude financial planning and instead focus narrowly on investment management. Others may set up a comprehensive service bundle that includes financial planning, tax preparation, estate planning review, insurance analysis and other, more specialized offerings. In those cases, the fee paid may be higher but aims to encompass full-scope financial guidance rather than just investment portfolio oversight.
Why Fees Matter Over the Long Term
While a 1% annual fee may seem like a small price to pay for professional investment guidance and financial planning, it can significantly erode portfolio returns over long time horizons. Even seemingly minor differences in fees add up in a big way when compounded year after year for decades.
Below is an example of how various financial advisor fee tiers can affect the ending value of a $2 million portfolio with a 7% average annual return over 10 years. This can illustrate that even small changes in financial advisor fees can make a substantial difference in returns over long time horizons. For context, without any fees taken out of the above $2 million portfolio, it would grow to $3,934,303 at that rate and time horizon.
|
Annual Advisory Fee Rate |
Portfolio Value in 10 Years (7% Return With Fees Charged) |
Difference From Portfolio Value Without Fees |
|
0.5% |
$3,741,955 |
-$192,348 |
|
1% |
$3,558,112 |
-$376,191 |
|
1.5% |
$3,382,439 |
-$551,864 |
|
2% |
$3,214,611 |
-$719,692 |
Finding a Fee Rate That Works for You
Paying higher financial advisor fees does not guarantee receiving better investment performance or service. On the flip side, nor does paying lower financial advisor fees mean you’ll automatically receive higher overall returns. If you manage your portfolio without professional help, you’ll save on fees but won’t have access to the services that a financial advisor can provide.
If you want professional aid from a financial advisor, focus first on paying a reasonable fee for the scope of services you think you require. This also involves avoiding paying for services you aren’t likely to use. For instance, maybe you have a strong retirement plan and don’t need financial planning services into your retirement years. However, be sure to clearly understand exactly what personalized offerings are included in exchange for the fees paid and negotiate respectfully if you feel costs seem misaligned or outweigh the benefits.
On the flip side, you could investigate lower-cost options like robo-advisors if your situation demands fairly simple, automated portfolio management rather than holistic financial and investment planning. As with most major financial decisions, take the time to thoroughly weigh all pros, cons and alternatives before committing to either choice, though. And remember to review your fee arrangements periodically to ensure they continue meeting your evolving needs over time.
Bottom Line
A 1% annual fee on a multi-million-dollar investment portfolio is roughly typical of the fees charged by many financial advisors. But that’s not inherently a good or bad thing, but rather should hold weight in your decision about whether to use an advisor’s services. Additionally, carefully determine what specific services you realistically need and receive in exchange for fees paid.
Tips for Finding a Financial Advisor
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Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel 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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Use SmartAsset’s investment return and growth calculator to compare the effect different levels of fees could have on your investment portfolio over time.
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The post I Have $2 Million Invested With My Financial Advisor and Pay a 1% Fee. Am I Paying Too Much? appeared first on SmartReads by SmartAsset.
Source: finance.yahoo.com