Are your fees competitive?

Financial advisors fee schedules have graduated rates and breakpoints that reduce AUM fees for larger account sizes. Median advisory fees for high-net-worth clients is close to 0.50%, at the same time, the total all-in cost to manage a portfolio is more than “just” the advisor’s AUM fee, the underlying costs and various platform fees can add up. A 2017 financial advisor fee study reveals that the true all-in cost for financial advisors averages about 1.65%.

With growing competitive pressures, financial advisors are increasingly compelled to do more to justify their fees. The standard investment management fee is increasingly a financial planning fee as well, and the typical advisor allocates nearly half of their bundled AUM fee to financial planning services (or otherwise charges separately for financial planning). Comparing the cost of financial advice requires looking at more than “just” a single advisory fee. Costs vary by the size of the client’s accounts, the nature of the advisor’s services, and the way portfolios are implemented.
Advisory fees, when broken into their component parts: investment management fees, financial planning fees, product fees, and platform fee… the portion of a financial advisor’s fees allocated to investment management is not that different from robo-advisors. At the same time, financial advisors appear to be defending their fees by driving down their all-in costs, putting pressure on product manufacturers and platforms to reduce their own costs.

For those who purchase individual stocks and bonds, there are no underlying wrapper fees for the underlying investments. However, the recent FPA 2017 Trends in Investments Survey of Financial Advisors finds that the majority of financial advisors use mutual funds or ETFs which adds a non-trivial cost to the advisory fee.

The median all-in cost for “small” clients was 1.85% versus an AUM fee of 1% for a difference of 0.60% – 0.85%, larger clients over $1M face an all-in cost of 1.5% versus an AUM fee of 0.85% (a difference of 0.65%), and even for $5M+ the typical total all-in cost was 1.2% versus a median AUM fee of 0.5% (a difference of 0.70%). Which means the total cost of underlying – trading fees, expense ratios, and the rest – is relatively static, at around 0.60% to 0.70% for advisors across the spectrum.

A financial advisor’s all-in costs need to be considered across all four domains: investment management, planning, products, and platform fees.

For a total-cost AUM fee of 1.65% for a portfolio up to $1M, this includes an advisory fee of 1%, plus another 0.65% of underlying expenses (which is split between the underlying investment products and platform).

The underlying costs may vary significantly from one advisor to the next, some may use lower-cost ETFs, but have slightly higher trading fees, others may use mutual funds that have no transaction costs but indirectly pay a 0.25% platform fee (in the form of 12b-1 fees paid to the platform). Some may use more expensive mutual funds, but trim their own advisory fees. Others may manage individual stocks and bonds, but charge more for their investment management services.

If you want to study the topic more in depth, please check out the following link to Michael Kites July 30th 2017 article, ”Financial Advisor Fees Comparison – All-In Costs For The Typical Financial Advisor?”.

Download: Financial Advisor Fee Comparison

kitces.com-Financial Advisor Fees Comparison All-In Costs For The Typical Financial Advisor

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