Are You Paying Too Much For Financial Planning And Investment Management Advice?

Prior to forming Skyview Financial Planning, LLC, I worked for a fee-only financial planning and investment management firm that billed clients based on a percentage of assets under management. 

Practices that operate under this fee arrangement, often charge 1.5% on investment accounts with “smaller” balances (say $50,000) and 1% on accounts with balances up to $1,000,000.

Many physicians look at that 1% figure and don’t think too much about it. One percent, after all, is such a small number. 

Doing a little arithmetic may reveal otherwise. 

When 1% is just too much.

In order to determine whether or not a 1% fee is actually “worth it,” it’s necessary to explore the services being provided. After all, shouldn’t cost be tied to the service offering?

Investment management services often include:

  • Investment selection;

  • Asset allocation and portfolio construction;

  • Ongoing monitoring and rebalancing;

  • Asset location (for tax purposes);

  • Behavior and accountability coaching.

Financial planning services often include:

  • Tax planning;

  • Retirement planning;

  • Education planning;

  • Cash flow management;

  • Debt reduction planning;

  • Insurance planning;

  • Estate planning;

  • Student loan planning.

If these services are attractive to you, it can make sense to partner with a financial advisor. But what about the rules of arithmetic that I mentioned in my introduction?

For the physician with a $100,000 investment account receiving fiduciary financial planning and investment management advice, a 1.5% fee seems reasonable. The annual fee comes to $1,500. 

But as the account grows, thoughtful physicians should question why their fees grow as well. If the advisor is doing their fiduciary duty (acting in the best interest of clients), they should be providing best interest advice no matter the size of your account. If the service that you receive doesn’t change, why should your fees?

Here are some examples for you to consider:

  • At the traditional 1% fee your $500,000 account will be charged $5,000 per year. 

  • At 1% your $1,000,000 account will be charged $10,000 per year.

Suddenly that 1% fee doesn’t seem so small. (Even with fee breakpoints financial planning and investment management services become increasingly expensive as your account grows. I’ll let you do the math on accounts at the $2,000,000 and upward range.)

The seasoned physician might shrug this off because “all financial advisors charge 1% on assets under management.” 

While 1% fees may be the traditional compensation model, a growing group of flat fee only advisors are offering services at rates that aren’t tied to your investment portfolio. (Here are just a few: Bason Asset Management, RFK Capital Management, SwitchPoint Financial Planning.)

Compensation drives concentration.

I believe that the way you pay your advisor will drive their concentration. For example, if your financial advisor offers “free” advice, it’s likely that they are paid on commission from the sale of insurance or investment products. They will necessarily be focused on convincing you to purchase what they sell.

Similarly, compensation will influence the advisor that is paid based on a percentage of assets under management. If you choose to engage in this type of fee arrangement, don’t be surprised if your advisor consistently brings up that outstanding IRA rollover, or focuses the planning on your investments. This type of advisor increases their compensation when they can convince you to bring more assets to their management. 

The focus on assets under management can create conflicts, even for fee-only financial advisors. In his book, Financial Boot Camp Dr. Jim Dahle of The White Coat Investor writes:

Also be aware that even fee-only advisors can have biases and conflicts of interests. For example, if the advisor is only paid on a percentage of assets under management, they may recommend an IRA rollover that is ill-advised (which would increase assets under management), recommend against paying off student loans or mortgages (which would decrease assets under management), or recommend against investments that they would not manage such as real estate. (116) 

Some final thoughts.

Most financial planning and investment management firms adopt a compensation model that doesn’t make sense. Do you really want your financial advisor to only get paid when they sell you a product (commission model)? Do you really want your financial advisor’s compensation tied to the value of your investments (assets under management model)? Is it reasonable to pay someone $10,000 per year (or more) for financial planning and investment management advice?

Once more, consider Dr. Dahle’s words from Financial Boot Camp

No matter how you are paying your fee-only advisor, be sure to add up the total annual fee you are paying and then determine whether you feel you are getting that much value out of the relationship. Since high-quality financial advice and investment management services can be obtained for a four-figure amount per year, if you find you are paying $10,000 or more, I highly recommend you negotiate a lower fee with the advisor, switch advisors, or learn how to manage your own investments. (116)

The thoughtful physician recognizes that if additional value is obtained by paying a higher fee, it may be worthwhile. But when comparable services are offered for reduced rates, what purpose is there in paying higher fees? 

For physicians in search of independent advice for a fair price, they should explore the growing group of financial advisors who charge based on a flat annual retainer, project, and hourly fees.

For more of my writing and thinking, click here.

Disclaimer:

The content provided is for informational purposes only. Yes, I’m a financial advisor, but this article isn’t intended as advice for you specifically. Your unique situation needs to be taken into account, and the ideas presented here may not apply. 

Please make sure you do your due diligence before implementing anything. Due diligence includes hiring a qualified professional who understands your situation completely and can offer you personalized advice.

Donovan Sanchez