Fees In Action
Now we know how you can be charged, let’s see how this translates to cost-effectiveness. This really boils down to whether or not the options available to you are within your reach, but more often than not people are not seeking any assistance simply because they think they can’t.
For example, just because someone you know paid $150 an hour to sit down with an adviser, doesn’t mean that’s the only option for you. There may be a free initial consultation, or fees could be spread out through their AUM or use of commission-paying products.
The difference here is that if you just want a one-off consultation and manage things yourself, you will need to pay upfront. However, if you wish for ongoing advice, these can spread out costs and make it easier; perhaps you may even consider using a retainer fee until you are happy to go solo.
It also depends on your initial investment. If you have a lump sum of, say, $10-20,000 to invest, the initial upfront cost could be $1500, followed by an ongoing service fee of 1% per annum; this would start around $100-200 a year in this case. Now, remember my concerns with commission? An adviser may charge no initial upfront fee but claw back this cost from the fund choices; if an adviser continues to do this, this may be more expensive than an initial upfront fee, and not be disclosed to a client.
A Fee-Only adviser is arguably more transparent and has a fiduciary responsibility to act in the best interest of a client, seeing as they don’t take commissions. However, this leads to them being more expensive up front, as you are paying directly for their service and often even just to sit down with them. Fee-Based can mix this up and spread costs in exchange for ongoing service and likely an upfront fee if a lump sum is invested. Commissions can also spread out costs, but be mindful of how they are being taken.
Realistic Expectations
Remember, at the end of the day you are paying for a service. How and how much you pay for this service should be researched carefully and considered for your position, not what anyone else is doing. If you believe that financial advisory is out of your reach, you most likely haven’t explored all options.
Stripping it down, work around the industry AUM average of 1% per annum and shop around for rates in your area when it comes to fixed fees. Financial advisory can be a lot more than investment management nowadays and fees reflect that; advisers are under more pressure to justify their expenses over other options available, and this has led to more thorough services being offered over a Roboadvisory, for example.
At the end of the day, you are paying for a human adviser and the level of expertise you need from them; the service you require of them will be reflected in those fees. Make sure you do your due diligence and research, but ultimately decide upon someone you can trust. If their fees are transparent, fair and justifiable against other options, there’s no reason you can’t afford advice with the right opportunity.
