What are reasonable fees for financial advice?

Question

I'm currently looking for a fee-only financial advisor. About 15 years ago I met with someone who prepared a simple financial plan over a few hours; this cost me $300 and was among the best choices I ever made. Their plan greatly simplified my affairs and made me more confident and knowledgeable moving forward.

Now, I've recently interviewed two potential advisors (one of whom is the same person I met with years ago, who has now greatly expanded their advising firm). Both advisors quoted annual prices based on overall wealth, with a minimum of about $3000 per year. So I'm experiencing a little bit of sticker shock at the moment. I make a middle-class income (pretty close to U.S. median), and this would be about 5% of my annual income.

What is a reasonable annual fee for financial advice, possibly expressed as a percentage of overall income or wealth?

Answer 1

From what I have seen, every retail financial advisor who charges as a percentage of wealth is charging what I would consider to be an unreasonable fee and I continue to be amazed how many people pay this. Somehow 1% or more of your assets every year sounds like a reasonable amount while the dollar equivalent would have people running out of their offices. Financial advisors will charge you as much as they can get away with. It's up to you to avoid getting taken advantage of.

The nature of financial advising is that there is some work to do up front and then after that you just stay the course. An hourly rate for financial advice will likely be high, but still cheaper than letting them actually manage your investments. Moreover, advisors who also invest for you will typically put your money in funds that have an annual 12b-1 fee, which is an additional fee--often large-- that the mutual fund continually charges you and then passes along to your advisor.

Financial advisors greatly increase their revenue by selling the idea of you handing over the keys and they take care of everything for you. Most of the value they provide is in the advice they give, which can be had for much less, but most of the revenue comes from them performing very simple services like allocating your money across a few mutual funds. If instead of handing over your investments to them, you pay them for advice and then do the investing yourself, you will save a great deal. If your current possible advisors will not give you an hourly rate, then find another.

Consider the following as well: Pretty good financial advice can be had for free in many cases. The company managing your 401(k) will have someone on staff who you can meet with for free and will (again for free) provide some pretty good guidance. If you have a broker account of any type, they will have people on staff who can give you guidance. It just may not be "investment advice" from a legal point of view, but the content will not be much different. You can open an account at futureadvisor.com or personalcapital.com and their website will investigate your current accounts and give automated advice, again for free. You can go to bogleheads.org and ask those guys for advice and they will give you pretty good guidance for free.

The most useful role for retail financial advisors is to help people who are unable to manage their own affairs, like people experiencing mental decline or people who have personalities that are highly unsuited to the management of money. If you have any willingness at all to learn and manage your own affairs, you can likely get the advice/information you seek for free, or at least for very little money. At your income and apparent cognitive level, I think it would be very unwise to pay $3,000 per year or anything like it for financial services, even if this rate is common enough to be "standard practice."

Answer 2

What's "reasonable" is largely dependent on what you're expecting them to do for you. Nerd Wallet has a decent article about the cost structures of various FA arrangements. What you're describing from those 2 FA's you interviewed seems to be option 2, which is essentially an annual retainer. What you paid for originally was option 4 - a flat fee for a plan, meaning you buy the plan and walk away.

2. A RETAINER FOR CONTINUED SERVICES

[...] One common way to charge for that kind of planning is an annual or monthly retainer. For that fee, the advisor typically will create a financial plan for you, help you implement it, monitor your progress and adjust things as needed. If you have trouble sticking to a plan or need help changing your behaviors, a retainer model may be for you because it provides ongoing oversight.

The cost of the retainer typically isn’t linked to how much you have available to invest. However, you may pay more if your financial situation is complex.

Typical charge: Between $2,000 and $7,500 a year.

Answer 3

You are interviewing two advisors who are pricing their services differently than the one you used 15 years ago.

They aren't spending x hours and giving you a report and walking through it in a short meeting. You then executed their plan over the next 10+ years.

These two are proposing a continuing set of services, because they are proposing an annual fee. One risk is that they will be sending you advice every month to justify their regular fee. This could lead to conflicting advice.

But if you are comfortable with executing a basic plan based on an advisors set of rules developed with your goals and situation, you should be looking for an advisor that will generate the type of plan you paid for 15 years ago. Not one that is basing it on a percentage of your wealth.

Yes it will be more than the $300 you paid 15 years ago, but it won't be 10 times the cost either. They should be able to explain their fee based on the number of hours.

Answer 4

Here's an answer and follow-up to my own question: A year after I wrote up the question, I did find a fee-only financial advisor who offered the flat-fee-per-plan service that I desired (unlike my prior advisor who had abandoned that service from their expanded practice).

I found this advisor via the Garrett Planning Network, which specializes in fee-only financial planning without long-term commitments. I understand that some or many advisors in the network have picked this up as side jobs with a small amount of training; however, in my case I did find someone who had spent a career in corporate finance, and was extremely happy with their service.

Looking at the Nerd Wallet link from @BobbyScon's answer, we see the service I desired described thus:

FLAT FEE PER PLAN

Some advisors charge a flat fee for creating a financial plan. There is no ongoing management or oversight; you carry out the plan yourself.

• Cost: The cost will vary by service, but $1,000 to $3,000 is typical for a financial plan.

• What you get for that fee: A comprehensive financial plan and guidance for how to follow it, but no ongoing services or investment management. The advisor charges a set fee for each type of service. You’ll get an outline of what’s included and see the fee upfront.

The amount I was charged for the flat-fee-plan was a little less than $2,000, very close to the median range given in the article, so it looks accurate according to my experience. Note that range is indeed 3 to 10 times higher than what I paid thirteen years earlier for a similar service.