What fee should you pay for financial advice?

I was recently approached about my financial planning fee and process for a journalist who was creating a list of “Low cost financial advisors”. This gave me the idea to write about the cost of financial planning and how to evaluate it.

Financial planning involves looking at a client's entire financial picture and advising them on how to achieve their short- and long-term financial goals. From saving for education and planning for retirement to effectively managing taxes and insurance, financial planners develop valuable relationships with their clients to provide them with confidence today and a more secure tomorrow. How much a financial planner charges will depend on a litany of factors, including your needs, how often those services are provided and the planner’s fee structure.

What Is Financial Planning?

CFP Board's Code and Standards define Financial Planning as “a collaborative process that helps maximize a Client's potential for meeting life goals through Financial Advice that integrates relevant elements of the Client's personal and financial circumstances.”

Financial Planning is about a process (and not just the document/plan itself as a deliverable), and is broader than ‘just’ giving Financial Advice unto itself. Instead, “Financial Advice” constitutes the act of making a recommendation regarding a particular course of action, and Financial Planning occurs when that advice “integrates relevant elements of the Client’s personal and financial circumstances.”

CFP Board’s new Code and Standards have adjusted to a 7-step process:

1) Understand the Client’s personal and financial Circumstances (including gathering quantitative and qualitative information, analyzing the information, and identifying any pertinent gaps in the information);

2) Identify and select Goals (including a discussion on how the selection of one goal may impact other goals);

3) Analyze the current course of action and potential recommendations (evaluating based on the advantages and disadvantages of the current course of action, and the advantages and disadvantages of potential recommendations);

4) Develop financial planning recommendations (including not only what the Client should do, but the timing and priority of recommendations, and whether recommendations are independent or must be implemented jointly);

5) Present financial planning recommendations (and discuss how those recommendations were determined);

6) Implement recommendations (including which products or services will be used, and who has the responsibility to implement); and

7) Monitor progress and update (including clarifying the scope of the engagement, and which actions, products, or services, will be the CFP® professionals’ responsibility to monitor and provide subsequent recommendations).

What fee should you pay for financial advice?

That’s a tricky question and the answer will be different for everyone. I think the best way to evaluate your fee is the value your are getting for what you pay.

1. Am I doing better than I would be if I did it myself?

2. Do I know what I am paying?

Simplicity and transparency are important parts to figuring out how much you are actually paying. Wall Street came up with this great idea of charging an AUM fee (charging based on the amount of assets they manage for you).

The media would like to tell you average is around 1% but this study found it was actually closer to 1.65% on $1 million portfolio.

1% seems like a small fee that doesn’t make much of a difference and would provide you with great value. Which is exactly why Wall Street created it. They like taking advantage of people who are too lazy to figure it out or who aren’t good at math. And since markets do this(see below) over time, it is also very profitable.

There’s nothing wrong with charging AUM fees, but in my view, it’s not the most straightforward pricing method.

3. What ways are there to pay for financial planning?

1. Standalone/Project-based: This fee is normally a one time fee allowing clients to receive a specific or targeted service and mostly likely a “financial plan” at the end. Example: $5,000 fee for a financial plan.

2. AUM: Fees that are based on a percentage of assets under management are the most common way advisors are compensated for portfolio management. However, some firms and individual advisors may offer comprehensive wealth management services that include both asset management and ongoing financial planning. As a client, your wealth management fee will be based on a percentage of your assets under management. Example: 1% on $1 million portfolio would be $10,000/year in fees.

3. Hourly: Like standalone financial planning provided for a fixed fee, some professionals offer financial planning services on an hourly basis. Hourly rates typically range from $150 to $350 per hour, the median hourly charge is $250.

4. Flat Fee (Retainer): Charge one hard dollar fee that is clearly stated (annual, quarterly or monthly). Rather than arbitrarily deriving compensation from the value of an investor’s portfolio, a retainer fee is structured around the services that are provided. I know from experience that it does not cost a firm more to manage a portfolio of $1,000,000 than a portfolio of $500,000; it does not cost more to manage $5,000,000 than $1,000,000. So the retainer fee is based on the advisors costs and reasonable compensation for a professional service provider. Example: $5,100/year (which also happens to be my flat fee ;))

4. Where can a financial planner add value?

The value proposition for using a financial advisor has always been easier to describe than to define. Value will always be subjective and vary from person to person. The added value of some aspects of investment advice can be quantified but at best it is only an estimation. Because each is affected by the unique client and market environments to which it is applied. The value that relationship-based services can ultimately bring to a portfolio can be intermittent, but significant and timely. But Vanguard attempted to do that and here is what they came up with:

Simply put, paying low financial advisor fees allows you to keep more of your hard-earned money! The impact of fees charged over time can be pretty significant.

A lot of financial advisors are grossly overcharging clients and not doing much more than parking their money in a few ETFs and doing an annual performance review. If that is the case, it’s probably not worth paying 1% of your wealth. So it’s not as much about the fee being charged as what you are getting for it.

About the Author

Erik Barnes, CFP®, is a fee-only financial advisor serving clients locally in Naperville, IL, and the surrounding Chicagoland area and throughout the U.S. He is a member of XY Planning Network, a group of fee-only financial advisors who focus on serving those in Gen X and Gen Y, as well as NAPFA, Fee-Only Network, and the Financial Planning Association. Erik has worked in financial planning for 20 years and takes great pride in helping clients on the road to retirement. When he’s not building financial plans, you can find Erik tinkering with his fantasy football roster or checking out one of the many food spots in Chicagoland.