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Dec 21 2009 12:00AM

Question


What are average fee percentages that advisers charge? I have talked to a financial planner who is asking for three percent of the investments I purchase.

Answer


According to FPA member Stephen D. Calder, CFP®, of Wasatch Wealth Advisor, many of the fees charged by financial advisers depend on the type of funds and/or accounts being managed. "In my experience, I can say that on average, a three percent fee is at the high end of the range — the typical range being one to three percent," said Calder. "More normal fee ranges are one to one and a half percent as an advisory fee."

Other financial planners agree. "There are almost as many compensation arrangements in the financial services industry as there are financial advisors, but I would venture to say that the majority of fee-based or fee-only financial advisors charge between one and one and a half percent of a client's 'assets under management,'" said FPA member Paul Winter, CFP®, president of Five Seasons Financial Planning, LLC. "Frequently, this percentage declines on a sliding scale as client investment assets increase.  For example, an advisor might charge one percent for the first $500,000 under management, 0.9 percent for the next $500,000, and so on."

For his part, FPA member Jeffrey C. Vincent, CLU, ChFC, CFP®, with Great Basin Financial Services, said the following fee schedule would be normal for Utah:

$1 — $99,000                        1.50 percent
$100,000 — $249,000             1.35 percent
$250,000 — $499,000             1.25 percent
$500,000 — $749,000             1.20 percent
$750,000 — $999,000             1.10 percent
$1,000,000 — $1,999,000        1.00 percent
$2,000,000 — $4,999,000        0.90 percent
$5,000,000 +                         0.80 percent

Now if your financial adviser works for a broker/dealer, Winter said he or she may instead (or in addition) receive their fees as a portion of the sales loads their firm will charge you either up front, on an ongoing basis, or on liquidation of a mutual fund in which you invest. In addition, Winter said there are financial advisers who charge by the hour or on a one-time project basis.

But fees are only part of the discussion. "It's equally important to understand what you will receive for your advisory fees," said Winter. "Fee transparency and full disclosure are critical in choosing a financial advisor. What services are offered in return for your fees? Will these services be provided on an ongoing basis, or just once on initial investment? Will the financial advisor provide advice on investments only, or on a full range of personal financial topics (e.g. retirement planning, college funding, debt management, insurance, etc.)? Can he provide other services like tax preparation and the preparation of estate planning documents? How much time and effort will the advisor expend on your behalf — some investments like private equity or venture capital might require a lot of due diligence while others might be fairly plain vanilla? Will your financial advisor commit in writing to a fiduciary standard in his relationship with you?"

Others agree. "A lot of variables will come into play when an advisor determines a fee to be charged," said Vincent. "If the investment involves a high degree of attention, then the fee could be higher. It really depends on the level of attention your advisor is providing and the nature of the investments. If you are investing in a portfolio of mutual funds and you establish a basic asset allocation model with quarterly, semi-annual or annual reviews, it may be less. If you are buying a pool of individual stocks that your advisor will be actively managing, your fee could be much higher."

You also need to discuss fees in contest of investment returns. "With long-term returns on stocks averaging about 10 percent, current yields on investment-grade bonds about five percent, and cash surrogates yielding next to nothing, one could make the case that a diversified portfolio should be expected to return seven to eight percent over the long term," said Winter. "You can place the fees your prospective advisor will charge in that context."

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