Your Financial Advisor Might Be Charging You $20,000 a Year. Here's Why.

A fee that looks small on paper can become a significant annual expense when it is tied to the value of your investments. With $2 million invested, a 1% advisory fee means paying $20,000 every year, and that charge may be easy to overlook when it comes directly from the account.

This arrangement is commonly called an assets under management fee, or an asset-based fee. The advisor charges a percentage of the assets being managed, so the dollar amount of the fee changes as the account value changes. According to the SEC’s Investor.gov, asset-based fees are commonly stated as an annual rate and may be paid from the investment account. The SEC explains how these fees work.

Here's the catch. The financial planning fee can rise simply because the portfolio grows. That may be appropriate when the advisor is providing a level of investment management that justifies the arrangement. But investment growth alone doesn't necessarily mean your planning needs have become more complicated.

I'm not saying an advisor who charges an asset-based fee isn't providing value. The better question is whether the way you pay matches the work you actually need. Investment management and financial planning often overlap, but they aren't always the same service.

Another way to pay for financial planning

At Tiverton Wealth, I run a 100% flat fee financial planning firm. We charge a flat dollar amount based on how complicated your financial situation is, not how much money you have invested.

That structure separates the cost of planning from the size of your portfolio. A person with a larger account doesn't automatically pay more for the same planning work just because the account balance increased.

Flat fee planning isn't the only alternative. Advisors may also use hourly fees, engagement fees, subscriptions, or other arrangements. The important part is understanding exactly what you receive, how the advisor is paid, and whether the fee changes as your account changes.

The SEC recommends reviewing an advisor’s agreement, fee schedule, services, and Form ADV before entering into a relationship. CFP Board also says CFP® professionals must explain how they and their firms are compensated. Investor.gov offers questions to ask an investment adviser, and CFP Board explains compensation disclosures.

If you’re reviewing what you pay for financial advice, I’d be glad to talk through the fee structure and the services behind it. Contact me to learn whether flat fee financial planning may fit your situation.

Source: SEC Investor Bulletin on Subscription-Based Advisory Fees; Investor.gov, Investment Advisers; CFP Board, Duties Owed to Clients.