Question: I want to know if a 1% fee is reasonable to pay for an IRA account with a balance of $800,000. If not, is there an option that you would suggest?
Answer: A 1% fee is around industry average, but you could pay less. You need to ask yourself what type of value you’re receiving for that fee. “Does the fee include ancillary services such as financial planning or tax preparation? Investment management, like any service, can be shopped around. Simply make a list of your must-haves in the relationship and compare with other wealth managers,” says certified financial planner James Daniel at The Advisory Firm. (Looking for a new financial adviser? This free tool can match you to a fiduciary adviser who may meet your needs.)
It’s not uncommon for the fee on the first $500,000 to be about 1.25% and the next $500,000 to be assessed at 1%, says Kenneth Robinson, certified financial planner at Practical Financial Planning. “This would result in a $9,250 per year fee on an $800,000 portfolio,” says Robinson.
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Much like service-based businesses that offer quotes to prospective clients detailing the work to be performed, any investor looking to hire a financial adviser should ask for the same details. “Ask for a description of the services to be included in the 1% fee, an estimate of when and how often said services will be performed and a proposed meeting schedule for the year,” says certified financial planner Eric Presogna at One Up Financial.
Remember that the 1% management fee is what’s paid to the adviser, but there are other costs associated with investments that investors should be aware of. “An adviser charging a 1% management fee using only actively managed mutual funds may end up costing the investor close to 2% in fees. As such, it’s important to pay close attention to the adviser’s approach to managing investments and get an estimate of the cost or expense ratios associated with the funds used in their strategies,” says Presogna.
There’s always going to be a cost to managing investments and it’s essential to assess whether the services and benefits provided by the adviser justify the costs. Some things you might look to an adviser to do include “recommending suitable asset allocation using diversified fonts, ETFs, choosing cost-effective investments, rebalancing, behavioral coaching during market volatility, developing a spending strategy and more,” says certified financial planner Ryan Haiss at Flynn Zito Capital Management.
In today’s highly volatile market, it’s become increasingly difficult to achieve better results than the market while maintaining appropriate risk levels. “As a result, paying 1% for a single investment service may seem expensive. For that amount, you should receive complimentary services which will help you determine if you’re on the right path for your retirement, with tax planning as well as a holistic view of your finances. Using the CFP, NAPFA and FeeOnlyNetwork websites, you can compare various options and see their prices,” says certified financial planner Alonso Rodriguez Segarra at Advise Financial.
Have an issue with your financial adviser or looking for a new one? Email [email protected].
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