Some people are shocked when they hear my transparent, financial advisory fee. Some of those people have 401(k) accounts or IRAs where they pay commissions. However, they don’t know what share class means nor have an idea how much they pay in commissions. Some have investment professionals who charge investment advisory fees. I have not met anyone who can tell me what they get for those fees.
You may associate financial advisor with investments. You may think financial planner and financial advisor are synonymous. This blog associates the term with someone that provides holistic values based, financial planning advice. That most often comes from financial advisors with planning designations like Chartered Retirement Planning Counselor, CERTIFIED FINANCIAL PLANNER™ professional, etc. When you work with one of these professionals you should expect a return on investment (ROI) on any financial advisory fees you pay.
Assessing financial advisory fee ROI
One way some people would assess fees would be to compare one advisor with another. For example, one may quote $1000 and another $6000. Still another may say that I will do it for free if you invest. While tempting to jump on the freebie, there is no free lunch. A better way to look at it is what should I expect from your financial advice?
The following categories represent some of the tangible ROI categories I’ve seen people benefit from working with a holistic financial advisor. Your situation may be different.
- Health insurance analysis
- Tax advantaged health savings analysis and plan
- (Flexible savings account, health savings account)
- 401(k)/IRA maximization
- Taxes saved from shifting from taxable, to deferred, tax-free
- Taxes saved from commission to Tax-deductible Investment Fee
- Actuarial retirement calculations and savings plan
- Actuarial college calculations and savings plan
- Social security income maximization strategy
- Attorney and probate fees and taxes saved by your beneficiaries due to your estate planning
- Heartache saved from wrong beneficiary designations on investments or insurance
- Potentially increased investment returns from asset allocation or investment picking
- Reduced cost of credit
- Behavioral coaching
Some of the items on the list require you to put a dollar amount on. For example, the heartache from having the wrong beneficiary designation. The entertainer, Prince, seems to have cost his heirs a $100 million or so in taxes because of not having an estate plan. You should put a dollar amount on the pain and suffering of some of these items in addition to their hard costs.
Should you pay higher financial advisory fees?
Let’s say hypothetically that you were quoted a $10,000 fee. If you are looking for a 10% return on your financial advisory fee investment, the financial advisor would need to provide an $11,000 return. Of course, hypothetically you may want to pay a $5000 fee and still get the same $11,000 return. Unfortunately, the financial advisor may not be able to do the work required to get you the $11,000 return for a $5000 fee.
Hopefully this framework helps you assess financial advisory fees. Fees should not be seen in isolation as many people seem to do. The fee appears to be the certain part of the ROI whereas the return on investment seems to be uncertain. However, if you have not had someone take a deep dive into your entire financial picture there are probably many areas that could be tightened.
If this approach appears to be appealing I recommend that you read my blogs on selecting financial advisors, we aren’t all the same. Of course, you can always contact us and request our “Financial advisory fee return on investment (ROI) worksheet”.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.