How To Know If You’re Paying Too Much For Investment Advice

November 13, 2018

A question that I often get is, “Am I paying too much for investment advice?” This really boils down to a question of value, which like beauty, is in the eye of the beholder. So, while you may be paying more than another investment option, if you’re receiving sufficient value for the investment advice, it is worth the additional cost. Here’s how to know.

Step 1: Evaluate your current advisor

  • Performance: Your year-end statements should list your after-fee return for that year, so gather those statements to create a list of what your returns were.
  • Fees: Your fees are often listed in percentage terms so get out your calculator and convert that to dollars so you can see what you are actually paying. For example, your statement might say you pay 110 basis points, which is essentially 1.1%. If you have an account worth $100,000, that means your annual fee will be $1,100.
  • Compare: If you are considering a new investment advisor, make sure you are clear on their advisory fee in addition to any underlying mutual fund fee. For example, if they charge 1.1% and then put your investments in a mutual fund with a fee of 45 basis points (aka .45%), then your total fee is actually $1,550 ([$100,000 x .011] + [$100,000 x .0045]).
  • Risk: Evaluate how much risk your current advisor is taking. Your statements should give you a percentage of stocks, bonds (fixed income) and cash.
  • Compare that to your risk: Complete the Risk Tolerance Profile and Asset Allocation Worksheet to determine how much risk is appropriate for you to take, then compare that to see if your current advisor is taking an appropriate level of risk for you.
  • What else do they do: Finally, consider what your advisor does that you value. This can be face to face meetings, invitations to events, guidance on estate issues, etc. Note, this may not be what the advisor believes that you should value – remember that value is in the eye of the beholder.

Step 2: Evaluate other offers

  • While you won’t have year-end statements for other advisors, they can provide you information about how a portfolio that they would recommend to you performed (or you can enter it into this calculator to see for yourself). Make sure you are looking at after-fee (aka “net”) returns (both the advisory fee and mutual fund fees).
  • Is there anything that the new advisor provides that you value? Is there anything that they do not provide that you value?
  • Look for them to be suggesting a portfolio that takes an appropriate amount of risk, not the one that has the highest return.
  • Finally, consider the points made in two of our other posts about investing: Two Investment Approaches for Busy Professionals and Is Robo Advising Right for Me?.

Step 3: Evaluate your options

  • Value is determined by and unique to you. It is not value in the eyes of your advisor, friend, neighbor, etc. Value can be almost anything.
  • Compare after-fee returns over time (10 year or 5 year — as a long-term investor, you want to know what long-term results to expect, not what’s happened recently, which can be skewed by current events). If the return of option A is lower than option B, ask yourself if you get enough value from B the make it worth trading into higher returns – it may not always be.
  • In other words, a higher cost option may be appropriate if they provide enough value to you.
  • If the more expensive option or the option with the lower return has sufficient value to you, it is the appropriate one for you.
  • Past returns are no guarantee of future performance. This means basing your investment decision on the one with highest return last year is not a good strategy.
  • Additional ways an advisor provides value, beyond those mentioned above, include things like:
    • They balance you out so that you don’t make emotional investing decisions.
    • They help you invest for a variety of goals with different timelines, rather than just for highest performance.
    • They return your calls and answer your questions in a way that makes sense to you.
    • They provide advice on money they don’t manage, such as your 401(k).
    • They help your family members, even if they don’t make money off them.
    • They provide comprehensive financial planning that tells you what you need to do to achieve your life goals.
    • They help you make decisions around college funding, Social Security strategies or even making the most of your workplace benefits.
    • The list goes on…

No matter what, there is no black and white standard that says how much is “too much.” If you don’t feel like you’re getting value in return for what you’re paying, then it’s time to research other options. You may find a much better value out there. Or you may find that you need to adjust your expectations.