As I mention on my Services page, transparency is important to me in everything I do with clients. Trust is essential to any relationship, and transparency helps to maintain that trust. With that said, please bear with me for this discussion of financial planning fees in general, and how I structure mine. If you want, you can skip directly to the examples of how I calculate fees.
There are numerous methods in the industry for computing and charging fees for financial planning and/or investment advisory services. Let’s take a look at a few; this is not an exhaustive list, but it does show the range of approaches out there.
- One method involves charging commissions for stock or mutual fund trading, as well as for insurance policies.
- Advantages: If the fee structure is entirely made up of commissions, then you may come out ahead if you make very few trades or don’t buy the most expensive products.
- Disadvantages: If the person or business giving you advice stands to benefit financially from your purchase of something, then a conflict of interest may exist. Whether it is acted upon or not, an incentive always is in place for them to recommend products that make them more money.
- Example: Northwestern Mutual charges a $75 transaction fee for buying no-load mutual funds, and they also make commissions on the insurance products.
- Others charge fees based on Assets Under Management (AUM), basically an annual percentage of the investment funds they are in charge of managing.
- Advantages: The fees you pay are on a sliding scale, so when you have less money to be managed, you pay less. If financial advice is part of the package, then you might get a good deal if you have very little for them to manage. No commissions does mean that your incentives are more aligned than the example above, however,
- Disadvantages: The advisor is incentivized to have you move all your accounts onto their platform, whether that makes financial sense for you or not. Additionally, some institutions may have an investment asset minimum (meaning unless you have $X, they won’t manage it for you), or may not include bigger-picture financial planning advice as part of the offering.
- Example: Edward Jones has a sliding scale that charges 1.35% for the first $250,000.
- A third option is to charge a single annual fee for providing financial advice and/or managing your investments.
- Advantages: This removes the pursuit of putting assets in the AUM pile, so there wouldn’t be pressure to consolidate accounts if it didn’t make sense financially for you. Additionally, it aligns the advisor’s incentives with yours; they don’t make money from selling you products and aren’t trying to maximize the AUM metric.
- Disadvantages: If the fee is fixed regardless of your assets or situation, it may be higher than what you’re able or willing to pay.
- Example: Flat Fee Portfolios charges $3,196 per year for those with less than $1 million.
For further reading on this topic from some generally disinterested outside sources, you can take a look at NerdWallet, The Balance, and AARP as well as Investopedia articles about fee-only advisors and fees vs commissions, or Google variations of “financial planning fees”.
The traditional measure of investment advisors is assets under management, or AUM. This is the total value of the client’s investment accounts that the advisor has responsibility for managing and the ability to execute trades for the client. AUM typically doesn’t include assets that are “held away” – that is, they are in an account that the client has that’s at another institution, say a 401(k) that has to stay with a certain bank. If you have $100,000 with Fidelity and talk to an advisor there, the $50,000 you have in a Roth IRA sitting at Merrill Lynch is not part of the AUM for Fidelity, and they might want you to move it to Fidelity so they can manage it for you. However, I use assets under advisement (AUA) instead of AUM. I’m splitting hairs a bit here, but AUA includes the value of all your investment accounts (retirement accounts like a 401(k) or a Roth IRA, as well as regular brokerage accounts) for which I provide investment management services. This includes custodial accounts as well as any held-away assets for which the client wishes to receive ongoing recommendations and monitoring, since I’m doing work to monitor and make recommendations for them as well. If you don’t want advice for a particular account, then it isn’t included in the fee. All investment accounts agreed upon in the advisory agreement are included in AUA for the purpose of computing fees. Services provided under the “investment management” umbrella include: continuous monitoring, development and revision of the investment management strategy, recommendations of investments, and assistance with implementation of the strategy.
Still with me? Haven’t just skipped to the end yet? Great. My approach is a combination of some methods above, and it aims to ensure that 1) my incentives are aligned with your goals and 2) the fee structure scales properly on both ends so that you don’t end up overpaying – whether you’re young and just starting a career, or successful and faced with managing a significant nest egg. First, as a fee-only advisor, I don’t charge commissions for trading and don’t have particular products I’m trying to sell you. Second, my fee isn’t one-size-fits all; it is tailored to your situation instead of sticking you with a single flat fee.
I calculate your annual retainer fee – which covers investment management, financial planning, and tax preparation – based on the assets under advisement (AUA) concept discussed above. For those with under $200,000 of AUA, the annual fee is based upon the complexity of your situation, but generally doesn’t exceed $2,000 (the minimum AUA fee), except for exceedingly complex clients. After meeting with you and getting an understanding of your situation, I estimate how much time it will take to provide the services you need in a given year, and set the annual fee based on that estimate. If I underestimated how much time it would take, that’s my fault and you don’t have to pay any extra. If I overestimated and don’t need that much time, then you won’t be billed for work I didn’t do. If you have over $200,000 of AUA, your annual fee is based on 1% of AUA up to $500,000, plus 0.25% for any amount of AUA in excess of $500,000.
A few more words about the rationale behind this approach, before we get to a detailed example. Many young physicians and other young professionals may have a need for financial planning and investment management services despite being saddled with student loans and/or having very little in their investment accounts. I don’t want to shut them out by establishing an investment asset minimum – my wife is currently doing her residency, so I understand and genuinely want to help. Further, setting a fixed annual fee – as opposed to charging a percentage of investments at very low levels – ensures our incentives are aligned on the question of paying off debt versus adding to your retirement savings. Regarding using AUA instead of AUM for calculations: this ensures that I don’t care where your investments are housed; I provide advice on your entire portfolio and only recommend moving from one custodian to another when it financially makes sense for you to do so. Also, utilizing AUA instead of AUM is a better reflection of the total value I provide you, since I want to consider your investments as a total portfolio; leveraging the different investment options and tax advantages of the various accounts is most likely better for you than establishing an identical stock-to-bond ratio in each account.
Finally, in the interests of building relationships with clients, some people will qualify for discounts when their current income is low, but their anticipated future earning capacity is high. Discounts are at my discretion, but I recognize that those who are in graduate school, medical residency programs and similar situations are on a tight budget, but are also looking for financial advice and planning.
Okay, let’s get down to brass tacks. (I mean, this is why you came to this page, right?) Here are three examples of how I calculate fees:
Example 1: Let’s say you’re just starting out and have $20,000 (or $10,000 or $2,000 or $300) in some retirement account(s). As long as the total of the accounts is below $200,000 – no matter the amount – we disregard the amount and tailor a fee to the complexity of your situation. We would have a discussion about your situation and then I’d estimate how many hours of work per year are needed to provide you financial planning, investment management and tax services. In this example, 10 hours at $150/hour is an annual fee of $1,500. However, every situation is different, and as I mentioned above, some clients may qualify for a discount when just starting out.
Example 2: Let’s say you have a few investment accounts (maybe a 401(k), a Roth IRA, and a regular brokerage account) totaling $300,000. Because this is between $200k and $500k, the fee is 1% of the total value of the accounts you want me to help manage. So your annual fee – which covers investment management, financial planning, and your taxes – is $3,000.
Example 3: You’ve been working and saving for a while, and have accumulated $600,000 in your investment accounts. You’d pay 1% on the first $500,000 – that’s $5,000 – plus 0.25% on the remaining $100,000 (that’s how much you have in excess of $500k), or $250. So your annual fee would be $5,250 for investment management, financial planning, and your taxes.