Investment advice can be one of the larger expenses when it comes to investing your money. In this article, we’re going to break down the investment landscape as it relates to fees. My goal is to help you, the investor, better understand how investment fees work, what the Average Advisory Fee is and lastly, why it is worth paying for investment advice.
Difference between a Broker and an Investment Advisor
To start with, it is important to understand the two primary ways a financial advisor or financial firm charges for their services. At the core of how they charge is whether they are acting as a broker/dealer or as an Investment Advisor Representatives or IARs of RIAs. These terms sound similar but they are very different.
In the first instance, the investor is paying to have a trade executed and the broker is determining whether or not it is a suitable investment for the investor based on the specific time at which the order is taken and entered. It is a picture of what the investors goals, assets, risk tolerance, etc. are.
In the latter case, the investor is paying for investment advice, and the investment advisor is acting as a fiduciary. Fiduciary comes from the Latin “fiducia”, meaning “trust,”. In this model, the advisor has the power and obligation to act for another (often called the beneficiary) under circumstances which require total trust, good faith and honesty. This concept was primarily reserved for rich people that used Trust departments until the late 1970s, early 1980s. In this model the advisor is required to not only look at the investment’s suitability at the time he/she enters the order, but also is obligated to provide on-going advice. It is more a movie, than a picture (as in the first model).
Average Advisory Fees
Based on a 2016 RIA Industry Study*.published by an industry firm called RIA in a Box, advisory fees generally range between 0.25% per year and 2.00% per year. This year, the average investment advisory fee charged by firms was 0.99% — with 90% reporting their fees at or below 1.33%.
This gives you a great place to start when it comes to reviewing how much you are paying for ongoing investment advice.
But let’s make this easier to see by showing it in dollars, based on having $250,000 invested and paying .25%, .50%, 1.00%, 1.50%, and 2.00% per year.
What About the Quality of Advice?
When it comes to investment advice, many people think that higher fees for investment advice should yield higher investment returns. It makes sense, right? This assumption, though wrong, is arrived at honestly because that is what we have been told: “You get what you pay for”, “If you want quality, you have to pay for it”, and on it goes. But technology has turned this belief upside down. Look at Amazon, Google, Schwab, Costco, etc.— these firms provide high quality products and a great shopping experience at a low price relative to their competitors.
My suggestion when it comes to fees is two-fold. First, make sure you know what you are paying in fees. And know it dollars, do not let a firm or advisor quote you just the percentage. Second, confirm you like the service model the advisory offers. Are meetings face to face, how often, what is covered, do you feel comfortable and confident?
Reasons to Work with an Advisor
Overwhelmingly, it appears that investors who are currently working with a financial professional are more prepared for retirement and feel their relationship with an advisor has helped make this possible.
According to the Insured Retirement Institute **, just 55% of baby-boomers currently have retirement savings. Another way to look at this is that 45% of Americans age 53 – 71 have zero retirement savings. Of those baby-boomers with retirement savings, over 90% work with a financial professional. For those working with a financial professional, eight in 10 feel that their investments are in better order as a result.
If you are feeling underprepared for retirement, or simply want help building your retirement savings, a financial advisor can be a critical resource.
And financial advisors aren’t just for the ultra-wealthy anymore. With average advisory fees now less than 1%, why are more Americans not working with a financial advisor?
The Bottom Line
In Summary, as an investor strive to understand how investment fees work and what you are paying in dollars annually. The average Investment Advisor Representatives or IARs of RIAs fee is a little under 1%, though do not fall for you get what you pay for and higher fees mean better investments. Lastly, do not go it alone on all your investments, though this fee may look big each quarter, it can be worth it.
* RIA in a Box. 2016 RIA Industry Study
** Insured Retirement Institute. Boomer Expectations for Retirement 2016
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