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Financial Advisor, Financial Services, Investing, Personal Finance, Retirement

Is the 1% Financial Advisor Fee a Thing of the Past?

Charging a percentage of assets under management has been the accepted fee model in the financial advisor industry for decades now. And despite pressure to change, asset-based fees remain the norm for most advisors. Yet the standard 1% fee has faced increased scrutiny in recent years as clients have asked for more personalized services from their money managers along with a justification of their fees. With lower stock market returns projected for the next few years and the growing popularity of other financial advisory pricing models, the 1% investment advisor fee may soon become a thing of the past.

Assets Under Management Fee Model Continues to Grow

The assets under management (AUM) fee model continues to grow in popularity as many financial advisors who worked on commissions or flat fees have decided that this model makes the most sense. Indeed, advisors who charged a percentage of assets, either in total or as part of fee structures to their clients, actually increased to 92% last year from 90% in 2019, according to a recent survey from by Ignites Research.

And while trading fees and mutual fund commissions have declined in recent years, the fees that registered financial advisors charge on the portfolios they manage have risen. For example, clients with approximately $750,000 paid an average of 1.04% of assets in 2020, up from 1.02% in 2015, according to the research firm Cerulli Associates. Furthermore, investors with $10 million paid an average of 0.62%, up from 0.54%.

Market Uncertainty Leads Investors to Seek Alternatives

After years of outsized returns from a booming stock market, industry analysts now predict that stocks will yield only 1.3% annually for the next decade, with bond yields faring only marginally better at 1.8%. While other estimates may not be so gloomy, few expect the market to continue doing as well as the last few years. For the decade that ended last June 30, stocks yielded 14.7 annually and bonds 3.4%.

When your net worth is going up by double digits, a 1% management fee might seem like small potatoes. When annual returns start shrinking, however, those fees start to eat up a bigger share of the pie. As a result, many consumers have sought out alternatives to the traditional financial advisor fee model such as advisors who charge fees monthly or annually or robo-advisors that handle portfolios via computer algorithms.

Below is a more detailed look at some of these options:

Flat Monthly or Hourly Fees

Often, advisors who charge monthly for financial advice target younger individuals who haven’t had the chance to accrue much wealth. These advisors will charge anywhere from a few hundred to a thousand dollars a month, depending on the intricacy of their clients’ finances and their overall net worth.

Many fledgling investors wind up with advisors that charge monthly because traditional advisors won’t take them on without a bigger portfolio. Other investors prefer this model because it saves them money over the long term.

Furthermore, some financial advisors now act more like law firms that charge hourly. These advisors will charge anywhere from $300-450 an hour for financial advice. In this case, clients usually retain custody and control of their assets while the advisor guides them through trades. Regardless of a person’s net worth, these advisors charge only for the time spent with a client.

Flat Yearly Fees

With these new fee models, investors are realizing that the more money you have, the more it makes sense to pay a flat fee instead of a 1% yearly rate for financial services. Should someone with a $5 million net worth pay an advisor five times as much to manage their portfolio as a client with only $1 million? Is it really that much more work to manage the former portfolio than the latter?

For instance, Wedmont Private Capital, a West Chester, Pa., firm that launched in January 2020, charges a flat $10,000 a year. Moreover, the firm’s co-founder claims he employs the same investment approach he used at a prior employer charging 1%.

Charging Less Than 1% of AUM

Another way financial advisors are using to retain clients is to lower the fees they charge from the traditional 1% of AUM. Mutual fund behemoth Vanguard Group, for example, charges a limit of 0.3% of assets for an advisor to handle a client’s portfolio. Furthermore, this 0.3% yearly charge on the first $5 million drops to 0.05% for portfolios greater than $25 million.

In addition, well-known robo-advisors such as Wealthfront and Betterment charge only 0.25% to manage money using computer algorithms. Indeed, Vanguard’s own robo-advisor charges just 0.15% of assets. One caveat about robo-advisors is that they aren’t great for those who need lots of handholding.

Nevertheless, the advantage clients have nowadays is that they can save quite a bit by comparison shopping, even if they still want a full-service financial advisor. Some advisors will have arrangements whereby they charge 0.65% on the first $2 million of a client’s assets and 0.35% on anything beyond $5 million, with a graduating scale in between.

The bottom line is that the way investors choose to pay for financial advice has significant implications for their long-term finances. Although the need for financial services isn’t going anyway anytime soon, the traditional 1% of AUM model is no longer a given in today’s world. Not only do investors have much better access to investment advice, but they also have more reasonably-priced options as far as financial services are concerned.

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