Excessive fees have become an obsession for many investors, and rightly so: Over time, an extra 1 percent or 2 percent a year can take a big bite out of a portfolio.
It’s not always easy to know how much you’re paying, however. Even if you can decipher your quarterly statements, you might not realize your adviser has an incentive to steer you into particular funds or recommend expensive insurance products.
The good news is that the market for financial advice is getting more competitive. Fees on many investments are falling, including those on some of the priciest products, such as hedge funds. Revenue for the asset management industry dropped last year, the first annual decline since 2008.
But how do you know if you’re getting a good deal? A new survey of almost 1,000 financial advisers sheds light on what U.S. investors are actually paying and what they’re getting in return. Inside Information, an adviser newsletter, asked advisers about a variety of costs to clients, including investment fees, trading costs, and financial planning fees. The sample was limited almost entirely to independent advisers, who tend to charge more transparent fees than brokers or insurance agents paid on commission.
The traditional rule of thumb is that a financial adviser costs 1 percent per year. That’s only partly right. The survey found that the median cost of hiring a financial adviser is 1 percent only for clients with $1 million or less in assets.
The more money you have, the less you typically pay. The median cost of a financial adviser for portfolios worth $5 million to $10 million is just 0.5 percent per year.
In one sense, the rich are getting a better deal. But in another sense, they’re getting hosed. An investor with $500,000 paying a 1 percent fee is handing over $5,000 a year to his adviser. An investor with $5 million paying a 0.5 percent fee is being charged $25,000 for more or less the same service.
Looking solely at the median cost of hiring an adviser can be…