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Question: I currently have $930,000 sitting in an Australian industry fund. Like most, it is losing money. I am looking to engage a financial adviser. My current long-term investments are 70/30 — a little too aggressive and there is limited diversification. The company I am looking at charges a capped fee of 1.6% up to $600,000. But I am already capped and looking at paying $10,000. Is this fee too high? Should I look for another type of adviser?
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Answer: Firstly, it’s important to understand what typical adviser fees might look like. There are many compensation structures to consider, but it sounds like the adviser you are considering works under the AUM structure, says Andrea Clark, certified financial planner at The Table Financial Planning.
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“AUM stands for assets under management and is calculated as a percentage of your investment assets managed by the adviser,” says Clark, adding that “if the fee is 1% of your $930,000, you will pay $9,300 to the adviser for their work on your behalf. The average AUM fee tends to be closer to 1% than 1.6% but some advisers dive into other financial planning topics beyond investments.”
In other words, a 1.6% AUM fee is on the high side, but it’s worth delving into this further. Because it’s capped at 1.6% but isn’t a flat 1.6%, you might be able to pay less. Look harder at the fees and request a breakdown of exactly what you’re paying for so you can see how the 1.6% is calculated. It’s possible that the adviser has additional fees in there which would indicate that they’re not a fiduciary, which is something you should be aware of.
How you vet the fee also depends on what the adviser does for you. “If they charge $10,000 to park something in a single mutual fund without any additional guidance or planning, that sounds like a bad deal,” says Robert Persichitte, a certified financial planner at Delagify Financial.
David Maurice, a certified financial planner at Worthwhile Wealth Council, says with your current adviser, “the biggest concern is that you don’t appear to have a clear picture of a value proposition at any fee level, meaning, your adviser hasn’t made it clear what you should expect for the fees you’re paying in terms you understand. That’s on your adviser, not you,” says Maurice.
Andrea Clark, a certified financial planner at The Table Financial Planning, says you’ll want to ask any adviser you might hire these questions, and “you want to find a fiduciary which is someone who is acting in your best interest, not pushing a product their company sells or earns commissions on.”
It could also be that you want to engage an adviser who works on a flat-fee or retainer model who is focused on comprehensive financial planning advice and not just investments. “Think tax planning, retirement income planning, risk management, real estate decision making and having a well diversified portfolio. These fees could be anywhere from $3,000 to $10,000 per year but would give you a more complete picture of your financial life,” says Clark.
To find advisers who fit the bill, you’ll want to check sites like the National Association of Personal Financial Advisors (NAPFA), XY Planning Network the Fee-Only Network or use this free tool that can match you to an adviser who might meet your needs.
There’s also a big issue of diversification that any adviser you hire should address smartly, says Anthony Ferreira, a certified financial planner at WorthPointe Wealth Management. “I would not recommend 100% to an individual investment that is not globally diversified,” Ferreira says, adding that “your age, goals or comfort with investment risk” need to be taken into account when deciding how to invest.
“We believe all client portfolios should have exposure to U.S. large-, mid- and small-cap funds as well as international and emerging markets. Concentrating your wealth can make you a lot of money fast but it can also lose you a lot of money fast. My first suggestion is diversification,” says Bruce Primeau, a certified financial planner at Summit Wealth Advocates.
What’s more, you mention that you have Australian Index Funds, but if you’re living in the United States, Persichitte says, “Having your money tied up in Australian dollars might post some unnecessary risk. Instead of looking for rules of thumb, try to find something that fits your needs and objectives.”
Have an issue with your financial adviser or looking for a new one? Email picks@marketwatch.com.
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