We’ve described our financial planning & investment management services. But what does it all cost?
Financial planners are commonly paid a fee that is calculated as a percentage of the assets they manage for a client. That’s how we do it at our firm. This fee is our only source of income.
Our Management Fee
Though we refer to this as our management fee, it covers the cost of investment management, financial planning and ongoing support.
We file what’s called an Investment Brochure or Form ADV with the Securities & Exchange Commission. This is what it says about our fees and compensation:
Excerpt from our Investment Brochure (Form ADV)
5. Fees and Compensation
Fees that we charge can be negotiable but will generally conform with the schedule outlined below.
|Assets Under Management||Annual Fee|
|Initial assets up to $500,000||1.25%|
|Additional assets between $500,001 and $1,500,000||1.00%|
|Additional assets between $1,500,001 and $5,000,000||0.75%|
|Additional assets over $5,000,000||0.50%|
For all clients, management fees are payable on a quarterly basis after the quarter is completed. These fees are based on the market value of their portfolio as of the end of each calendar quarter. Our clients have the option of having their fees deducted directly from their account(s) or paying by check. Our investment advisory contracts provide termination provisions which allow either the client or us to terminate the agreement at any time by telephone and then confirm in writing. As of the effective date of termination, any fee owed to AFIA by that client will be prorated.
An adviser that accepts compensation from the sale of securities to a client has an incentive to base investment recommendations on the amount of compensation it will receive rather than what may be in the client’s best interest. We do not receive compensation on either the purchase or sale of securities. Some of our Investment Advisor Representatives do receive incentive-based compensation from investment management fees generated by new client accounts. In some periods, this can represent a significant portion of their compensation.
Our clients will also incur costs assessed by brokers and custodians. Those firms are compensated by account holders through commissions, service fees, other transaction-related fees, custodian fees, and interest charges on any borrowings. Most brokerage firms also receive payments for order flow. None of these costs represent income to AFIA. We will generally select no-load mutual funds or ETFs when selecting those types of investments to minimize sales charges.
How Do These Costs Compare to Those of Other Firms?
Obviously, we think our fees are fair. But we recommend that you look closely at the fees and compensation disclosure documents of any financial advisor you are considering.
Here are a few things to keep in mind:
- If an advisor uses mutual funds, exchange-traded funds (ETFs), or other investment managers, be sure to add any operating costs from these to what the advisor’s firm charges.
- If a financial planner sells insurance, mutual funds or other financial products, understand that these will have their own charges.
- Fees are important, but they aren’t the most important factor in deciding which advisor to hire. You have to trust that your advisor will listen, be responsive, and offer sound advice.
Is It Worth Paying a Management Fee for an Advisor?
It’s easy to think that it’s cheaper to do financial planning yourself rather than pay for the help of an advisor. In simple cases this may be true. It can also be true if you have the analytical skill, temperament and time to do it well.
Hiring a financial advisor can improve your results far beyond the annual fee. Think of an advisor as a trusted agent who acts on your behalf.
What can your advisor/agent do?
- Help you clarify your goals and develop a plan to achieve them.
- Temper your emotions during volatile times so that you stay on track.
- Keep you from making The Big Mistake – a blunder that can take a big toll on your finances. This can come from something simple, like investing heavily in a “sure thing” or paying unnecessary taxes when taking money from an account.
- Coordinate with your tax and legal advisors to reduce taxes and make sure your beneficiary and other documents are up-to-date.
- Get answers to your financial planning questions as they arise.
If you’d like more information on the subject, Investopedia has a worthwhile article called “What Financial Advisor Do.” They explain the role of an advisor and include an overview of costs, too.