Overpaying for Financial Advice? How to Choose an Advisor

By Audra Lalley

The financial services landscape is becoming increasingly complex. There are plenty of headlines about "bad brokers" and unscrupulous advisors, but most are trying to do the right thing. A financial advisor should be a trustworthy resource for every investor’s wealth-building goals.

How Much Should I Pay?

As a very general rule, as an investor, you should expect to pay between 1 percent and 4 percent per year of your invested assets for financial advice and guidance. Costs will be less if your investments are very simple–U.S. and non-U.S. stocks and bonds. You will also pay less if your account is sizeable, the definition of which varies from firm to firm. Costs will increase quickly when you add complexity to your portfolio, with investments such as private equity, real estate, and hedge funds.

An advisor who does more for you outside of directing your portfolio may justify an additional fee. You might pay 1.5 percent on your invested assets and an additional flat fee for other services–financial planning, education for the next generation, foundation administration, guidance on estate planning, direction on insurance. Often the additional fees for services outside of investment guidance and education will go to other experts in those fields, with whom your advisor connects you.

Before beginning a relationship with a financial advisor, ask for clarification on what you are paying for. Also find out how the advisor gets paid--are they paid by a fee-based model or are they commission-based?

Whether or not you grant your advisor discretion on your assets, you always have the right to ask about costs, investments, insights, and anything else. If your advisor is not willing to provide answers or referrals to others who can provide those answers, you should find a new advisor.

Low-Cost vs Full-Service?

If you want to pay as little as possible for financial advice, you will need to make some of the decisions on how to invest. There are low-cost providers with online trading, many of whom have help lines or online chat services when you need them.

If you prefer a full-service advisor with whom you can develop a relationship over time, make sure you are clear about your expectations regarding what you believe you should pay. Many realities of managing investment accounts differ among firms. When you understand what services will be provided for a certain cost, you can better compare advisors. Simply comparing a bottom line fee might not be a fair comparison as some firms charge more than just a fee on your assets; additional fees may be justified and may include charges for things like wire transfers, annual custody, etc.

Credentials Matter

Aside from payment considerations, there are other factors you should use in your evaluation. Does the prospective advisor have professional or education credentials that may be helpful in the management of your assets and in the guidance they provide for related services?

You might want to consider their background in the field such as where they started their career and got training and how long they have been in the business. Also, do they have an MBA, a law degree, or other advanced degrees? Which institution granted the degree? Professional designations to consider are Certified Financial Advisor (CFA) and Certified Financial Planner (CFP).

Be mindful of whether an advisor asks you about your goals and investment experience. They need to know whether you are more interested in protecting your principal or aggressively building your net worth, whether you have specific philanthropic intentions and plans for your legacy, etc. You will want to ask the advisor how they work with clients–how often do they intend to communicate with you, meet with you, and do they seem willing to work with your schedule.

Trust Is Key

When you are making the decision as to who will oversee and guide you in the management of your assets and the ongoing organization of your financial life, consider everything. You should feel that the advisor is putting your interests first, and should feel personally comfortable with the individual.

Trust will come with time, but trust your instincts as well as you go over your check list. Ideally you will find someone who shares the same core values. Good communication and listening skills are also key–you want to build a relationship that will last.

It may be daunting to approach the outsourcing of investment and financial management, but it does not have to be overwhelming. You do not have to be an expert in any area of investing to demand details about how your assets will be handled. You will not likely forget you are the one who earned the assets. Be sure your advisor does not forget that either.