How to Cut Financial Advisor Expenses

In an ideal relationship, you and your financial advisor should both be happy with what you’re paying. But what if you feel you’re paying too much? Perhaps you can convince your advisor to agree to lower their cost. There is that balance between charging so much that it drives away business and charging so little that their services don’t appear to be valuable. Let’s examine what advisors are usually paid, what bang you can expect for your buck, and possible ways to reduce the price tag.

What Is the Average Cost of a Financial Advisor?

In 2021, the average fee for a financial advisor’s services was 1.02% of assets under management (AUM) annually for an account of $1 million, according to research done by Advisory HQ News Corp. A 2019 RIA in a Box study of more than 1,350 registered investment advisor firms put the total industry average advisory fee at 1.17%, decreasing depending on the size of your account.

However, high-net-worth individuals may pay less, because the fee structure works on a sliding scale. “A reasonable fee would be 1% at $1 million down to 0.50% at $10 million and 0.10% thereafter,” says Ryan O’Donnell, CFP, wealth manager, and founding partner of the O’Donnell Group in Chico, Calif.

In other words, clients should expect to pay a maximum of $50,000 on a $10 million account. Online advisors have shown that a reasonable fee for money management only is about 0.25% to 0.30% of assets, so if you don’t want advice on anything else, that’s a reasonable fee, says O’Donnell.

Value for Your Money

For the traditional 1% fee, clients can expect asset management services and a full financial plan that is updated at least annually, says Jacob Lumby, a graduate associate instructor of personal financial planning at Texas Tech University. Some firms provide tax-planning services at no additional cost, but many partners with accounting firms charge for all tax-related services. The same is true of legal services, he adds. 

“For high-net-worth clients with advanced planning needs, these fees can be worthwhile,” says Lumby. “They need high-touch, custom plans with many different professionals involved.” High-net-worth clients are very sophisticated, and they’re also very busy, says O’Donnell. They aren’t going to pay fees for the value they aren’t getting, but peace of mind and less stress can make a financial advisor’s fee worthwhile. 

An advisor should be able to explain how they’re adding value for any amount charged above standard rates. Is the advisor acting as your personal chief financial officer (CFO), for example, and helping with tax planning or estate planning? Are they evaluating where you are vulnerable from an asset protection standpoint? Is the advisor helping you ensure that your charitable gifts have a bigger impact? Input at that level goes beyond money management to the burgeoning realm of wealth management.

Passive vs. Active Management: Value vs. Cost

A passive investment strategy involves buying and holding investments long term. It looks to maximize returns by minimizing buying and selling. It relies on the theory that the market ultimately posts positive returns over time, and it eschews attempting to make money off short-term fluctuations or market timing. It is intended to build wealth incrementally but inevitably.

For example, “If a client wants to reduce fees to razor-thin levels, some advisors will manage ETF-based portfolios that track different sectors of the market,” says David P. Sims, a certified public accountant, a former registered investment advisor with the Virginia-based RidgeHaven Capital LLC, and the current corporate treasury manager for VCU Health in Richmond, Va. Exchange-traded funds (ETFs) usually contain a basket of equities or bonds that mirror an underlying index, such as the S&P 500 or an index of U.S. Treasury bonds. Passive management requires less work from the investment advisor and usually results in lower fees for the investor.

A portfolio that’s actively managed usually involves a team of investment professionals, headed up by a portfolio manager, who is engaged in monitoring the portfolio’s performance and holdings. The process would involve buy, sell, and hold recommendations and trades designed to outperform the market, which is typically measured by a benchmark index, such as the S&P 500.

“Expect to pay more for actively managed portfolios,” says Sims. “If the investment advisor puts more effort into beating the market, then clients should expect to pay a higher fee for assets under management.”

However, just because you can pay extra for active management doesn’t mean you should. According to a Vanguard study, “Active fund managers as a group have underperformed their stated benchmarks across most of the fund categories and time periods considered.” Plenty of other recent studies have resulted in similar findings. Nonetheless, the Vanguard report acknowledges that “a very talented active manager with a proven philosophy, discipline, and process, and at competitive costs, can provide an opportunity for outperformance.” 

If you’re going to hire a financial advisor with an actively managed strategy, be sure to know the types of securities in which the advisor will be investing and whether those holdings align with your long-term financial goals and risk tolerance level.

Vanguard and Betterment

If you want to work with a professional advisor but don’t need highly personalized service, Lumby suggests looking at Vanguard’s Personal Advisor Services, which allow full access to an accredited financial advisor, a unique financial plan, and ongoing wealth management for a fee of 0.3% of assets managed annually (with an account minimum of $50,000). And if you need only portfolio management, not financial planning or advising, consider wealth management services such as Betterment, for which the fee is just 0.25% to 0.40% of assets.

Pay Less for Quality Financial Advice

Although the goal is to reduce fees and expenses by as much as possible, it’s important to consider the level of service and performance the financial advisor offers. Below are some effective tactics for cutting financial advisor expenses.

Use a fee-based financial advisor

You’ve probably heard this before, but the best way to make sure you’re getting unbiased financial advice that’s in your best interest is to hire a fee-based advisor, not a commission-based one. Fee-based advisors have a greater incentive to grow their clients’ assets, according to Sims. “In the long run, this is a win-win solution for the client and the advisor,” he says.

Avoid up-front loads

Try to avoid “big upfront loads and other silly fees that often accompany products being sold by select brokers,” says Lumby. “Upfront loads are sales and commission charges that investment managers or funds charge investors at the onset of investing money with them. In today’s low-cost investment world, there is no place for loaded mutual funds or related products. Fees are one of the leading indicators of investment results. Low fees result in more money in your investment account and a bigger legacy to pass on.”

Negotiate for lower fees

Another way to pay less is to negotiate a financial advisor’s fee. Be prepared to explain why you feel it is too high and why it makes sense for the advisor to take you on as a client for less than what their firm normally charges. If you like the advisor but want fewer services than they typically provide for a client, they may be able to justify charging you less. The same is true if you’re bringing them more assets than they typically manage.

Hire a newbie

You could also take a chance on a newcomer to financial advising. “Often, they know they can’t demand top dollar and are hungry, need the business, and are willing to dicker,” says Gary Silverman, CFP, founder of Personal Money Planning in Wichita Falls, Texas, where he serves as its investment advisor and a financial planner.

Though you might get what you pay for, you’ll probably get more attention, says Silverman. What’s more, he adds, “Folks that are new usually know they are a bit ignorant, so they’ll study hard before handing you a recommendation. Just because someone has been doing this for three years doesn’t mean they do a poorer job than someone who’s been at it for three decades.”

The Bottom Line

When looking for a financial advisor or deciding whether to stay with your existing one, remember that you want the advisor who provides the best value, which will not necessarily be the one who comes at the lowest price. Think about which services you really need and how much they’re worth to you, then find a financial advisor who fits your criteria.