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Q&A: "I'm Paying a Financial Advisor 1.5% Plus a $750 Annual Fee to Manage my $450,000 Portfolio. Is this Too Much?"

Fiduciary Investment

Question: 

I'm paying a financial advisor 1.5% plus a $750 annual fee to manage my $450,000 portfolio. Is this too much? (David from Miami, FL)

Larry's answer: 

Hello David, At first glance it looks high to me. But the answer depends on the total package of services you're actually receiving from the advisor and whether it's valuable to you.

A few questions you'll want to consider: 

1) Does the advisor only provide portfolio management and nothing else? Some advisors charge a fee for assets under management, but then also provide routine financial planning and consulting services at no extra charge.

2) Does the advisor actually manage your portfolio? In other words, do they take "discretion" where they carry the responsibility to buy and sell investments without first consulting you? The weight of discretionary management is worth more than non-discretionary advising, where the advisor merely makes periodic portfolio recommendations to which you say yes or no. 

3) Is the advisor managing your portfolio using strategic asset allocation or tactical asset allocation?

Strategic asset allocation divvies-up your portfolio to different asset classes based on a model portfolio and then provides some periodic rebalancing. There's no attempt to side-step market downturns or deliberately take advantage of underpriced assets. 

On the other hand, tactical asset allocation attempts to avoid large draw-downs in the financial markets. In such cases, the manager may reduce weighting (even to 0%) on asset classes that are overpriced relative to historical averages or overweight asset classes that appear to be a bargain. Tactical allocation is much more difficult than strategic allocation and, if the advisor is any good at it, deserves a higher fee.

Coming full circle now . . . . 

• If you're only receiving basic portfolio management using strategic asset allocation and nothing else (along the lines of planning/consulting), then the fee you're paying is highway robbery. You should be able to find that level of service for 0.50% annually, give or take.

• If you receive basic portfolio management PLUS financial planning/consulting, I still think the fee is a bit high. But you have to be the judge of whether or not value has been delivered. I think you should be able to find good service along those lines for 1.0% to 1.25% annually or a comparable flat retainer fee negotiated with the advisor. 

• If you receive tactical portfolio management and your advisor is good at it, then the fee is probably fine. And all the more so if you receive any financial planning/consulting along with it.

Hope that helps. All the best. 

Originally answered on BrightScope's Q&A on June 14, 2014.