facebook twitter instagram linkedin google youtube vimeo tumblr yelp rss email podcast phone blog external search brokercheck brokercheck Play Pause

Q&A: "Is 1% a fair fee on a $2,000,000 portfolio? It seems it should be lower. $20,000 feels steep."

Fiduciary Investment

Question:

Is 1% a fair fee on a $2,000,000 portfolio? It seems it should be lower. $20,000 feels steep.

Answer: 

Whether a fee is a fair price or not depends on what you're actually receiving from the adviser. Two key questions:

  • Is the portfolio discretionarily managed (the adviser makes buy/sell decisions without consulting you first) or do they simply recommend (advise) portfolio changes to you?
  • If discretionarily managed, does the adviser use strategic asset allocation or tactical asset allocation (and, if tactical, are they good at it)?

With discretionary management, the adviser takes on the responsibility and weight of portfolio management. That typically deserves a higher fee than just advising a portfolio. 

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 will often reduce weighting (even to 0%) on asset classes that are overpriced relative to historical averages and will overweight asset classes that appear to be a bargain. This approach is much more difficult than strategic asset allocation. So if the manager is good at it, they deserve a higher fee. 

Coming full circle now...in my view:

  • Paying 1% on a $2 million portfolio for basic (non-discretionary) advisement is highway robbery.
  • Paying 1% on a $2 million portfolio for discretionary management using strategic asset allocation is too high. I'd expect to pay between 0.50% and 1.00%.
  • Paying 1% on a $2 million portfolio for discretionary management using tactical asset allocation is fair--and if the manager is any good at it, that fee might even be a bit low.

One other thing...I've answered this from the standpoint of portfolio management only. If you also receive broader financial planning and consulting services at no extra charge, then that changes the fairness picture as well.

Hope that helps. All the best.