How much does it cost to work with you?
I will often hear in my meetings, “Jason, what you’re saying sounds great, but I know you don’t work for free. I mean, how much does it cost to work with you?” I’ve even had people ask how much it costs to sit down with me for an initial meeting. There seems to be a fear that there is a barrier of entry that is too high to even begin meeting with an advisor, and that is simply not true, especially not for an initial meeting. When understanding the cost of what it takes to work with an advisor, it helps to understand what exactly your advisor does and who is sitting across from you (or on the other end of the telephone).
Many advisors hold the title of “Financial Advisor” or “Financial Planner.” What they do for you is only one specific thing and not necessarily a holistic approach to planning. Below are three types of planners, what they do for you and the associated cost. A disclaimer on the examples that follow is that these are three general types and not every possible type out there. The descriptions will help give you a better idea of what to look for or and what to ask when you sit down with someone.
The first type of Financial Advisor is really only an Insurance Agent. This advisor’s main objective is to help you obtain insurance, and that’s about it. An Insurance Agent is compensated based on a commission of the sale, and the commission can range from anywhere between 40 - 95% of what you’re paying. Insurance is based on your age, sex, and health; therefore, the younger and healthier you are, the less expensive it will be. An insurance policy can be as cheap as $9/month, or you have the option to put beyond one million into a policy. It really depends on what your needs are and the company that you choose. It should be noted that on insurance, some advisors are paid out in the first year, and it doesn’t matter whether you keep your policy past that. Other advisors are paid out slowly over several years; therefore, they want you to keep your policy for the length of the contract. The second version is typically the better option as you can have more faith they’ll do it right the first time.
The second type of Financial Advisor is an Investment Advisor. This advisor’s main objective is to manage your assets, and that’s about it. With the Investment Advisor, you could potentially see multiple fees, whether hidden or not. The possible fees are as follows:
The “Fee Based Advisor,” which means there is a fee for them to make a recommendation on how to manage your investments. This fee can be anywhere from $1,000 - $10,000 as it’s up to the discretion of the advisor. This fee is not to manage your money, but only to make the recommendation on how to manage your money. This should be explained up front and should be a one-time fee.
There could be a “Brokerage Fee,” which can be thought of like a sales charge for each transaction. Every time you invest you pay the fee, and the fee can range from 0.25%-5.75% depending what you’re investing in and with whom.
There could be an “Advisory Fee,” which is not a transaction but more of an ongoing fee on your account. This fee can range anywhere from 0.75% - 2% based on account sizes and who is sitting in front of you. Generally, the larger the account, the smaller the percentage. This advisory fee can be a flat fee or one that moves with the account size. Typically, it’s preferred to have one that moves with the account size, as you want your advisor’s pay to be tied to your performance. If you make money, they make money. If you lose money, they lose money. The flat fee advisor has less skin in the game as they’ll make money whether you make or lose money.
There will always be underlying fund/hidden fees, and these fees can have a very wide range. Make sure you have your advisor explain these underlying/hidden fees. I’ve often seen an advisor say, “There’s no fee to invest with us,” only to see the underlying fund/hidden fees be double or triple what they would be somewhere else.
The third type of Financial Advisor is the true Financial Planner. This advisor integrates the insurance planning and the investment planning to create a holistic plan, and the cost is a combination of the previous two. The advisor will be compensated based on commission from any insurance, there will be a “Brokerage/Advisory” fee on the investments and this advisor could also be a “Fee Based Planner.” It is often the third type of advisor that is the most helpful as they are protecting against what could go wrong AND planning for what could go right.
There are many people out there who are more of a “do-it-yourself” mentality, which has created the following two problems: people being underinsured and performing worse on average than the market itself:
Over a third (35 percent) of all households would feel adverse financial impacts within one month if a primary wage earner died.1
The average investor gained 5.19%, while the S&P 500 averaged 9.85% for the twenty years ending in 12/31/2015.2
Vanguard performed a study that showed an advisor can add roughly 3% in net returns vs the average investor.3 Half of the ~3% came from behavioral coaching, which essentially means preventing a client from destroying their own plan, often due to their emotions. Many of the advisors at my office have a colleague do a double check of their own plan to ensure that they aren’t letting their emotions get in the way of the prudent planning.
When it comes to the fees that you’ll pay an advisor, it’s best to keep things in perspective. Think of how often you’ll go out to dinner, grab coffee, or grab drinks throughout the year, and roughly add up that number. When you add that up, consider what kind of tipper you are on average: 15%, 18% or 20%+. Multiply the amount you spent by your average tip to get an idea on how much you’ve paid in tips to have someone bring you your food, make your latte or mix that cocktail. Now compare that to the 0.75% - 2% fee you would pay to have a professional manage your life’s savings and plan for you to eventually retire, send your kids to school, save up for your wedding or buy your dream home. Which would you say was more meaningful to you in the long run?
1. 2018 Insurance Barometer Study - LIMRA
2. 2018 Quantitative Analysis of Investor Behavior – Dalbar Inc.
3. Quantifying Vanguard Advisor’s Alpha – Vanguard Funds
Jason Conger is an Insurance Agent of Northwestern Mutual and Northwestern Long Term Care Insurance Company, Milwaukee, WI (long-term care insurance), a subsidiary of NM.