Financial advisor: flat fee vs. percentage (i.e. 1%)

Hi Parents,

We have been working with a financial advisor for a few years, primarily for retirement investments.  We really like our financial advisor, but sometimes I flinch when, at the end of one of our bi-annual meetings, he shows us how much we paid him for the past year of investing.  With that in mind, I would greatly appreciate some advice regarding whether it is worth paying a financial advisor 1% of the portfolio he/she managers or whether it is better to go with an advisor that charges a flat fee.  My husband is adamant that you get what you pay for and does not want to more away from the percentage approve.

Thanks in advance for any advice.

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Unless he's earning you more in above-average returns (compared to index funds of a similar risk profile), and assuming that you're not invested in exotic investments, it's time to let go of this arrangement.

Regarding your husband's assertion that you get what you pay for, the reverse is true in retirement investment, according to research: Controlling fees is the top priority, because generally you can't beat the market consistently, and fees are the only thing you control. I'd ask your advisor to show you the numbers on how your investments performed compared to appropriate benchmarks. For the entire period you've been with him, not just this year. If he's actually earning you 1% alpha *consistently* over time, then he's earning his keep. If not, he's costing you precious retirement assets.

A flat fee advisor can be useful to help you determine your overall investment strategy. After that, you can apply that strategy using low cost index funds and periodically rebalance. If you're using annuity products, be very careful about penalties and hidden fees. FYI journalist Helaine Olen's The Index Card is a great evidence-based primer on retirement investing that cuts through industry BS.

Finally, ask any advisor how they get paid, and whether they have a fiduciary duty to you. So many advisors get commissions and that is an inherent conflict of interest, no matter what they tell you. The Obama Administration tried to regulate retail retirement advisors using the fiduciary standard, but the regs got killed under Trump.

I do think you get what you pay for. If you value their expertise and everything that comes with that, you won’t have a problem paying the percentage. I don’t have a flat fee person to recommend because everyone I know in this field charges a percentage. The costs of operating an advisory practice is huge - they deserve the income. 

I don’t think there is a single financial advisor charging a percentage of assets under management (AUM) who is worth it. Building wealth in the stock market is all about the power of compound interest - if your advisor is taking a cut off the top, over many years that will mean hundreds of thousands if not millions of dollars less in your account. Personally I don’t even think most people need an advisor who charges an hourly fee. Check out the bogleheads forum and ditch the bloodsuckers!

My wife and I have our stock portfolio managed by an advisor who charges 1% of the value of the account and is paid on a quarterly basis. We prefer this type of arrangement as there is the incentive for him to increase its value as much as possible because he will earn more commissions. In addition, all the dividends received pay for his fees so we collect all the capital gains.

It depends on what you're investing in and whether you can/would want to do it yourself. If it's just the stock market for long term savings, you could probably save yourself the money and invest in index funds, and rebalance as you move closer to retirement. If you want to include fixed income investments (eg tax free municipal bonds) or anything more exotic, the advisor might be able to give you access and know-how that you lack.