WHAT DOES A FINANCIAL ADVISOR COST?
The question of how much a financial advisor costs is a hard question because it depends on how they charge. If a financial advisor charges a flat rate, that cost is easily determined. If a financial advisor charges a percentage based on your account balance, that takes one more step but is still also fairly easily to calculate. The only complicated situations to calculate are commission based advisors that get paid a commission from the sale, and the cost may depend on the product itself.
When people ask to know the financial advisor cost, what they are often really asking is whether hiring a financial advisor is worth it. To answer that question, I like to turn to Vanguard. What’s interesting is that Vanguard is the quintessential investment shop where people who like to do it themselves go. As the place that made their mark on the world by offering low cost funds for the average person, they are the ones that came out with an article titled “Putting a value on your value: Quantifying Vanguard Advisor’s Alpha”. This piece could easily be subtitled – are financial advisors worth the cost?
What the Vanguard article states is that picking the right investments doesn’t necessarily add any value to clients. There are, however, other ways that financial advisors can show their value (click here for the full link to the article):
Cost-effective implementation (expense ratios) – worth 0.34%
- Translation: making sure to use the right balance of mutual funds, index funds, ETFs, and stock that offer a balanced internal cost
Rebalancing – worth 0.26%
- Translation: buying low and selling high
Behavioral coaching – worth 1.50%
- Translation: keeping clients from human nature of buying high and getting out of the market when things go down
Asset location – worth 0% to 0.75%
- Translation: making sure the right kinds of investments are made for clients’ individual situations
Spending strategy – worth 0% to 1.10%
- Translation: accessing the right money in the right accounts to minimize taxes and maximize opportunity
Using Vanguard’s analysis, on the low end a financial advisor is worth 2.10% to a client’s annual return, and on the high end a financial advisor is worth 3.95% to a client’s annual return. They average this together and say that a financial advisor is worth about 3% in annual returns for clients. So getting back to the original question of what does a financial advisor cost, the answer may be a lot less than they are able to help.
At the end of the day, make sure your financial planner understands your needs and desires and can help support you in minimizing costs and maximizing returns. At the Cremé Wealth Team we believe in full transparency and empowering people to make the right decision. Please reach out and continue to explore our website to learn about our background and how we help clients blend their goals of low-cost strategies with long term financial planning strategies.
These hypothetical data do not represent the returns on any particular investment.