Put an advisor’s or banker’s clients together in a room and you’d be surprised by the range of fees. It is not an indictment of the advisor or banker but of the system. There has been very little transparency on fees over the years and with that lack of transparency comes a feeling of the wild west when you try to understand the range of fees. Is your financial advisor fee fair? We’ll help you find out if your financial advisor is charging you a fair rate.
At Moenio, we work with our clients in asking and understanding the fees being charged by their financial advisors and bankers. We feel advisors and bankers should be paid for the services they provide and it should be fair, but what does “fair” mean? In a white paper we will be putting out shortly we’ll discuss something called the “fee ratio” in more detail but the basics are built around a simple model. If I give someone money to manage and they manage it for three years and five years, what is my “net” gain over those time periods? And, more importantly, how much of the net gain was paid in fees?
For example, if I paid an advisor $250,000 over five years and had a net gain of $1,000,000 my fee ratio is 25%. is that good or bad? It depends on a few things. How much was my total investable assets? $10,000,000, okay. We might consider that descent. $20,000,000, I’m starting to get a not so good feeling. However, how did the performance stand up relative to the goals, the benchmarks, and choices made by the advisor? Unfortunately it is not a straight linear answer as there are multiple factors under consideration but the fee ratio does give someone a chance to quantify what they pay in a better light.
There are a few factors working against clients when looking to pay what we call, “fair pay.”
1) There is not a “standard fee model” you can evaluate. Although some industry groups publish yearly fee averages, this information is not shared and is inaccurate. The only groups with an accurate fee model are the wealth management firms and RIA’s with the clients and they are not sharing anytime soon.
2) A wealth management firm or RIA can have a sizable increase in revenue (or decline) if they charge healthy fees. I’ll give you two scenarios; The first is a sole practitioner/RIA with a $10,000,000 client. If the RIA charges their client 1.00%, they make $100,000 in fees which then breaks down to typically $80,000 to $90,000 net. By decreasing the fee to 0.75%, their net goes from $80,000 to $60,000 on the lower end and $90,000 to $67,500 on the higher end. Quite a drop. In the second scenario take a wealth management firm with 10,000 financial advisors managing an average of $50mm. If that firm is charging an average of 1.00% on their clients assets with a total of $500b under management their net fee is $500mm. If that fee drops to 0.75%, the net fees drop to $375mm. A significant amount having a material impact. YOU are often times not negotiating with the financial advisor or the banker but the firm where they work.
3) Fees are always up for negotiation as long as you know how big you are to the financial advisor. If a financial advisor has 100 clients and you happen to be the 50th client by asset size, your ability to negotiate will be limited. I would argue the financial advisor has a solid model with a very clearly defined fee being charged for the clients from number 100 to 20. The top 20 to 15 probably have some room for negotiating. Our statement about advisors having various fees applies to those top 10 clients who hold the bulk of the advisors/bankers assets and have a disproportionate revenue total for the advisor.
4) Don’t underestimate the value of “other services” provided by your advisor or banker. The best advisors and bankers offer more than investment performance, although they must deliver on performance. They help their clients have a simpler life when it comes to their finances and planning. There is a cost you must take into account however quantifying it can sometimes be difficult. Just recognize how much “other services” they are providing and if it seems plentiful then the fee conversation changes somewhat.
At Moenio, we help our clients quantify the relationship they have with their current advisor or help them find an advisor chosen specifically for their needs.