Is 1% a fair price to pay a financial advisor? My advisor moved most of my IRA into Russell bond funds in 2010. I'm making very little now. He says it's safe because I'm 64 and trying to not lose like the fall of 2008.

Is 1% a fair price to pay a financial advisor? My advisor moved most of my IRA into Russell bond funds in 2010. I'm making very little now. He says it's safe because I'm 64 and trying to not lose like the fall of 2008.
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#1

Feel like he’s the one making money.

I’ve made $6K on $200K since March 2010. Not happy.


#2

The broker has discretion as to what he can charge you  based on the AUM he manages for  you. 1% on $200,000 is not unreasonable. He probably can shave off 25 basis points (.25%).

2.5 %-3% on bond funds is a decent return and relatively safe  considering interest rates over the past few years and your age. Corporate bonds have a higher pay-out then government bonds.However, as interest rates rise, which will happen eventually, you will have interest rate risk which means your capital can lose value. 

If you are looking to get a little bit more of a return, then  you will need to rebalance your portfolio and ad equities. I do not know your situation so I can not make a recommendation.


#3

Good morning and thank you for your question.

I would typically say that 1% fee is a fair fee for a portfolio that is being actively managed for you. Where your advisor reviews your account on daily basis and makes adjustments/trades on it depending on the current market conditions and your objectives, risk and goals. However when you are invested in Fixed Income the fee, in my opinion and my opinion only, of 1% if very high. Typically you see a fee of .30-.50% percent to managed and Individual Bonds portfolio. Where you actually create your own "bond fund".  

However you are invested in a bond fund, my opinion is that, if that is all you have and you are only holding that position or other bond funds 1% fee is high. The yield on bond funds are not the same as they were 1 or 2 years ago, and the bonds are definitely at risk, as you saw this year, and once the rates start to move up you definitely stand to see some volatility. A fee that high will take away from your yields which are very low already. I would definitely try re-negotiating as well as reviewing your entire portfolio to make sure you have a right asset allocation for someone your age, based on your goals objective and risk tolerance.

I hope this helps, if you have any questions please feel free to contact me

Sincerely 

Michael Mezheritskiy

Founding Partner

Visionary Private Wealth Management Group


#4

A fee based asset management charge of 1% is normal for managing many investment portfolios.

Bonds have been on a 25 year bull market run and short term interest rates have been close to zero for longer than many have expected. As interest rates creep higher if you are in only one asset class - Bonds you are subject to significant risk. Unless your advisor has a crystal ball and is assured interest rates will continue to remain low and will not rise, you may want to consider additional options for your investments. Ask your advisor to show you the impact of three different interest rate scenarios on your money. A rise of 1% in rates, 2%, & 3%. You'll likely see your money is not as safe as you want.


#5

It is difficult to say whether 1% is appropriate without knowing the level of services the advisor is providing and the amount of time he is spending on your investments.  In general, bond investments will have lower fees than equity investments, but the relative appropriateness of the fee again depends on the total services provided - is the advisor providing other financial planning services?  Is he meeting with you regularly to assist you with other aspects of your financial situation?  I would not evaluate the fees paid in the context of your returns.  Advisors cannot control markets, and we do not get paid to generate performance.  We get paid for advising clients on the appropriate investments and other financial decisions they should make, based on the client's investment objectives, risk tolerance, income level, time horizon, etc., etc.  


#6

Your 6% may include the downturn in 2013 in the bond market. So you might have actually been at 10% for those years (which is still pretty low.) But it will come back as interest rates rise.

At 64, an all bond portfolio is very conservative and not likely to help you build the income you are hoping for at retirement. Yes, the 2008 downturn was a disaster for portfolios, but all of our clients are up significantly since then, if they did not panic and bail out.

I am sure you have heard this before, but if you are going to invest in the stock market, you have to be prepared for the ups and downs. But overall, the market goes up. At 64, you have a 20 year time horizon, maybe longer. So to be in a conservative bond portfolio, when inflation is 3% and likely to grow, is a poor risk allocation.

You need to have a conversation with someone who can give you solid, sound advice on how to withstand the coming economic conditions. Being in bonds would not be my first choice for a client with your profile (although you have given very little real information).

So is 1% fair? 1% is a fairly standard fee for managing your account. If it just sitting in a bond fund, then it is probably not the right amount. I would think 25bps would be fairer. An advisory fee is payment for managing your money. This falls short of that criteria.

Talk to your advisor about it. If your advisor wants to keep your account, they will likely make an adjustment.

Hope this helps.


#7

It is challenging, with rates so low but faced with the prospect of rising rates and a volatile stock market, to make a prudent investment decision these days.  And while that fee - assuming it is a fee only fee (i.e., it is the only compensation received by your "advisor", as opposed to other compensation arrangements known as "fee-based" or "fee and commission" where the fee is only part of the compensation) is pretty reasonable, it is high as a percentage of today's paltry income.

My biggest concern with your question has to do with your current use of bond funds.  Principal is at risk in such funds if interest rates go up and I'm worried that many bond fund investors are not going to appreciate that risk until rates have risen and principal has been irretrievably lost.  You should consider something with more principal stability than a bond mutual fund at this juncture.


#8

It depends on what your financial advisor has been hired to do for you. If your advisor is only investing your assets and giving you no other feedback on your overall planning, then this is a bit high.  If your advisor is looking after your planning and how that coordinates with your  investments, then this is a reasonable fee.

What would be of most interest is how this asset mix was chosen. This decision should be made by measuring both your risk tolerance and your required risk. Risk tolerance is measured by a well-designed risk questionnaire while required risk is measured by a financial planning exercise.
Please let me know if you have questions about this.





#9

1% annual assets under management fees are pretty common compensation for asset management these days.  And 6% is actually pretty low for the last 3 years.  However, it is not possible to see the whole picture from the limited information given.  A highly concentrated bond portfolio could be much more risky than you or your current advisor realize.  Interest rates have already risen this year.  If they continue to rise, it will have serious negative effects on bond funds.  At 64, you are not old and may have many more years ahead in retirement. Since bonds are fixed-income and won't give you protection from inflation, you should consider other sources of income besides primarily bonds, even though it may be true that bonds could benefit from short-term disruptions, such as the market meltdown like in 2008.  


#10

Yes a fair fee-based fee is 1% and yes I understand in a low return investment environment you feel that he is making more than you.  Remember, if you would have kept your funds in cash I doubt you would have earned this much money!  I think you have an asset allocation problem.  You are now watching equity returns of 8-12% but want the benefits of bond income protection in a low interest rate market.  I would review the bonds and determine what kind of bonds you have and what are their durations!  When interest rates rise, bonds will loss value!!  Remember the Feds are artificially holding them down so what happens when they stop?  Up they go and bond values will decline!

My recommendation is to reformulate your portfolio to a THREE DIMENSIONAL portfolio comprised of Global Equities, Global Income (NOT BONDS) and Risk Managed.  Based on your risk profile the actual %'s for each of three  allocation can be determined. The key here is to broadly diversify your Global Equities, generate Global Income NOT from just US Bond income and add a risk managed allocation to protect the portfolio from inflation and interest rate risks.  This is how University Endowments and Institutional Investors manage their portfolios  to generate "sustainable wealth"!  Visit our web page if you want to learn more.  Control your costs, your diversification, tax impacts and inflation/interest rate risks!!  You can't control the short-term market returns!! Good luck!


#11

1-  Yes 1% is a fair fee to pay an advisor.  Anything over 1% starts to become a little much.

2-  Bond funds can lose principal.  If and when interest rates rise, the value of bond funds will fall.

You may want to review other advisors and see if you they may provide the service and advice you are looking for.  Look on CFP, Paladin, or NAPFA.

Sorry you have not had a good experience.  I assure you it is not indicative of most CFP advisors.

Best wishes,


#12

It's hard to give an evaluation with the information given.  While 1% is a fairly standard fee, whether it is fair depends on what service you are paying for. 

Presumably you have indicated to your advisor that you wanted something that is not too risky.  Most likely a bond portfolio would not be as risky as the "Fall of 2008".  As others have pointed out, that does not make it riskless.  Have you asked for riskless or to have risk managed?

You indicate that you are not happy with the return.  As your advisor may have explained risk and return are related.  Normally a low risk portfolio will have low returns, by design.  If you want more return, you would have to accept more risk.

Your appetite for risk may also vary depending on your goals.  In the short run you probably don't want as much risk as you are willing to accept for the long run.

If all of that is greek to you, the problem may not be the amount of the fee, but who you are paying it to.  You might need to get another advisor who will spend the time to devise a portfolio that addresses your concerns and helps you reach your goals


#13

I think a very fair question back to you and your advisor is have you created a financial plan?  When creating a financial plan and comparing your goals to your financial resources (i.e. retirement assets, liquid assets and retirement income such as a pension and social security) you should get a probability of success on whether or not you are on track and you will be able to reach those goals.  Since you are paying an advisory fee to the advisor I highly recommend you complete a customized financial plan and the way I look at it is take the least amount of risk you need to in your portfolio to reach your goals.  In my opinion the financial plan should be done for you gratis.

Best,

Mike


#14

First, what are you getting for your $2,000/year? Ask your advisor exactly how he is advising your account. What is he doing to earn that money?

Second, you need to ask yourself, why did you lose money in 2008? Are you a buy and hold person? Does your advisor have a clear, concise, and verifiable track record that validates why you should be paying him 1%? Not all investors lost money in 2008. FBIAS: Fact Based Investment Allocation Strategies avoided the bear markets of 2000-2002 and the financial crisis of 2008. Find out if your advisor can do the same. If you're 64, it is very likely that you could have a another 30 years of life expectancy, and your money needs to last that long. A bond fund may not be the place to be.


#15

1% is the industry average, but it might be about .75% for bonds, depending on the amount being managed. We actually charge more than that but it is due to the types of assets we manage. Don't worry about the fees so much as your net return. 

If you were making 20% annually (Bernie Madoff type returns) for 15 years, you probably wouldn't care if you were paying 5% in fees. People mostly only focus on fees when the returns are small.

The past 15 years have been challenging for everyone. Hedge fund managers (arguably some of the smartest investors in the world) averaged 7.4% in 2013 when the SP500 made 30%, and -1% as of Nov 19th in 2014. If you were in bonds and didn't lose much when 2008 happened, then you shouldn't worry about only making 3% since 2010. If he took you out of stocks in 2008 and put you into bonds, then that is a different issue. You might want to shop around if that is the case.

A good advisor will help prevent you from becoming a performance chaser. Your biggest problem is that human nature is working against you. You should be aware of peer performance anxiety or peer-pressure to make the same returns as your friends. If you find yourself doing this, stop and think about why you are acting like a sheep. Just don't do it... unless you are friend with Peter Lynch of course, then you might want to mimic him.

The investment managers at GMO lost over 40% of their assets because they got out 2 years early from the tech bubble. they were ultimately right, but investors only want to know "what have you done for me today." It is one of the reasons why average investors under perform the market.


#16

Two questions:

  • Do you pay your financial advisor to grow wealth or protect your money so that you will be able to draw it down at retirement? Which leads to...
  • Do you have a plan that your advisor is implementing?

If you have no plan (or you are using SOTP investing - that would be Seat Of The Pants) then your "advisor" is using a boilerplate strategy based upon your age rather than your goals. If so, 1% for this "strategy" is about 100% too high.

If, on the other hand, you plan to need this money in the next 5 years, then your advisor has been protecting your interests as, in the short term, money should not be invested. Bonds are not investments, btw, they are loans. A bond fund is too risky for my tastes, however, and I would have preferred straight bonds. Either one, you could have done yourself.

If you lost money in 2008, it was due to, again, not having a long-term plan and an advisor with the guts to stick to it. I beg you to read Simple Wealth, Inevitable Wealth. It's fairly short and perfectly understandable. After that, you will have a very clear picture of what your next step should be. If that next step is to find another advisor, please make sure it is a fee-only advisor who will implement the steps in the book and work with you on a real plan. In that case, 1% will be a bargain.

Good luck and I hope this helps!


#17

1% is fair. FYI - most 3 year fixed annuities are beating short term bond and certificate of deposits rates right now though. You shouldn’t have to pay a fee to the advisor or insurance agent for a fixed annuity as the annuity company will pay the financial advisor or insurance agent at the point of sale for the annuity.


#18

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