Are you paying too much to your financial advisor?

Globally, financial advisors charge around 1% of the total assets under management (AUM). The fee could be a bit less or more depending on a few factors, including the advisory's reputation, the AUM value, and the scope of the service. This practice, a standard for a long time, is now being called into question, partly due to technological disruption.

Technology has digitalized several processes related to making, monitoring, and managing an investment portfolio. That has inadvertently simplified financial planning, enabling an investor with considerable digital dexterity to handle several processes by themselves. "Robo-advisors, for example, harness deep-learning AI algorithms to allocate funds into various asset classes, monitor performance in real-time, and rebalance portfolios, all while charging a nominal fee of less than 0.5% of the AUM.

So, many investors ask, "Is the 1% fee justified for the given services?" Such scepticism often encourages many to look for alternative options with relatively lesser fees or more services for the same charge. The concerns are more pronounced among investors whose advisors are adding more weight to comparatively less-risky avenues like low-cost index funds, hedge instruments, and ETFs. Under that scenario, is the 1% or higher fee tenable?

The typical argument in favour of a 1% or higher fee is that advisors channel their years of expertise and lived experiences into investment decisions. If the relationship with the client is long, then the decisions also factor in the latter's unique circumstances, including career trajectory, financial health, risk appetite, and legacy planning—propositions that extend beyond what is currently offered by robo-advisors. 

However, if the financial advisor is merely undertaking asset allocation, monitoring the portfolio, and rebalancing it periodically without an element of personalization, then a fee well over 1% is hard to defend. If the advisor is a non-fiduciary — those not obligated to put their client's interests before their own — a high fee cannot be rationalized in today's evolving circumstances. On the other hand, fiduciaries tend to have the client's best interests in mind when making investment decisions, hence more worthy of the fee. 

If a financial advisor is charging up to 1.5% of AUM a year, then it is safe to expect a broad range of services, including retirement, estate and legacy planning, besides portfolio management. Typically, such advisors tend to have a holistic idea of the client's personal and financial circumstances, enabling them to pursue a multi-pronged strategy. For example, if someone becomes a client in their peak earning years and continues the association till retirement, then the advisor is well-positioned to generate significant returns on investments while reducing risks as time passes and priorities change. 

The knowledge of family circumstances and relationships enables such advisors to meticulously plan the estate, with insurance products and irrevocable trusts, and avoid exorbitant inheritance tax and potential conflicts. In the above scenario, about 1% of the AUM a year pales in comparison to the profound financial outcomes a client can achieve. 

In most cases, advisors in a long-term association tend to know the clients better than the latter's kin and kin. Such relationships go a long way than a transaction with a low price tag. Sacrificing that for a better price point isn't advisable. However, if the client feels the charges are unjustified, they can leverage the current wiggle room created by digitalization to negotiate a flat fee or more services. The objective is to ensure the advisor-client relationship is built and nurtured on a foundation of absolute faith without letting money come in the way of long-term value creation.