[Editor's Note: This article originally published as one of my regular columns for MD Magazine titled How To Negotiate Lower Advisory Fees. This is an important post because most docs never even consider negotiating with their advisor. This is unfortunate because almost all of them are paying more than they need to, even if they're getting good advice.]
In personal finance, it is well-known that success comes from winning the big battles, rather than amassing thousands of minor triumphs. Psychologically, it is hard to deny yourself over and over and over again. So use your limited willpower where it will make the biggest difference – on the big expenses of your life. For most people, these include the costs associated with housing and transportation.
For many physicians, the cost of their advisory fees are also a large expense, and over the course of a lifetime, may even dwarf the cost of housing. Minimizing these costs will speed your way to financial independence, and allow you to spend more on people, activities, and causes that bring you happiness. It doesn’t take a genius to realize that paying your financial advisor twice as much isn’t going to make you any happier.
6 Steps to Lower the Price of Your Advisory Fees
1. Determine How Your Advisor Is Paid
Financial advisors are paid in a number of different ways.
- Some are paid via “loads” or commissions on the sale of stocks, mutual funds, or insurance products
- Others are paid a percentage of your assets under management (AUM), such as 1% per year
- An annual retainer fee
- A set fee for a financial plan
An hourly rate like an attorney might charge- Many advisors will make money through more than one of these methods, such as earning commissions when they sell you life and disability insurance, but also charging you an AUM fee to manage your investments.
If you can’t figure out how your advisor is paid, you may be able to look it up on the regulatory sites, here or here. Or better yet, just ask.
2. Determine How Much Your Advisor Is Paid
Once you have figured out how your advisor is paid, you can add up how much you are paying for the advice you are receiving. Without this knowledge, it is impossible to even begin a negotiation.
3. Determine a Fair Price For Services
Most physicians have no idea what the “going rate” is for financial services. The truth is there is a huge range in prices paid. Some doctors are paying $30,000 or more a year for services that are obtainable for as little as $1,000 per year. The “industry standard” for AUM fees is 1%, but there are advisors who will work for as little as 0.37-0.5%, and “roboadvisors” who charge as little as 0.15%, 1/7th of the “industry standard.” Many advisors charge $5,000 to $10,000 as an annual retainer, but some advisors charge as little as $1,000. Hourly rates vary from $100 to $500 an hour. The “fair price” is determined by the market, but if advisors are willing to provide these services for $5,000 a year or less, why pay $20,000?
4. Determine How Much You Are Willing to Do Yourself
Since financial advice and services are so expensive, you may find it well worth your time to do much of the work yourself. For instance, simple, but sophisticated investment plans consisting primarily of index funds can be automated and managed with little time or effort once set up. You will need to learn enough to be able to do this sort of thing yourself, but it does not have to be an “all or none” decision. You can use the services of an advisor for a few years until you get it figured out, and even after moving on can still pay for occasional “check-ups” with a professional to make sure that you’re on track.
5. Carefully Research Your Alternative(s)
Now that you know how you are paying, how much you are paying, the going rate for financial services, and how much you want to do yourself, you’re almost ready to start negotiating.
In order to negotiate from a position of power, you need an alternative. Just like your best chance for a raise when negotiating your salary is to have another job offer, you need to have seriously looked into another advisor in order to really get a discount on your advisory fees. When an advisor truly believes that you are leaving, but would stay if the price were lower, you might be surprised just how much he will lower his fees.
6. Negotiate From a Position of Power
Information is power in any negotiation, and now you have it. Negotiation doesn’t come naturally for doctors, who generally dislike confrontation. Your advisor has gone to great lengths to build a relationship with you, perhaps even a personal relationship. Severing it may be painful. It is best to keep the discussion strictly on business terms. (“It’s not that I don’t like you, but if I switch I can save $5,000 a year and as you know I could really use that money.”) If he tries to make it personal, I would suggest turning the tables. (“Since we’re such good friends, I’m sure you would be more than happy to lower my fees to less than I can get from Joe down the street.”)
In the end, if you feel you’re getting good advice and good service from your current advisor, and if she is willing to lower your fees to what you would pay elsewhere, stick with her. If any of that is not true, at least you’ve already done the research to know where you should go.
What do you think? Have you ever negotiated fees with a financial advisor? Why or why not? Do you think this is a reasonable approach? If you're an advisor, what would you do with a client who tried to negotiate a lower fee? Comment below!
I’m still relatively new at this, but IMO personal finance just really isn’t that complicated. I struggle find out why any physician would pay someone an annual fee to “manage” their money. The cornerstones of an intelligent portfolio are simple, low fee investments and commitment to a savings/investing plan. If you made it through med school and residency I think you can handle this on your own. And its not complicated or time consuming, as many would have you believe (although it can be if your buy into the hype). Seriously–You could read like 1 or 2 decent personal finance books (such as WCI book) and a dozen important posts on this website and have pretty much all you need.
For someone overwhelmed by taking on the challenge I’d recommend seeking an advisor who will be paid a flat one time fee or hourly rate for an initial “financial planning/education” session and doing the actual investing and money management on your own. For one time fee of $500-1000 you could get great advice and execute it on your own. It seriously as simple as clicking a few buttons of the mouse!
There is certainly a lot to learn to be an adviser, but as an individual investor, you only have to learn that which is relevant to you, which is far easier. 90% of what I write about on this blog I’ll never deal with again- student loan refinancing, taking out a mortgage, setting up an investing plan, buying life insurance, buying disability insurance etc. An advisor needs to keep up on all of that. But if you don’t have student loans…who cares what’s going on there?
Well said. Just go to a financial calculator and see the 40 yr results of a 7% return versus an 8% return if you are paying an advisor 1% as an example. Obviously to myself and others 1% is astronomical. Many are having fees well beyond 1% if their assets are actively managed. Bogle’s books explain it quite clearly in graphs
It is not only the advisory fee that should be considered but also hidden expense ratio fees, back end loaded fees and hidden commission fees especially when the advisor is using a hybrid model. Transparency is lacking in the financial services industry.
Hi. I am relatively new to the White Coat Investor. I don’t always find time to read the daily emails but when I do I find them interesting and helpful. This is a timely post for me. I have been using the same financial advisors for at least 15 years. I am the type who doesn’t want to think about or look at my investments on a daily basis. I just want everything to happen automatically. This advisory firm has some cool amenities such as a website that tracks all of my assets (even those that they don’t manage) and liabilities. This updates daily to give me a net-worth picture anytime I want it. They also have done the risk tolerance evaluations for my wife and myself, and the life insurance recommendations, and retirement date projections, everything you would expect from a financial advisor. While this makes life easy for me, I am beginning to realize that this hands off approach may have cost me a significantly over the years. I have had a great personal relationship with my advisors. They have helped out with a Simple IRA plan for my office staff members and for myself. We all have our own individual accounts. This setup has been attractive for me because I don’t want to be responsible for my staff members’ accounts.
There is an AUM fee of about 1.5%. My investments are in mutual funds that have been changed from time to time over the years for reasons that have seemed reasonable at the time. We have yearly meeting to discuss how the portfolio is doing, are we on track to meet goals, etc. It has never been really clear to me how much the relationship has cost me on a monthly or yearly basis because there seem to be hidden fees. Several times I have attempted to get that information, but it just never happened.
We had our yearly meeting a week ago and this time I was a bit more assertive about finding out my costs. What I found out was that my advisory fees are about $11,000 per year and the total fees of the mutual funds are about the same. So… last year I contributed about $37,000 to my retirement accounts and my cost for advisory and management was about $22,000.
This was an ah ha moment for me that occurred during our meeting. I honestly believe it was also a revelation to the advisor! At that point I asked if there was a better way to do things. Frankly, overall my portfolio hasn’t done any better than a stock market index fund would do. What I proposed was that we change the relationship (for myself only) to a situation where I pay a yearly retainer and I invest in no-load mutual, low fee funds such as Vanguard index funds or target date funds. I want to have continuing access to someone I can talk to for advice and someone do the paperwork, etc. My wife, who was at the meeting also, hasn’t ever been interested or involved in our finances. She was totally embarrassed about me bringing this up. Privately, of course she agrees that we are paying a lot.
What do you think would be a fair yearly retainer or hourly rate?
Thanks in advance for your answer (if you have the time to read this and answer) and for your website/blog.
Tom
They want you to be embarrassed to bring this up. I think what you’re doing is reasonable. You’re like many/most docs. You want an advisor. You expect top notch advice. You are willing to pay a fair price. But now you feel taken advantage of. It’s hard to recover from that. I suspect you may change advisors in the next year or two. And that’s perfectly fine. There are many who won’t treat you the way you’ve been treated up until this point, even if they are a minority in the profession.
Tom, I just want to share how closely your experience resonates with me. I am in the process of slowly divorcing our CFP RIA of 25 years. These are the enlightening steps I’ve gone through thus far.
— find and tally the AUM fees. these are buried within the transaction sheets.
–chose a benchmark to compare results. I’m using Vanguard 2020 Target fund. , which matches his stock / bond portfolio for us.
–ask Mr. CFP RIA about the lag. Is he transparent? Does he use hand waving? Is the explanation credible?
–among the blizzard of data, find the expense ratios.
–stop transferring money to my taxable account for Mr. CFP RIA to manage. I’m using Wealthfront and loving it.
My next step is to educate my husband and his partners of the performance drag, excess expense ratios, and alternative options. What are the alternatives for a 3 man group , with 6 employees to execute a retirement plan?
Mr CFP RIA responds that his 0.5% AUM fee is very reasonable. It depends what the denominator is. Our denominator is $200,000. Our after tax retirement draw will be $200,000. $22k is 11% of our budget.
That’s not gonna work.
For many years I understood the relationship all wrong. I felt too ignorant to talk to him, and he once shut me down with some complex jargon. His meetings with us were mostly to congratulate us on being good little savers.
In retrospect he also guided well, educated sufficiently, but I’ve passed the Rubicon with him. There’s no going back.
I don’t think asset-based fees are fair to the clients for a number of reasons described in this article:
http://litovskymanagement.com/2012/08/no-aum-fees/
A flat retainer would suffice if you want your assets managed and advice to be provided proactively on an ongoing basis. In fact, you can also get all of your investments managed, and there is no reason to pay $5k a year just for accessing your adviser (who by the way should be proactively communicating with you, not waiting for you to initiate). A lot more services have to be provided for this fee, and it goes without saying that investing in low cost index funds and ETFs is the best way to go vs. expensive mutual funds.
All the bells and whistles can be gotten for very little cost. There are plenty of websites that would aggregate your investment accounts. I think the best way to do this would be to consolidate as many accounts as possible at discount brokerages such as Vanguard. Besides, that’s not value-added advice. Doing annual budgeting and tax planning meetings, setting up various buckets (Roth, HSA, After-tax, 529, etc) and deciding on how to fund them is a lot more important than being able to aggregate accounts in one view.
Another thing to note is that your adviser has to be a real fiduciary (not a paper fiduciary). They have to act in your best interest, and most advisers (even those with an alphabet soup of designations) can cease being fiduciaries when they decide to sell you stuff (especially if they can make more money). You can buy insurance from an independent broker, and your adviser should not be selling you insurance (though they can help evaluate your needs and select the best products for you).
I am not surprised to know that even advisers might not know exactly how much they are making off of your assets, but suffice it to say that once they have your assets, they will not really do much more other than ‘relationship maintenance’ or whatever it is they do to make sure that you don’t quit on them (even when you find out that your fees have been enough to buy a house, as WCI says. I think that if adviser provides ongoing services the value of which exceeds their fee, this relationship can be a long-term one.
The big issue with doctors and dentists is the fact that they often have both personal and business finances, and lots of complexities related to retirement plans for small practices and multiple sources of 1099 income, which requires a lot of complex planning involving solo 401ks and Defined Benefit plans. One reason to hire an adviser is to help you get organized and manage multiple accounts together, as well as to help you come up with a comprehensive financial plan. A good adviser should also coordinate the work of other advisers, and such cooperation is a must when dealing with retirement plans.
To anyone who is planning the extrication process of their assets into lower cost investments in taxable accounts – you need to be aware of capital gains taxes – short term gains will get taxed at your marginal tax rate (maybe even plus some recent surcharge tax), and long term gains at a lower tax rate, if you sell old investments and buy new ones. If so far you’ve had an adviser manage such things for you, and someone else preparing your taxes, it may come as an unpleasant face slap in April of next year. Or just a tax due note from accountant, and you will wonder why it’s so high, and pay it. Or if you do your taxes yourself and actually start understanding what happened, you’ll be ready to kick yourself.
And those of you who let your advisers change your investments for you periodically (while you pay AUMs) – do the math to figure out the tax costs of these transactions, not just ER’s, AUMs, trading charges, etc. All those fees would pale in comparison to what your advisers gift to Uncle Sam on your behalf. I’m assuming investments are making at least some gains, else you would be getting some capital losses and offsetting your earned income.
If you are transferring funds from one institution to another, you should try to do an “in-kind” transfer, meaning that you will keep old funds with their expense ratios, but won’t pay AUM to the adviser once the money transfers out. You should figure out what your basis is – if the basis is high, fine, sell it all and buy low expense ratio funds. If you’ve had a lot of gains over the years – think about what you would owe in taxes if you sell, sell if it does not bother you. If you are not willing to pay taxes on your gains – consider donating most appreciated shares (need to have held over 1 year) to charity (easiest accomplished through donor advised funds, as not all charity can accept stock or mutual fund gifts). Or, wait for another June-August 2015, or October 2014 when your gains are minimized, or maybe even you are at a loss. Do math on your own – compare higher expense ratios potentially over few years vs. what it would cost you in taxes. Maybe will have lower earning year, and can sell then at lower tax burden, etc. There is some average time period for market corrections of about 10%, of course unpredictable. And of course 10% drop only resets the value of investments back by a year to year and a half (on average). If you are not going to be waiting for a correction, just be aware of tax costs for changing your investments.
None of this of course applies if the assets are in tax advantaged accounts, as they have no ongoing tax implications.
never understood why aum fees are based on assets; vanguard even has advisors who charge about .3% of assets; is it more work to manage 5 million versus 1
obviously if you need an advisor, fee based only
All the families that I work with pay $1200/yr-$3000/yr flat fee for the all in relationship. I’ll help set up their accounts at Vanguard or wherever they want to minimize investment costs. The reason I can do this is because my overhead is modest and my lifestyle doesn’t require me to charge more than I have to. I’m not sure why anyone would pay more than that….
Why do I not have you listed on my recommended list again? Do you have no need to advertise?
https://www.whitecoatinvestor.com/financial-advisors/
I currently have no room for more families so paying for advertising doesn’t make sense.
Sounds like you need to raise prices, as much as it pains me to say that!
What do you do when your investment adviser is your brother?
Put him in a headlock, and give him a noogie until he agrees to work for free. Of course, that might not be a low enough price if the advice and service isn’t good.