How much advice do you need?

How much advice do you need?

October 22, 2021

Q: I have decided that I want to work with a financial advisor, but I am confused about how much I should expect to pay them. I looked at an online advisor and it looked pretty cheap. Then I looked at a fee-only advisor in town and they were a lot more expensive. What am I missing? Is there a reason why I wouldn’t just go with the cheaper online advisor?

A: Hiring a financial advisor is a big step in your financial life, so it pays to take your time and ask lots of questions. Deciding how much you should pay for advice will be easier if you first define what you want from your relationship with your advisor. If your needs are simple, a low-cost solution will probably be sufficient. However, if your needs are more complex, you will probably need to pay more to get the support you need.

Registered investment advisors (RIAs) generally charge fees based on how much money they manage for you and the level of service they provide. The online advisors you mention, known in the industry as “robo-advisors”, are typically the least-expensive RIA option. Many of these computer-based advisory platforms are great if you are primarily looking for help implementing a simple asset allocation strategy. Robo-advisors typically charge annual management fees of around 0.25% of your account value, but some like SoFi don’t charge a management fee at all.

Robo-advisors are a great option for young investors or others with very simple portfolio management needs. They often require very low minimum initial investments (SoFi is $1) and they do a good job keeping portfolios aligned with their target asset allocation. They also help take emotion out of the investment decision-making process, which solves one of the problems that gets many investors into trouble. The fact that many robo-advisors use very low-cost exchange-traded funds means they also reduce the expense drag that can eat away at investor returns.

The value proposition for robo-advisors breaks down quickly as complexity increases, however. As a simple example, think about transferring a portfolio with large embedded capital gains into a robo-advisor for management. The simple trading algorithms used by some robo-advisors could end up costing you much more in taxes than you would ever save in advisory fees. In addition, robo-advisors cannot do comprehensive financial planning or integrate the results of such a plan into your portfolio. Advice for complex financial decisions is really the domain of traditional RIAs.

Traditional RIAs generally charge an annual management fee somewhere in the neighborhood of one-percent of assets under management. Typical RIAs offer a wide ranges of services from portfolio construction and management to advice on other financial matters that arise. Some advisors include regular financial plan updates as part of their service, while others charge separately for financial planning. Often, RIA fee schedules are tiered, meaning the fee rate declines as a client’s assets under management grows. It is also common for traditional RIAs to have higher investment minimums, some as high as $1 million or more.

If you compare RIAs with other types of advisors, it may seem that you are paying more for the RIA. However, in my experience, the cost difference is less than it may at first appear. When you evaluate different advisors, make sure your comparison is both accurate and complete. When you evaluate the cost of an RIA against an alternative, make sure you look at all the costs of the alternative. And make sure that you evaluate it against a comparable alternative. For example, you wouldn’t compare a robo-advisor to a full-service stock broker because they offer completely different levels of service. Likewise, you wouldn’t compare a full-service RIA to the cost of using an advisor from a discount brokerage firm because, again, they offer completely different levels of service.

Finally, make sure you match the type of advisor you eventually select to the complexity of your situation. If your situation requires more than a robo-advisor can provide, don’t try to get by with a robo-advisor. Your success will be enhanced by selecting an advisor who has the skills, background, and resources to truly help you.

Steven C. Merrell MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey. He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning. Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA 93940 or email them to: