A WORD ON FINANCIAL ADVISOR FEES

The objective of building wealth is the accumulation of assets for current and future use. Maintaining the value and usability of an asset usually has some current cost associated with it. As a general rule, the greater value of the asset, the greater the cost. For example a home is often a family's largest asset for a good part of their lives. Houses and other real estate are taxed, often require mortgage payments, need insurance, have ongoing maintenance costs for upkeep, and experience the drag of commission when they are bought and sold. Housing expenses can easily reach 1/3 of income. In the case of a house, the costs are fairly transparent and amount to a large portion of a family's budget. Cars are another example, the more expensive the car, the greater the depreciation, interest payments (if leased or bought with a loan), and maintenance parts and labor.

Despite the cost, it is necessary to maintain the asset, lest it fall into disrepair and lose value. It is tempting to put off the oil change or fix a leak in the roof, but we learn from experience that ignoring maintenance will cost more in the long run as the asset depreciates. We also learn to be careful of inexpensive quick fixes that give the illusion of maintenance but only hide the underlying problem for a time.

Financial Asset Maintenance

The cost of maintaining financial assets is similar. In some respects it is the same; the greater the value, the greater the cost. To best meet the objective of asset growth, regular portfolio maintenance is necessary. Commissions and product costs are a part of the process, but can create a drag on value growth. Risk reduction, like insurance, is a worthwhile expense. Just as regular maintenance extends the longevity of your house or car, financial planning and investment management can extend the longevity of your financial assets.

In another respect though, the costs associated with financial assets are different. Because the assets are not visible, the potential for deterioration is sometimes hard to see. It may be hard relate to and justify the maintenance cost until it is too late. How does a person value the cost of financial planning when it may never be known how much could have been saved in taxes or by making a different financial decision? How much is risk maangement worth when a bear market could otherwise cause a portfolio's value to fall 20% or 70%? It is probably worth more than a 1 or 2% fee.

Investment Firm Fees and Services

While maintenance of financial assets is arguably an important undertaking, it can also be hard to differentiate among the services that advisors offer and relate them to the fees that are charged.

Digital computer programs, or so-called "robo-advisors" have very low fees from (0 to .8% not including fund expenses and invisible third-party rebates), but also provide only limited services. They typically generate a generic portfolio recommendation and occasional transactions to keep a portfolio near its defined allocation. It is a mechanical approach without human assistance that is now being offered by a growing number discount brokers and others. It is a small step up from the computerized portfolio construction tools that have become commonplace on broker's web sites.

Some stock brokers say they are providing low cost or free financial planning, but a primary purpose is to determine what products they have to sell that are suitable for your situation. Some financial planners create comprehensive plans on an hourly or retainer basis, but the extent of their investment advice is to define an asset allocation and to rebalance portfolios occasionally, not unlike a robo-advisor. However, unlike a robo, they understand your real financial needs and adjust their recommended plans accordingly.

Other firms like LFM&P provide customized, personal planning advice and customized investment advice or management. They look out for risk in the markets and focus on maintaining and protecting client portfolios.

When searching for a financial advisor, it can be difficult to determine which type of firm you are considering working with. Judging whether their services provide value is even more difficult. A 2017 study by Bob Veres¹sheds some light on this question. He conducted a survey to determine the "all in" cost of financial services. His "all in" costs for advisors combine the advisor's fee, trading costs, and platform expenses. The results show:

Representatives of stock brokers had the highest median cost of 2.27% of assets.
The median cost of dually-registered (as broker and investment advisor), also known as "fee-based" advisors was 1.7%.
Fee-only asset managers and planning firms had the lowest median cost of 1.4%.

Although, as a fiduciary, we must disclose that we are biased on this subject, our take-away from this information is two-fold:

The median individual who has accumulated sufficient wealth to use a financial advisor and has decided that a human is better than a computer, believes that a cost of between 1.4% and 2.3% is a reasonable maintenance expense to maintain and grow their assets.
In addition to, or perhaps because of, a fee-only registered investment advisors' fiduciary duty, fee-only costs are lower than both fee-based advisors and brokers' representatives.

You choose which is best for you.

LFM&P Fees

LFM&P is a fee-only registered investment advisor. We provide financial planning, investment management, and investment advice as a fiduciary. These services can be provided either by themselves or together. When they are combined we do not charge for the lower cost service, although combined planning and investment management is subject to a minimum. We give a 20% discount for retirement planning. LFM&P's fees for these services can vary with family income and the asset value managed or advised. You can see what your fee would be by using our fee calculator or if you prefer, you may compare our fees with other advisors with the Massachusetts Stand Alone Fee Table.

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¹Veres, Bob "2017 Planning Profession Fee Survey" 2017