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The Advicer

I live in California, and have a financial adviser who is charging 0.84% to manage my $2.3 million portfolio. Should I switch up how I pay her?

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Should I ask to switch to a fixed fee instead?

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Question: I live in Southern California and I’m paying my adviser 0.84% to oversee my $2,288,500 portfolio. Should I ask to switch to a fixed fee instead? 

Answer: A roughly 1% fee is fairly typical under the assets under management (AUM) model, which is where you pay the adviser a percentage of the assets he or she manages. That said, you could pay less, and whether 0.84% is reasonable or not really depends on what you’re getting out of it. (Looking for a new financial adviser? This tool can match with with an adviser who may meet your needs.)

“It depends on the services your current adviser is providing. If they’re providing wealth management services like retirement projection updates, tax planning, managing your portfolio, reviewing estate plan documents and more, 0.84% is a reasonable rate on a $2.3 million dollar portfolio. If the only service your adviser provides is portfolio management, then 0.84% is likely on the high side,” says certified financial planner Bruce Primeau at Summit Wealth Advocates.

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That said, this still adds up to plenty of money – nearly $20,000 a year – and it’s important to note that fees are negotiable. It is worth at least thinking about a fixed fee — after all, why should your adviser get significantly more money just because she’s managing a larger amount if she’s really doing the same things she would on a smaller portfolio.

In financial planning, a fixed-fee or flat fee payment structure means that a client pays a one-time, pre-determined fee for an adviser’s services that characteristically includes the creation of a comprehensive financial plan. Some advisers include investment advisory services under their flat-fee umbrella, but because there’s no hard-and-fast rule about what services a flat-fee covers, it’s imperative to ask the adviser exactly you can expect to receive.

Clients with large asset balances may benefit greatly from working with a flat-fee planner, especially if they’re looking to maintain an ongoing relationship while growing their money. With a flat-fee, a client might pay less in the long run, versus an assets under management agreement which could fluctuate depending on the client’s portfolio.

Indeed, if your assets continue to rise over time, a fixed commission can benefit you, says certified financial planner Alonso Rodriguez Segarra at Advise Financial. “If, instead, they start to go down because you’re going to retire, a percentage is better. When negotiating commissions, it’s essential to consider that this can be a sensitive issue. If you’re not satisfied with the value you’re receiving, it’s worth considering more than just the return on investment,” says Segarra.

Of course, a fixed fee isn’t for everyone. “How would you have felt if your adviser was paid the same amount for their services the first 9 months of 2022 while your portfolio was going down? Some folks would have a hard time knowing their portfolio was in decline and their adviser was getting paid the same amount as prior years,” says Primeau. 

Indeed, many financial advisers believe the AUM model works best because it aligns your adviser’s interest with yours. “The better your portfolio does, the better you both do. If your portfolio declines, you both participate in that decline,” says Primeau. 

Choosing whether or not to do a fixed fee isn’t always the easiest choice. “In my opinion, the decision of what to do with your portfolio comes down to three things in this order: the relationship and trust you have with the adviser, the services included in the asset management and the cost difference,” says certified financial planner Harrison Hinz at Spark Financial. 

Basically, if you’re able to switch billing with your current adviser, discuss the changes to any services because paying less may mean cutting back on certain services. “If switching advisers, consider the relationship and trust you’ve established with your current adviser. It really comes down to what’s most important to you,” says Hinz.