An Inside View of Financial Planning Fees

in /by

I’ve worked in the financial services industry since 1997.  I worked for two brokerage firms and an independent investment advisory firm before opening Clarus in 2005.  Over these many years, I’ve met hundreds of advisors and seen nearly as many pricing models.  It’s no wonder there is confusion as to what financial advisory services cost, so I will sum it up:  too much!

Many brokerage firms, banks, and some investment advisory firms charge commissions. If you have a friend who believes they don’t pay for their investments, they’re likely working with this type of pricing model. They likely paid 3-5% on their initial investments and have ongoing fees of .75 – 1%, but they didn’t write a check (hence their belief that it’s free) – the fees came from investment performance. A $1 million portfolio cost them $30,000 – $50,000 initially, and $7,500 – $10,000 annually. In addition to the investment advice, they may also receive retirement planning advice, at no additional charge.

Most investment advisory firms charge an annual percentage fee based on the amount of assets they manage. Typically, this fee is 1% for the $1 million portfolio ($10,000/year).   I’ve seen some banks and brokerage firms charge up to 2.5% per $1million invested ($25,000/year).  Internal investment costs may bump the total fees up by an additional 0.1 – 1% per year.

The examples above are for the easy math, $1 million portfolio.  But what would a $4 million dollar portfolio cost?  There are discounts on higher dollar amounts, and many firms will charge closer to .75% ($30,000/year).

I believe this pricing structure will radically change over the next decade.  With the advent of firms such as Motif, Wealthfront, Betterment, and others, portfolio management is becoming an ultra low cost commodity for the individual investor.  Why pay 1-2% per year now that these new models exist that cost closer to 0.25%?

Now wait, Liane, some of you are thinking, the fee is for more than just investment management. The 1-2% fee includes retirement planning, insurance reviews, cash flow analysis, Social Security optimization, pension consultation (and more). And for many people working with fee-only advisors, this is absolutely true. The problem, however, is that many firms determine their fees based on the investments they manage, not on the critical financial planning and life planning advice they provide.

Clarus Financial Planning is different.  We embrace change.  We encourage lower industry costs. Clarus clients take advantage of the low-cost investment advisory options available in the marketplace and couple those services with our comprehensive financial planning services. Clarus fees range from $125/month – $400/month ($1,500 – $4,800/year), depending on financial complexity.

If you are not a Clarus client, what are you paying? And what services do you receive for that cost?