Advisors don’t need to treat their clients like charity cases. If an advisor has the education, experience, and competency to be a great advisor, he or she should charge their clients a market rate.
A benefit of being part of one of the major RIA consolidators is that I get to see a large number of financial advisory firms and practices. I see who provides financial planning, who fancies themselves as market gurus, who pays attention to their clients’ taxes and who’s only in this business for the money.
And I also get to see how much advisors charge their clients.
A standard rule of thumb in this business is that advisors charge about 1% of assets under management. This is accurate for clients with less than one or two million, but as the asset size increases, the amount advisors bill their clients is roughly 70-80 basis points from five to 10 million and 40-70 basis points above that.
What surprises me is not what is negotiated for larger clients, but how little some advisors charge for smaller clients.
As an example, I recently met with a founder of a firm who told me his average fee was about 60 basis points. Given that low number, my assumption was that his average client must have 10 million or more with the firm. But as I pressed further, I discovered that his typical client did not have eight figures invested with him. His average client had an account size closer to $800,000.
When I pressed this advisor as to why he charged so little, his response was that he had a very profitable firm, lived a great lifestyle and had no financial need to charge his clients any more than he was.
This is not the approach I’ve taken with my business over the years. I was a practicing financial advisor for over 20 years and, during that time, I charged slightly above the market rate and I rarely discounted.
Why didn’t I discount my fee? For a couple of reasons.
One, I was a great financial advisor. I kept up to date with tax changes, estate laws, financial markets, investment products. Plus, I provided in-depth financial planning and spent time with my clients helping them determine what it was they wanted with their money. Further, I provided great service to my clients.
Two, the value a quality financial advisor adds to one’s life is almost priceless. I’ve experienced managing client relationships, along with their portfolios, as the market went through horrific bear markets. I know the tremendous impact it has when someone sells out at the wrong time. And I’ve guided clients as they’ve gone through both the beauty of life as well as the tragedies that occur from time to time.
So, when I see a quality financial advisor under price his or her services, I view it as either the advisor doesn’t believe he or she adds much value, or the discounted fees are really a charitable handout.
There are numerous causes I support and I’m a big believer in generosity. But for me, I’d rather have my charitable giving go to organizations that have an impact on people and causes, rather than those who are already somewhat wealthy.
Scott Hanson is co-founder of Allworth Financial.
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