The general rule for financial advisor fees is about 1%. More specifically, according to a 2019 study by RIA in a Box, the average financial advisor firm fee is equal to 1.17% of assets under management (AUM), compared to a 0.95% average in 2018. As an example, a $1 million account would have to pay investment management fees of approximately $11,700 per year for services rendered, and fees would probably be paid quarterly. There are many other factors and variations when it comes to investment-related costs. While the most accurate information as it pertains to your personal situation would come from seeking out and potentially consulting with a professional financial advisor, it helps to know the nuts and bolts.
What Do Investment Management Fees Pay For?
Investment management involves the professional assessment and management of assets. Assets can fall under various types, or classes, including stocks, bonds, mutual funds, ETFs and alternative kinds of investments such as real estate, commodities, etc.
Part of your investment management fees likely goes towards the support of this analysis. Financial advisors and their teams are responsible for researching markets and trends and creating strategies in order to bring your money to its full potential. Some investment philosophies and strategies that are commonly used include:
- Fundamental analysis
- Technical analysis
- Charting analysis
- Cyclical analysis
Firms also consider factors such as risk tolerance, time horizon, liquidity and income needs and any specific financial or investment goals you may have when putting together these strategies.
Types of Fees and Fee Schedules
Many times, advisorshave an opportunity to earn commissions from insurance sales, which is a service that would probably fall outside of the purview of average investment management services. If this applies to a firm, it would make the firm fee-based, as it receives income from both client fees and outside sources. This is different from a fee-only firm, which avoid this kind of conflict of interest by only earning compensation from the fees that clients pay.
Wrap fee programs are another kind of fee structure that firms employ that also bundle together more than the usual services in one package. Wrap feesinclude trading fees, commission fees, administrative costs and other investment expenses in one charge.
Additionally, fees can also be fixed, as opposed to being based on AUM. Sometimes certain services are provided for a flat fee or at an hourly rate. Very often, the services rendered for these fees do not encompass the average investment management services but rather one-off services such as shorter-term financial planning or consultation.
To find out more specific information, one resource that is available to potential investors and customers of an advisor firm is the firm’s Form ADV, which a firm files with the Securities and Exchange Commission (SEC) under specific requirements. You should look at the Form ADV carefully – there’s a lot of fine print – to understand the types of fees and fee schedules. Having a financial advisor to speak with might allow for an expert to walk you through all those little details.
Other Fees to Watch Out For
Whether investing with the help of an advisor firm or on your own, it’s important to understand everything that your fees are going towards, and what other fees might be necessary. Other fees that clients may have to cover include certain transaction costs and brokerage fees. As mentioned above, certain commissions may apply, as well as performance-based fees. Doing more research for each firm you consider will help you understand whether or not any of these expenses are already included in average costs.
Robo-Advisor Fees
For those who are relatively new to or have smaller account balances to start with, it might be useful to consider working with a robo-advisor. Generally, robo-advisors charge lower fees than traditional advisors, with some fees as low as 0.25% to 0.89% of AUM. Different platforms will offer different levels of service, planning and access to resources.
Bottom Line
The average investment management fee is over 1% for $1 million in assets under management. It’s important to know what kinds of fees firms may charge and how they structure them. If you’re not ready to work with an advisory firm that works with higher AUM amounts and will charge more, you might want to look into the possibility of using a robo-advisor. However, they may not be able to handle more complex financial situations with the expertise that a professional traditional advisor might.
Tips for Investors
- If you’re primarily investing to build a secure retirement, then consider first checking out ourretirement calculator. Just punch in your current savings,your target retirement age and a few other details, and the calculator will indicate whether you’re on pace to meet your retirement income needs.
- Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors in your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Photo credit: ©iStock.com/sutlafk, ©iStock.com/Teamjackson, ©iStock.com/ljubaphoto
