Are you paying too much for financial advice?

Secrets of a dream retirement
Secrets of a dream retirement

My adviser moved all my savings into low-cost index mutual funds and ETFs. But I'm still paying him 1.5% a year for "investment guidance," which seems a bit expensive. Can I get that guidance elsewhere for a lower fee? -- James, Falls Church, Va.

I'm sure there are financial advisers out there who will see you as a bit of an ingrate for repaying your adviser's good turn of moving you into low-cost index funds by seeking out lower fees elsewhere.

But you're right to ask. Indeed, it's a question that investors and advisers alike will increasingly face as the government moves closer to holding advisers to a fiduciary standard. The basic issue: Whose interests are being better served -- yours or the adviser's?

The issue is more nuanced than the simplistic way it's typically portrayed in the financial press (and in this video on the Department of Labor website).

Yes, there are some greedy advisers out there selling investments that pay them the highest commissions. But it's not as if advisers who charge a percentage of assets or a flat fee instead are immune from conflicts of interest.

To determine whether an adviser is putting your interests first you have to look at the entire relationship.

In your case, your adviser has put you into low-cost index funds, so it seems very unlikely that he is profiting unduly from the investments he's picked for you. It's possible, I suppose, that the adviser might be able to find index funds that have even lower fees.

But if an adviser were really looking to line his pockets at your expense, index funds wouldn't be the way to go. He'd more likely select actively managed funds, which generally come with much higher annual costs (and, sometimes, marketing charges). Or he'd load you up with other investments that traditionally have onerous costs, like variable annuities. So the chances of a conflict between your adviser's interests and yours seems, on the face of it, very unlikely.

But that leaves the other major aspect of your relationship with the adviser: the 1.5% a year you're paying for investment guidance. The relevant questions there: Are the guidance and any other services you're getting really worth 1.5% of assets a year? And, can you find someone else to provide comparable services for less?

First, consider what the adviser is actually doing for that 1.5% a year. If he's mostly creating an asset allocation for you (i.e., recommending the percentage of your assets that should go into the index funds based on your risk tolerance), monitoring performance and then re-balancing your mix of assets when necessary to restore your portfolio to its proper proportions, then 1.5% a year strikes me as a bit pricey.

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Given the technology available today, creating and monitoring a portfolio is an activity you can put on autopilot for the most part. That's why many large mutual fund companies and investment firms have asset management services that charge well below 1% a year (not including the cost of underlying investments). And many "robo-adviser" -- firms that use algorithms to allocate assets, monitor performance and fine tune portfolios -- charge 0.5% a year or less.

Of course, I'm sure many advisers who charge 1% or more a year would say their fee is reasonable because they watch your portfolio like the proverbial hawk and stand ready to overhaul it at a moment's notice to capitalize on changing market conditions. I'm skeptical that such an active investing style generates superior returns after adjusting for costs and risk.

But the point is that, unless the adviser claims to be doing something pretty remarkable with your portfolio (and backing it up with just as remarkable results), I think it's a challenge to justify paying 1.5% a year for investment guidance alone.

But if your adviser provides a comprehensive range of services beyond asset management, then that 1.5% a year might be warranted. Say they help you budget to help you save enough for retirement, coordinate your investments in workplace retirement plans with the assets you hold outside your company plan and makes sure you've got the right life, health and disability insurance coverage. Or maybe he's helped create a retirement income plan, ranging from when to apply for Social Security to the best way to draw money from your mix of tax-deferred, tax-free and taxable accounts so you don't run through your savings too soon.

Only you can decide whether you're getting your money's worth from your adviser. A good way to begin is to have a sit-down with your adviser and ask them to show you, in writing, exactly what services you're getting for your 1.5% a year.

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It could be that the adviser is doing more than you think -- or perhaps he's figured services into that 1.5% fee that you feel you don't want or need. But unless the information he provides is so compelling that you realize that 1.5% is a bargain, you can negotiate for a lower fee.

Don't be afraid to interview a few other advisers to see if you can get the guidance you need at a lower cost. And if all you really want is assurance that your money is invested in a reasonable way at a reasonable cost, then you may be better off signing up with one of the portfolio advisory services offered by companies like Fidelity, Schwab and Vanguard, or even with a robo-adviser.

Going that route doesn't mean you have to forgo advice on other matters (whether to convert an IRA to a Roth IRA, developing a retirement income plan, etc.). By consulting one of the minority of advisers who are willing to charge by the hour or a flat fee for a particular project, you can pay for help on specific matters as pop up.

Bottom line: There are all sorts of ways to get all kinds of financial help at a variety of prices. Each has its pros and cons; none totally eliminate conflicts of interest. But ultimately, the onus is on you to explore alternatives and compare prices to make sure you get the services you need at a fair price.

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Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.

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