By now, we’ve all seen the aggressive ad campaigns for discount brokerages and robo advisors on our TVs. They often feature a busy family having the hard discussion about firing their (human) financial security advisor to save on investment fees. The question they are trying to invoke from the audience is: “is it worth it to pay for financial advice or am I better off with a digital platform?” My goal today is to break down the components of that question and help provide a crystal-clear answer.
Let’s start off with the cost of advice. Before we can assess the value of advice, we must know the dollars-and-cents cost. The figure most commonly quoted in the industry, and contrasted in these commercials, is a fee of 1% of assets managed per year. This fee can be higher or lower depending on the advisor and the complexity of the client’s situation. It is also often discounted for larger investors as a $4 million portfolio is seldom 10x the complexity of a $400,000 portfolio; so 10x the fee is not practical. For the sake of our analysis, let’s stick with 1% as the standard fee. Therefore, on a hypothetical $100,000 of investments, the average Financial Advisor is charging a $1,000 per year retainer for advice, while the discount brokerage “saves” by not charging that $1,000 fee. $1,000 per year becomes our cost of advice for this scenario.
Next, let’s look at the services rendered by a digital platform. They will likely walk you through a risk tolerance questionnaire, perhaps some goals-based questions, recommend a portfolio based on how you answer the questions and keep you updated through online access and regular statements. That is very straightforward account setup and, if that is all your financial security advisor is doing, well worth saving 1% per year in comparison. The value of the discount platform is a risk-appropriate portfolio, meeting compliance and regulatory obligations, at a savings of $1,000 per year. Minimum-level service for a minimum-level price.
The next factor to consider is the value you are receiving from a financial security advisor. Assuming our hypothetical $100,000 portfolio costs $1,000 per year for advice, do you receive less or more than $1,000 in value? If your financial security advisor can produce $1,000 or more in value, then the cost of advice has been worth it for the year! If he or she does not add $1,000 in value, you may wish to explore other options.
What if that financial security advisor was able to generate significantly more in value than $1,000? What if their planning, advice and direction could save tens or even hundreds of thousands of dollars over the years? That kind of return can be far, far more valuable than 1% per year. Part two of this article will focus in on some specific ways good financial advice can far outweigh the cost and add tremendous value to your family’s finances.
This information is general in nature, and is intended for informational purposes only. For specific situations you should consult the appropriate legal, accounting or tax advisor.
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