Ask an Advisor: ‘Am I Getting Fleeced?’ I’m 66, Contributing $272 Per Month to an IRA and Paying $136 Monthly in Fees. That’s 50% of My Contribution

I am 66 years old, still working and with very good health insurance. My company does not have a 401(k). I do have an individual retirement account (IRA) with approximately $120,000 invested. I contribute $272 per month, yet my program fee is $136 per month. That’s 50% of my contribution. Am I getting fleeced? – Garry

There are two points to address here with your question. The first is about understanding the way your fee is calculated. The second is to assess whether you feel that the service you are receiving is worth the fee you are paying. 

These are very important points. After digging in, you may decide that you want to make a change. But bottom line: I wouldn’t say you are getting fleeced. (Looking for a new advisor? This tool can help match you with potential advisors.)  

Calculating the Fee

It’s good that you check your account statement and pay attention to the fee. Like any other service you use, you should know what you’re paying for it. 

While you can clearly see the amount, it may not be as obvious to you how the amount was determined. Your advisor would have been required to disclose this to you at the time you became a client. Take a look at the paperwork you were given. Unless something is missing, it will be spelled out in detail. Or just call and ask. 

It’s helpful to understand how your fee works. I bring this up because you’re comparing your monthly fee to your monthly contribution, which isn’t typically how the fee is calculated. Fees for portfolio management are often calculated as a percentage of your total assets under management (AUM), not how much you contribute on a regular basis. (Looking for a new advisor? This tool can help match you with potential advisors.)  

Different Types of Fees

The amount you pay an advisor can be calculated in several different ways. At a high level, advisors might be paid either by commission or through fees. Sometimes they’re paid both ways.

• Commissions: If your advisor receives commissions from the investment products that they invest your assets in, these would be based on the amount of your monthly contribution. But these are rarely above 10% and are often much lower. It’s highly improbable that this is the arrangement you have.
• Fees: If your advisor doesn’t receive commissions, you pay them in the form of fees. There are several ways that fees can be calculated. It could be based on the assets they manage for you, by the hour, a flat annual fee or a monthly subscription.

It looks like your advisor charges based on the amount of assets they manage for you. As I mentioned earlier, it’s usually stated as an annual percentage of your account balance.

I suspect you’re paying an AUM fee in large part because it’s the most common method of calculating fees. It also lines up with what my experience tells me is a common fee for the specific financial services firm you are using, which you shared privately. If I had to bet, I’d say your fee is probably 1.35% of your total assets under management (AUM), and that you’ll notice the monthly fee fluctuates based on the value of your account. Again, though, this can be verified by either checking the paperwork or asking the advisor.

(Looking for a new advisor? This tool can help match you with potential advisors.)  

Am I Getting Fleeced?

Next, there’s the question of whether or not you are getting enough value for that fee. That depends on what the advisor does for you and how much it’s worth to you.

In the world of percentage-based fees, 1% is often viewed as a benchmark. By comparison, 1.35% may seem relatively high, and many people, including myself, might initially question it.

As a practical matter, however, 1% is normally for accounts larger than $120,000. If you are receiving full financial planning and plenty of communication from your advisor for about $1,600 per year, you are getting a great deal. If it’s just investment management, and you never hear from them, you can probably get a comparable service somewhere else for less. (Looking for a new advisor? This tool can help match you with potential advisors.)  

Thinking about hiring a financial advisor but not sure if it’s worth it? Use the Financial Advisor Value Calculator below to estimate what an advisor could potentially add to your financial picture.

Next Steps

Of course, it’s not about how the advisor feels, but how you feel. It may help to have a candid discussion with your advisor. The relationship shouldn’t feel unclear. The advisor should be able to explain what they do for you, and you can weigh that against what you’re paying.

If you’re satisfied with the explanation and feel the value aligns with the cost, you may decide to stay the course. If not, you can continue exploring other options that better match your expectations.

Tips for Finding a Financial Advisor

• Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Start by clarifying what you need help with. Some advisors focus on retirement planning, others on tax strategy, estate planning or investment management. Knowing your primary goal makes it easier to find someone whose experience aligns with your situation.

Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.

Please note that Brandon is not a participant in SmartAsset AMP, and he has been compensated for this article.

Photo credit: Photo courtesy of Brandon Renfro, ©iStock.com/Inside Creative House, ©iStock.com/skynesher