The wealth advisory business is great because it’s a sticky business that earns more money over time as client balances grow. There are some wealth management teams out there who manage over $1 billion in combined client assets. That’s a cool $10 – $20 million in fees a year!
The actively managed mutual fund business is also lucrative given the high fees and similar leverage effect. Many portfolio managers I know at large mutual funds easily make seven figures a year, while doing no more work than portfolio managers at small mutual funds. A lot of fund managers don’t even outperform the S&P 500, but they’ll still get paid. Hence, if you want a potentially lucrative career, get an MBA or CFA and join the money management business.
What if you can charge an annual advisory fee plus get your clients to own actively run mutual funds your company has created that also charge a fee? That’s where you can make the mega bucks as you earn double income from your clients. Don’t believe me? Know that Charles Schwab is worth over $6 billion and Abigail Johnson of Fidelity is worth over $14 billion. Beware of the double dip!
Average Adviser Fees By Brokerage
Ever wonder how much wealth management companies like Merrill Lynch, Morgan Stanley, Charles Schwab, Fidelity, and Ameriprise charge in annual advisory fees? Well look no further as my old client, Personal Capital has put together a white paper ranking the most and least expensive brokerage firms by advisory, mutual fund, and total fees.
Chart 1: Average Advisory Fee Percentages By Brokerage
This is the fee you pay on your total assets managed by the brokerage company to manage your money and provide financial advice.
Chart 2: Average Mutual Fund And ETF Expense Ratio By Brokerage
This is the fee you pay as a shareholder of the mutual fund or ETF by brokerage. The fee is paid in hopes the mutual fund or ETF outperforms its benchmark. ETF fees are generally much lower than actively managed mutual funds.
Chart 3: Average Total Fee By Brokerage
This is the combined total of adviser fee plus mutual fund / ETF fee by brokerage. Anything over 1.5% seems high to me. At least it’s not a 5% selling commission fee real estate agents charge! If your money is being managed by a brokerage / wealth management company, please ask them to disclose their fees and ask what you are getting for the fees you are paying.
Note: Vanguard just launched their semi robo-advisory business in 2015 and charges 0.3% + ~0.1-0.2% in expense ratios. Only clients with over $500,000 will get a dedicated advisor. Clients under $500,000 will get a team e.g. junior person. Edward Jones charges 1.35% – 1.5%, depending on AUM size for their advisory business + ~0.5 – 0.7% in expense ratios.
How Much Will You Pay In Fees Over A Career?
Let’s say you have a $500,000 account balance with one of the big brokerage firms. Below is a chart of how much in fees you’ll pay over 30 years per brokerage company.
Paying close to $1 million fees should make you feel a little queasy if you are a client of Merrill Lynch, even if your portfolio grows into the multi-millions. Their average advisory fee percentage is 1.30% and their average mutual fund and ETF expense ratio is 0.76% for a total fee of roughly 2%.
2% is not egregious if your portfolio is outperforming the market every year by 2% or more. But we all know that the majority of actively run mutual funds underperform the S&P 500 or whatever index they are benchmarked against over time. Hence, you better get some darn good financial planning advice if you are willing to pay ~$10,000 a year in fees on a $500,000 portfolio!
These high fees clearly demonstrate why there is so much money pouring into the financial technology space. Opportunity is ripe for democratizing access to investing and wealth advisory services.
Lower Your Investment Fees
Before running my investment portfolios through Personal Capital’s free Investment Checkup tool, I had no idea I was paying roughly $1,200 a year in fees for a Fidelity Blue Chip Growth Fund with a 0.78% expense ratio. I just bought the mutual fund because it had a good Morningstar rating and served the purpose of providing me exposure to higher quality large cap stocks. Check out my pre-Investment Checkup portfolio back in 2012.
I wasn’t down to spending ~$100,000 in management fees over the next 20 years, so I sold my expensive Fidelity Blue Chip Growth Fund and bought the SPY ETF instead. Although the Fidelity fund has performed relatively well since, over the next 20 years, I don’t think it will outperform the S&P 500.
If you haven’t done so already, run your portfolio(s) through the Investment Checkup feature yourself and see what you’re paying a year. Just link up your investment accounts and then click the “Advisor Tools” tab on the top and select Investment Checkup to run your numbers. I bet you’ll be surprised. There are a bunch of other free features, such as their Retirement Planning Calculator you should try as well.
If you want to have Personal Capital manage your money, they charge 89 basis points for the first $1 million AUM. For clients that invest $1 million or more it’s 0.79% for the first $3M, 0.69% for the next $2M, $0.59% for the next $5M, and 0.49% for over $10M. They build your portfolio using ETFs and stocks to minimize expense ratios. Of course, you can just use their free tools and manage everything yourself like I do currently.
Don’t Be Afraid To Leave
If you were put into an actively managed mutual fund created by a wealth management company that is also charging you an annual advisory fee, you’ve got to immediately ask your advisor WHY with all the lower cost options out there. We know why, but it’s good to make them explain themselves for not looking out for your best interest in order to make themselves more money.
Once they’ve fumbled about trying to explain why their actively managed mutual funds are the best, really ask yourself whether they are worth the fees you are paying every year. If the answer is “no,” then move your money! OK, maybe give them a three month probation to prove themselves, but after that, find an alternative if nothing changes. It’s much easier than you think. You deserve better.
I had one personal finance consulting client pay $12,000 a year in fees and another $8,000 a year in mutual fund fees because his entire portfolio consisted of 20 funds created by his brokerage. He had no idea until we spoke. Now he’s at a new firm that constructed a similar portfolio for 90% less in fees.
Who Should Hire A Financial Advisor?
You shouldn’t expect to get anything valuable for free (except for maybe the content here). I believe wealth management firms should charge a fee for the services they provide, with a declining fee structure as your assets under management grow. But not all services are created equal. They’ve got to clearly demonstrate what you’ll get for the amount you’re paying.
For those of you who are uncomfortable investing your own money because you don’t understand the markets, hiring a financial advisor to manage your money is not a bad idea. Mobilizing idle capital beyond a money market account could easily provide a greater than 1-2% annual return over the long run. After all, a financial advisor is spending his or her entire working day studying the markets.
For those of you who are too busy to manage your finances because your expertise is making money elsewhere, using a wealth management company will probably help you out tremendously over the long run as well. The stress of managing your own money after a certain absolute dollar figure can get to you. Offloading this duty to a professional will seriously reduce such stress. Just remember to ask your financial advisor the tough questions before hiring them.
But for those of you who are comfortable making your own investments, then it’s easy to build a low-cost portfolio of ETFs that basically do what an investment advisor would do. Your focus should first be on building a portfolio with the proper asset allocation of stocks and bonds. You can keep things as simple as buying the S&P 500 ETF, SPY for your equities allocation, and IEF, the 7-10 year Treasury bond ETF for your fixed income allocation. Or, you can make things as complicated as you want.
If you invest by yourself, you won’t get research commentary on the markets, thoughts about how to position your portfolio if the Federal Reserve raises the Fed Funds rate by more than expected, or estate planning advice from a financial advisor. But there’s a plethora of great free information out there to help you make smart investment decisions.
Updated for 2020 and beyond.