When you go to a doctor, you get a bill and pay the balance due. There’s rarely room for haggling. But when you hire a financial adviser, you may be able to negotiate your fee. The adviser won’t invite you to do so. It’s up to you to ask.
The first step is to understand how the adviser gets paid. Depending on the type and scope of financial planning services provided, you might pay an upfront flat fee, an hourly rate or a monthly or annual retainer.
If you want the adviser to manage your investment portfolio, you will pay a percentage of your asset size. This is called an AUM (assets under management) fee.
You can expect to pay between 0.59% and 1.18% a year in AUM fees, according to a 2021 study by AdvisoryHQ. The more money you want the adviser to invest, the lower your fee.
Negotiating fees solely to save money may not produce the best results. Ideally, your goal is to pay what you think is fair to compensate the adviser for their time, expertise and commitment to service.
“It’s perfectly fine to try to negotiate fees down if you don’t think you are receiving value,” said Micah Hauptman, director of investor protection at the Washington, D.C.-based Consumer Federation of America. “You can always negotiate. But it shouldn’t be a contentious conversation.”
Instead, Hauptman suggests that investors continually reaffirm that the fee reflects the value they feel they get. That’s especially useful if you’re paying for investment management under an AUM model. “If your portfolio has been growing for a few years, maybe a fee adjustment is appropriate,” he said.
Say you started years ago with $100,000 in investable assets and paid $1,000 a year in fees. Now your portfolio has ballooned to $500,000 and you’re paying the same 1% at $5,000 a year. You’ll want to ask yourself if you’re getting an extra $4,000 worth of value now. If not, a polite chat with your adviser about fees can pay off.
“ Independent advisers who launch their own firm are eager to attract clients, so they might be more receptive to adjusting their rate. ”
The size of an advisory firm, and the type of practice the partners run, affects whether you can score a lower fee. Independent advisers who launch their own firm are eager to attract clients, so they might be more receptive to adjusting their rate. Larger firms with dozens of advisers and well-established policies may have less flexibility to offer discounts.
Research your options ahead of time, Hauptman says. Know what other advisory firms charge, including digital platforms with automated investment services. Create a bullet list of all the services your current adviser offers and compare it to what you’d get from competitors, including lower-cost robo advisers.
Like any negotiation, your success hinges on your mastery of the dynamics of the situation. Signaling your intent to align your fee with the type of account you bring to the advisory firm strengthens your case.
“Advisers charge based on time and complexity,” said Pam Krueger, founder and chief executive of Wealthramp, a San Francisco-based service that connects consumers with vetted, fee-only advisers. “So if you have pretty straightforward needs, maybe a few 401(k)s and IRAs, and you know what you want from the adviser, you have more leverage.”
Kruger recommends broaching the subject of fees by asking questions such as, “Because I don’t think my account is complex, can we reduce my fee? Is there a range?”
Adopt the adviser’s perspective. Say that you’ll be willing to pay a higher fee if your needs change later. If you’re a new client, keep in mind that the first year of a relationship can be more time-consuming as the adviser analyzes your assets and digs to determine your goals, history with money and risk tolerance.
“The adviser needs to go in deeper during the first year,” Krueger said. “The adviser will spend more hours doing auditing” and getting to know you. In that case, waiting a year may make sense before you try to negotiate fees.
If you feel awkward about negotiating fees, understand that it’s in your adviser’s interest to provide a service that you find valuable and reasonably priced. Advisers with top client satisfaction rates also have high retention rates and benefit from more referrals.
“I don’t know one adviser who would not be willing to negotiate with a new client,” said Krueger, who has interviewed hundreds of fee-only advisers around the country for her network. Still, she cautions consumers not to overplay their hand. The adviser-client relationship is built on trust. Clients who believe that their adviser delivers expertise and value should view the fee as fair and transparent.
“If you’re shopping for an adviser and you focus on fees as your No. 1 thing, you’re making a huge mistake,” Krueger said. “Never make price the main event.”
This post was originally published on Market Watch
