What's fair / the going rate for a Fiduciary?

Question

Hi Y'all:

We're in the stages of possibly transitioning away from our financial advisor at a large institution to a third party custodian and hiring a true Fiduciary. The one I'm considering right now is fee based only and asking for 1.5%/year. It feels a little high to me, but I truly don't know what's fair, or what the going rate is. I know that they make money only when we make money, so they have a vested interest in doing well. Do you have any thoughts on this?

Thanks in advance!

-Jennie

Scott Jensen · Answer

@Jennie Berger  Financial advisors all do things differently and there are many that specialize in a particular niche to provide value to a specific type of client. I responded to your CAPs below in italics.

So much great info here--thank you! A few questions IN CAPS:

A few things good advisors do to justify the costs:

• Low cost well diversified investing
• Ongoing tax planning and reviewing tax returns annually- FIDUCIARIES DO THIS? IS THIS NOT FOR A CPA TO DO? Some tax preparers do long term tax planning but most don't. Tax planning (not tax preparation) is one of the competencies of a CFP Professional. I meet with clients before the end of the year and in March to do tax planning.
• Some tax preparers do long term tax planning but most don't. Tax planning (not tax preparation) is one of the competencies of a CFP Professional. I meet with clients before the end of the year and in March to do tax planning.
• Reviewing your financing options and giving recommendations- FINANCING OPTIONS..MEANING, FINANCING FOR REAL ESTATE INVESTMENTS AND THE SUCH?Yes, understanding HELOCS, investment property financing, etc. Also, depending on how you're investing in the stock market, you may be able to get a margin loan or collateralized line of credit for 0.74% - 4% interest rates. These work wonderfully for real estate purchases. 
• Yes, understanding HELOCS, investment property financing, etc. Also, depending on how you're investing in the stock market, you may be able to get a margin loan or collateralized line of credit for 0.74% - 4% interest rates. These work wonderfully for real estate purchases. 
• Reviewing insurance policies periodically to make sure you have adequate coverage at a reasonable cost- NEVER WOULD HAVE THOUGHT OF THIS BUT I WILL FIND OUT ABOUT ITGood advisors will review your coverage and make sure it is appropriate and help you re-shop periodically. Generally, an advisor will refer you to an insurance broker to review certain coverages.
• Good advisors will review your coverage and make sure it is appropriate and help you re-shop periodically. Generally, an advisor will refer you to an insurance broker to review certain coverages.
• Make sure you have an estate plan and it stays current- THE FIDUCIARY DOES THIS? I THOUGHT I AM RESPONSIBLE TO HIRE AN ATTORNEY TO DO THIS.Good advisors will give a client a good broad understanding of how assets flow at death, make sure your beneficiaries are structured properly and up to date, remind you to update your POAs, etc. I generally work pretty closely with my client's estate planning attorney throughout the process. Oftentimes the client doesn't know the right questions to ask or the items that they need an attorney for.
• Good advisors will give a client a good broad understanding of how assets flow at death, make sure your beneficiaries are structured properly and up to date, remind you to update your POAs, etc. I generally work pretty closely with my client's estate planning attorney throughout the process. Oftentimes the client doesn't know the right questions to ask or the items that they need an attorney for.
• 
• Help you analyze you properties and determine what your rates of return are- HMMMMM...THIS SOUNDS LIKE SOMEONE WHO IS PART OF MY REAL ESTATE BUSINESS. WHY WOULD A FINANCIAL ADVISOR/INDEPENDENT FIDUCIARY DO THIS? HOW WOULD THEY HAVE THE EXPERTISE TO DO THIS UNLESS THEY ARE INTO REAL ESTATE THEMSELVES?Some understand real estate and help with it but most don't. Almost all of my clients are real estate investors. Every year I do a rental property portfolio analysis where we take a look at the internal rate of return for the portfolio as a whole and each individual property by measuring the net cash flow, mortgage paydown, and appreciation.  Often times I am involved in figuring out the best way to finance a property and also minimizing the tax damage when a client sells a property.
• Some understand real estate and help with it but most don't. Almost all of my clients are real estate investors. Every year I do a rental property portfolio analysis where we take a look at the internal rate of return for the portfolio as a whole and each individual property by measuring the net cash flow, mortgage paydown, and appreciation.  Often times I am involved in figuring out the best way to finance a property and also minimizing the tax damage when a client sells a property.
• 
• Review employee benefits and stock options to make sure you're taking advantage of whatever is offered- I'M NOT UNDERSTANDING THIS ONE. I OWN MY OWN COMPANY...CAN YOU CLARIFY?For employees, Advisors read through a client's employee benefit package to provide guidance on how to take advantage of whatever the employer is offering. A good example of this is reading through a client's 401(k) summary plan description to understand the details of what types of contributions the plan allows, what the match is, loan provisions, etc. For small business owners, advisors help set up a 401(k) for the business owner and employees if they have any. 
• For employees, Advisors read through a client's employee benefit package to provide guidance on how to take advantage of whatever the employer is offering. A good example of this is reading through a client's 401(k) summary plan description to understand the details of what types of contributions the plan allows, what the match is, loan provisions, etc. For small business owners, advisors help set up a 401(k) for the business owner and employees if they have any. 
• 
• Analyzing pension benefit options and Social Security options- THIS ONE IS ALSO ESCAPING ME. CAN YOU CLARIFY?
• Retirement planning, college planning, charitable planning, etc.Advisors help understand whether it makes sense to receive Social Security benefits at 62, 67, or 70. Sometimes it makes sense for one spouse to claim earlier and then to switch to a spousal benefit after the other spouse claims.If an advisor is only managing investments, 1-1.5% is high. If they are doing some of the other things I mentioned, a 1% or 1.5% fee can be reasonable.
• Advisors help understand whether it makes sense to receive Social Security benefits at 62, 67, or 70. Sometimes it makes sense for one spouse to claim earlier and then to switch to a spousal benefit after the other spouse claims.
• 
• If an advisor is only managing investments, 1-1.5% is high. If they are doing some of the other things I mentioned, a 1% or 1.5% fee can be reasonable.

• Some tax preparers do long term tax planning but most don't. Tax planning (not tax preparation) is one of the competencies of a CFP Professional. I meet with clients before the end of the year and in March to do tax planning.

• Yes, understanding HELOCS, investment property financing, etc. Also, depending on how you're investing in the stock market, you may be able to get a margin loan or collateralized line of credit for 0.74% - 4% interest rates. These work wonderfully for real estate purchases.

• Good advisors will review your coverage and make sure it is appropriate and help you re-shop periodically. Generally, an advisor will refer you to an insurance broker to review certain coverages.

• Good advisors will give a client a good broad understanding of how assets flow at death, make sure your beneficiaries are structured properly and up to date, remind you to update your POAs, etc. I generally work pretty closely with my client's estate planning attorney throughout the process. Oftentimes the client doesn't know the right questions to ask or the items that they need an attorney for.
•

• Some understand real estate and help with it but most don't. Almost all of my clients are real estate investors. Every year I do a rental property portfolio analysis where we take a look at the internal rate of return for the portfolio as a whole and each individual property by measuring the net cash flow, mortgage paydown, and appreciation.  Often times I am involved in figuring out the best way to finance a property and also minimizing the tax damage when a client sells a property.
•

• For employees, Advisors read through a client's employee benefit package to provide guidance on how to take advantage of whatever the employer is offering. A good example of this is reading through a client's 401(k) summary plan description to understand the details of what types of contributions the plan allows, what the match is, loan provisions, etc. For small business owners, advisors help set up a 401(k) for the business owner and employees if they have any.

• Advisors help understand whether it makes sense to receive Social Security benefits at 62, 67, or 70. Sometimes it makes sense for one spouse to claim earlier and then to switch to a spousal benefit after the other spouse claims.
• 
• If an advisor is only managing investments, 1-1.5% is high. If they are doing some of the other things I mentioned, a 1% or 1.5% fee can be reasonable.

That describes a lot of the things I work on with clients. In my opinion, good financial planning is worth far greater than 1-1.5% and I have no problem charging a fee of 1%.  If an advisor is managing your investments only, I don't see a lot of value in that and 1% or 1.5% seems pretty high.

Scott Jensen · Answer

@Jennie Berger It also depends on the amount they are managing. 1.5% of a $50,000 account is $750 per year. I wouldn't work with anyone for $750 per year. 1.5% of $5,000,000 is $75,000 which could be high depending on what the advisor is doing.  My pricing is 1% up to $1M, and 0.6% of anything above $1m with a $2,400 minimum annual fee. That works out pretty well most of the time.  I do customize the pricing if the situation is unusual.

instead of looking at it in terms of percentages, I would look at it in terms of dollars and value provided. Does this cost $5,000?  Does the value the advisor provide exceed the value?

A few things good advisors do to justify the costs:

• Low cost well diversified investing
• Ongoing tax planning and reviewing tax returns annually
• Reviewing your financing options and giving recommendations
• Reviewing insurance policies periodically to make sure you have adequate coverage at a reasonable cost
• Make sure you have an estate plan and it stays current
• Help you analyze you properties and determine what your rates of return are
• Review employee benefits and stock options to make sure you're taking advantage of whatever is offered
• Analyzing pension benefit options and Social Security options
• Retirement planning, college planning, charitable planning, etc.

If an advisor is only managing investments, 1-1.5% is high. If they are doing some of the other things I mentioned, a 1% or 1.5% fee can be reasonable.

Jennie Berger · Answer

Thanks so much for your advice. He would be fee only. 1.5% of AUM taken out quarterly. I would be working with him throughout the year. I definitely want advice and active management because I don't have the time or know-how myself. I've been working with an FA for the last 3 years with Merrill/BofA and I'm just looking to expand my financial planning horizons since that institution is limited in what it can offer.

This new person would not be limited by institutional offerings as we'd be working through a company like Schwab or similar to hold the assets but they'd be actively managed by him and his colleague regularly.

As for financial advisors that work specifically with real estate investors--do you have anyone you recommend? Feel free to PM me. Thanks!

Michael Metzger · Answer

@Jennie Berger It sounds like you are in a pretty good spot with this institution then. 1.5% is on the higher side of normal (depending on account size...smaller higher fee, larger lower fee).

I would really advise against annuities if they are pushing those. Big commissions for the advisor, but rarely appropriate for the investor.

On the fiduciary front, you always want to work with a Certified Financial Planner (CFP), as it makes them an automatic fiduciary, held to the highest standards in the industry, and the most prominent credential and testing that needs to be passed.

I would not say tax planning is standard, but something that should be. Most modern certified financial planners do proactive tax planning and strategies to create better overall return on income and return on life. You meet with an accountant once a year, typically before the tax deadline. There are many missed strategies during the year simply due to what your accountant can’t see, he can’t know. Getting proactive tax planning advise from your advisor is especially important for real estate investors.

It sounds like they created a comprehensive financial plan that calculates whether or not you can meet your overall financial goals and adjusts the plan accordingly so that you can. That is a good thing.

Food for thought. Hope that helps!

Bill Hampton · Answer

Jennie,

Many financial planners charge an annual or monthly fee for advice only. This amount will vary.

Some financial planners charge for selecting and managing your investments. The normal fee for assets under management (AUM) is one percent. 1.5% is on the high end.

You have to decide if you want advice and/or investment management.

I recommend finding a financial advisor that specializes in working with real estate investors. You may want to consider working with your advisor remotely to expand your options.

I would also recommend looking for an advisor who is willing to work with you throughout the year. You want an advisor that can help you strategize and who is responsive when you want to know the consequences of the financial decisions you are making throughout the year.

You should also look  for a Fee-only advisor who is not going to sell you products and/or try  get a commission.

Good luck and let me know if I can be of assistance.

Daniel McNulty · Answer

@Jennie Berger

Going rate depends on the amount, but the baseline is normally 1%.

Jennie Berger · Answer

So much great info here--thank you! A few questions IN CAPS:

A few things good advisors do to justify the costs:

• Low cost well diversified investing
• Ongoing tax planning and reviewing tax returns annually- FIDUCIARIES DO THIS? IS THIS NOT FOR A CPA TO DO? 
• Reviewing your financing options and giving recommendations- FINANCING OPTIONS..MEANING, FINANCING FOR REAL ESTATE INVESTMENTS AND THE SUCH?
• Reviewing insurance policies periodically to make sure you have adequate coverage at a reasonable cost- NEVER WOULD HAVE THOUGHT OF THIS BUT I WILL FIND OUT ABOUT IT
• Make sure you have an estate plan and it stays current- THE FIDUCIARY DOES THIS? I THOUGHT I AM RESPONSIBLE TO HIRE AN ATTORNEY TO DO THIS.
• Help you analyze you properties and determine what your rates of return are- HMMMMM...THIS SOUNDS LIKE SOMEONE WHO IS PART OF MY REAL ESTATE BUSINESS. WHY WOULD A FINANCIAL ADVISOR/INDEPENDENT FIDUCIARY DO THIS? HOW WOULD THEY HAVE THE EXPERTISE TO DO THIS UNLESS THEY ARE INTO REAL ESTATE THEMSELVES?
• Review employee benefits and stock options to make sure you're taking advantage of whatever is offered- I'M NOT UNDERSTANDING THIS ONE. I OWN MY OWN COMPANY...CAN YOU CLARIFY?
• Analyzing pension benefit options and Social Security options- THIS ONE IS ALSO ESCAPING ME. CAN YOU CLARIFY?
• Retirement planning, college planning, charitable planning, etc.

If an advisor is only managing investments, 1-1.5% is high. If they are doing some of the other things I mentioned, a 1% or 1.5% fee can be reasonable.

Jennie Berger · Answer

Thanks for your insight! It would be 1.5% per year of total AUM taken out quarterly. My brokerage accounts basically. He is an actual fiduciary however I didn't think to ask him about the tax and cash flow items. We would definitely stay in touch year round and my portfolio would be very actively managed and rebalanced on the regular, as needed. They would also advise on other products I can utilize to help me achieve my financial/larger lifetime goals (such as insurance policies, annuities, products that offer guaranteed lifetime income, etc.) I didn't realize a fiduciary for these types of things would also provide tax advice. Is that standard?

Michael Metzger · Answer

@jennie

A couple of questions and things you might want to consider. What are you defining as a Fiduciary? Is it that they are a Certified Financial Planner? Or did that institution just say it? Unfortunately that word is being miscommunicated and used a lot.

Also, for the fee, is it 1.5% on money they manage? 1.5% of income? net worth? It makes a difference. And what comes with that?

You ideally want a fiduciary financial planner that not only provides investment management, but year-round proactive planning that helps you reduce your taxes, increase cash flow, protect your liabilities, etc. Those services should be included if it’s truly “fee only” and some other planners charge a flat monthly or yearly rate.

What sounds expensive depends on what that institution is providing for you. If they also help you save $5k-$10k a year in taxes and increase your investment assets by x dollars- well then thats a pretty great deal.

Does that make sense?

What's fair / the going rate for a Fiduciary?

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