Alisa Wolfson at MarketWatch answered a reader who asked a fair question: is it okay for an adviser to charge twice the fee on $1 million as on $500,000, when it is obviously not twice the work? The typical asset-based fee is about 1%, and many firms tier it down as balances grow, something like 0.85% on the first $500,000 and 0.75% above that.
I told her the reader is partly right. Managing a $1 million index portfolio does not take twice the trades of a $500,000 one. But there is a point where the complexity of a client's situation, available options and potential mistakes compound exponentially. A household with $1 million usually has more account types, more tax-planning decisions, Roth conversionMoving money from a traditional pre-tax IRA to a Roth IRA, paying income taxes now in exchange for tax-free growth and withdrawals in the future. Conversions make the most sense when your current tax rate is lower than what you expect in the future — making the years between retirement and RMD age a prime window for strategic action. windows worth real money, equity compensation, estate questions and a larger cost of getting any of it wrong. The fee is not paying for the trades. It is paying for the decisions, and the stakes scale with the assets.
That said, the model should fit the client. If someone has a simple situation and mostly needs investment management, a flat fee, a retainer or hourly planning at $200 to $500 an hour may be the better math. If the situation is complex, a percentage fee with comprehensive planning bundled in can be a bargain relative to what one avoided mistake is worth.
Ask the adviser what you get for the fee beyond the portfolio. If the answer is nothing, the reader's instinct is correct.
Read the full article at MarketWatch →
