Retirement & Tax Planning Answers
Is My Financial Advisor Overcharging Me?
Quick answer
You're likely overpaying if your advisor charges close to 1% of assets under management with no breakpoints as your balance grows, if that 1% sits on top of embedded costs in proprietary or commission-paying products you were never shown as a separate line item, or if you're being charged the same percentage fee on a large cash position that isn't actually being managed. Industry surveys from NAPFA and Kitces Research consistently put the typical AUM advisory fee for a $1-3M portfolio around 0.85% to 1.10% a year, usually declining as assets grow past $1M, $3M, and $5M breakpoints. If your fee doesn't decline as your balance has grown, or if you don't know it exists as a schedule at all, that's the first thing to check. The bigger issue is usually not the visible advisory fee, it's what's stacked underneath it: a mutual fund or variable annuity with a 0.75%-1.5% internal expense ratio, a surrender charge on an annuity your advisor was paid a commission to place, or a wrap fee on top of fund expenses your advisor also collects a share of. None of that shows up as a separate charge on your statement. It shows up as lower returns you never get an explanation for.
Start with the number you can find in five minutes: pull your advisor's Form ADV Part 2A from the SEC's Investment Adviser Public Disclosure database (adviserinfo.sec.gov) and read Item 5, Fees and Compensation. It states the actual fee schedule, including breakpoints, in writing. Compare that schedule to what's actually being deducted from your account. A mismatch between the two is worth a direct conversation.
Then look one layer deeper, at what you're invested in. Pull the expense ratio on every mutual fund, ETF, and any variable or fixed-indexed annuity in your portfolio. An index fund runs 0.03%-0.10%. An actively managed mutual fund inside a wrap account often runs 0.75%-1.25%. A variable annuity subaccount, on top of separate mortality and expense charges that can run another 1%-1.5%, is a different order of magnitude. An advisory fee of 1% on a portfolio built from low-cost index funds and an advisory fee of 1% on a portfolio stuffed with actively managed funds and annuities are not remotely the same total cost, even though the visible number is identical.
Check whether the fee applies to assets that aren't actually being managed. Cash sitting in a sweep account earning a low yield, or a large concentrated stock position your advisor was told not to touch, shouldn't necessarily carry the same 1% fee as actively allocated assets. Ask directly whether cash and untouched legacy positions are included in the fee calculation, and if so, why.
Look for breakpoints, or the lack of them. Most AUM fee schedules step down as assets cross thresholds, commonly 1% up to $1M, 0.80% from $1M-$3M, 0.60% above $3M, blended across tiers. If your account has grown from $800K to $2.5M over several years and you're still being billed a flat 1% with no tier reduction, either the schedule was never applied correctly or you were never told one existed.
Finally, separate the advisory fee from anything transactional. If your advisor holds an insurance license and has ever recommended an annuity, permanent life insurance, or a non-traded product, ask directly whether they received a commission on that specific recommendation, and how much. A commission on top of an ongoing advisory fee is where the largest, least visible costs usually sit.
Pull your last four quarterly statements and your advisor's Form ADV Part 2A side by side. Add up the visible advisory fee plus the weighted average expense ratio across your holdings. Most people who do this for the first time are surprised by the total, not by any single number.
Ask your advisor in writing for the all-in cost: advisory fee plus average fund expense ratio plus any commissions paid on products recommended in the last three years. A clear, specific answer is a good sign. A vague one is the answer.
- Only looking at the advisory fee percentage and ignoring the expense ratios of the underlying investments, which is often the larger cost.
- Assuming a fee schedule with breakpoints is being applied automatically as assets grow, without checking.
- Not asking whether cash or untouched concentrated positions are included in the AUM fee calculation.
- Treating a commission disclosure buried in a prospectus as the same thing as being told directly, in plain language, what a specific recommendation paid the advisor.