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One Question To Ask Your Financial Advisor Thumbnail

One Question To Ask Your Financial Advisor

Since we are just getting back into the swing of things after Thanksgiving, I figured I would keep this week’s article brief. I am sharing with you my favorite question to ask your AUM advisor. It is a two-minute read.

 What is AUM?

  • As a reminder, AUM stands for Assets Under Management. This is how most financial advisors charge for their services.
  • Short version is they charge a percentage of the assets they manage for you. Say 1% to keep things simple.
  • So, if they manage $100,000 for you their compensation is $1,000. $1 million is $10,000.

 The Scenario

  • Your advisor has been managing your $200,000 IRA for you.
  • He is old school and charges 1% of AUM.
  • You pay him $2,000 a year.
  • You meet once a year for an hour and the only topic you cover is the performance of your account he manages.
  • Retirement is coming up and your 401k balance is $800,000.
  • Your advisor is recommending you transfer that 401k balance to him for him to manage.
  • The proposed fee continues to be 1%.
  • This translates into you paying $10,000 a year.

 The Question to Ask

  • Here is the question I always encourage people to ask their current, old school advisor.
  • “I am increasing your fees fivefold from $2,000 to $10,000 a year. Walk me through how the services you are providing me increase five times.”
  • There may not be a question mark, but it is definitely a question.

 My Experience

  • I have encouraged numerous people to ask their current advisor this question over the years.
  • Sadly, not a single person has ever received an answer to the question that satisfied them.
  • Also, the majority of financial advisors do not have different service based on what a client pays them.
  • Oftentimes, clients paying $20,000 a year get the same service as ones paying $2,000 a year.

 Conclusion

  • I am not saying there is a right or wrong way to pay your advisor.
  • This is simply a question to determine if there is an equitable exchange with your advisor when you increase his pay dramatically.
  • I know as a consumer I would expect something more based on my fee increasing dramatically, but maybe I am just weird.
  • This is why I charge a flat fee where everyone pays the same and every select client gets the same service level.
  • Again, feel free to ask this question and if you get a good answer please let me know, because it would be the first time.
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