Annual-Fee Financial Planners: A Good Investment?

Should you hire a financial planner who charges an annual fee? That's an important question. It's also one that can be answered on several levels.

Creating Financial Peace of Mind

First is your financial peace of mind. Would you feel better if you had a trusted personal financial planner who provided comprehensive advice on a proactive basis?

Second is whether an annual fee or a one-time initial fee is better. Your investment portfolio is invested and working for you every day based on the advice of your financial planner. You benefit every day and year after year from investment advice. It is not a one-time event or transaction, especially when periodic rebalancing is provided or withdrawals or deposits are made.

An investment portfolio is an asset and most assets have a cost of ownership. If you own a house, you have to pay real estate taxes. If you own software, you may pay an annual software licensing fee. Whether you use the software every day or only once in a while, you pay an annual licensing fee for the benefits of the software and keeping it updated.

Finally, consider the quantitative analysis performed by The Vanguard Group, a major national mutual fund company. Since 2001, Vanguard has done studies comparing individually-managed accounts to advisor-managed accounts. The conclusion was that advisor-managed accounts performed better and offered a potential additional value of about 3% per year.

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How Advisors Add Value

According to Vanguard, advisors added value in the following ways:

  1. Suitable asset allocation using broadly diversified funds or ETFs
  2. Cost-effective implementation (funds with low expense ratios)
  3. Rebalancing to strategic asset allocation targets
  4. Behavioral coaching: teaching people not to chase past performance or bail in down markets
  5. Asset location: explaining which assets should be held in different types of accounts
  6. Spending strategy (withdrawal order)
  7. Total return versus income investing

The importance of each element varied per investor but the total added value averaged about 3% per year.

Maybe the question shouldn't be, "Can I afford to hire a financial planner?" but rather "Can I afford not to hire a financial planner?