Is a 1% Financial Advisor Fee Worth It? What You're Actually Paying For

Why the 1% Fee Gets So Much Attention

I research a lot of investment topics. It's part of the job and naturally the algorithms have figured that out, so they tend to fill my feeds with investment advertisements and I get a look at them from the perspective of a client, a prospective client. Lately I've noticed the theme. Everyone seems to have discovered something better than the 1% financial advisor. And the financial advisor is often painted as someone who's smoking a cigar, sitting back with their feet kicked up and not really doing anything for you and collecting their fees. Hopefully that's not the case. If that is the case, then you and I need to have a conversation.

But when I look into the company that's creating these ads, I sometimes see a subscription-based financial planning firm. Sometimes it's an investment research service. Sometimes it's a newsletter, robo advisor, a course, or someone on the internet promising to teach you how to manage your own money. Naturally, I'm intrigued. It begs the question, why give a financial advisor 1% of your portfolio every year when you could pay a fraction of that somewhere else? On a million dollar portfolio, 1% is $10,000. On 2 million, that's 20,000. Put those numbers next to a flat $200 newsletter or $3,000 subscription and that conclusion writes itself. So this is a really effective type of advertisement.

The pitch works by creating a villain, convincing you that your financial advisor's overcharging you or it's something that you could easily do yourself just by subscribing to their newsletter and whatever they're selling immediately starts to look like a smarter alternative. And I don't wanna undermine the importance of being cost-conscious. So today, I wanna take a look at what the 1% actually buys. We'll break the advisor relationship into three pieces.

The financial planning that determines what your money needs to accomplish, the investments managed, that puts the plan into practice, and maybe the part that's hardest to put a price on, having someone there when markets, tax laws, or life itself doesn't go according to plan. Then we look back on the question that we started with, is this worth 1%?

What Are You Actually Comparing?

Products and services are usually based on needs in the market. The need in this particular case is the expertise to help folks plan for their financial future. That's not a small thing. It's not for someone to come in and tell you what you already know, but to prepare you for what you don't know or what you haven't considered. I always joke in my planning appointments that my job isn't necessarily to make you feel good, it's to challenge the things that you maybe should change in your financial behaviors, or to tell you blatantly whether there's some risks that you should be considering.

In other words, trying to find holes in the financial plan, red flags together, and that's really hard for someone to do objectively on their own. There is something, however, about that comparison that bothers me. We're comparing the prices as if we're buying the same thing. Let's say, for example, I told you I was tired of paying for homeowners insurance. It costs me $8,000 a year, and most of the time, my house doesn't burn down. So I went shopping and found something cheaper, fire extinguisher. It only costs $80. It goes right in my house, and if my house catches fire, I can use it. That's basically the same thing as having homeowners insurance, right? I know the example's ridiculous.

A fire extinguisher is useful. In fact, you should have one, but it only solves one particular problem. It doesn't help if nobody's home when the fire starts. It doesn't rebuild the house if the fire extinguisher isn't enough, and it certainly doesn't cover the hundreds of other things that could happen to a home that doesn't involve fire. The idea behind this is that it could be a mistake assuming that because it's cheaper, it's a substitute for insurance. And that's kind of the way I think about this conversation around financial advisory fees. A low-cost index fund can be a great investment. A robo-advisor could be useful.

A financial newsletter might contain fantastic research, and a subscription planning service may be exactly what some people need. But the fact that one costs less than a financial advisor doesn't tell us a whole lot about what you're actually getting or what the service provides. Otherwise, we're just comparing a fire extinguisher to a homeowners insurance policy. So financial planning is about a lot more than choosing an investment. A lot of these ads I see really just looks at the cost of an index fund compares it to a financial planner. And I don't think that's really an apples to apples comparison.

So if we're gonna have an honest conversation about a 1% fee, I think we need to start by asking what you're paying for. And to me, the value of a financial advisor really comes down to three things. The planning process, the ongoing investment management, and what happens when things don't go according to plan.

Financial Planning Starts With Your Life

The first is the planning process itself. And I think this is where a lot of the conversation around fees starts in the wrong place. We immediately start talking about investments because that draws our eyes and ears. Which funds should I own? What's the return? What's the expense ratio? Should I own bonds? What about foreign stock? What do you think's gonna happen with AI stocks? But that's not where financial planning starts. Financial planning starts with you. It starts with your life. When do you wanna retire? How much do you wanna actually spend? Where is your income gonna come from once the paycheck stops? When should you start taking social security?

What happens if a spouse dies before the other? How much cash should you keep? How much risk should you be taking? How much can you afford to take? What's the tax consequences of the decisions you're making? What do you want to leave your children? Do you wanna be able to help them while you're alive and experience the joys that having some financial security can provide? What happens if you need long-term care? What happens if life just simply doesn't unfold how you expected? I think that's an important distinction because a portfolio can be perfectly reasonable on its own and still be completely wrong for the person who owns it.

And 90% stock portfolio might look great on a spreadsheet, maybe in a bull market, the returns have been very impressive. Of course, 90% stocks. But if you're retiring next year and need to start taking substantial withdrawals from it, suddenly the context matters quite a bit and you don't wanna wait until something goes wrong to review your risk. That's why I tend to think about investment portfolio as an implementation of the financial plan. It's a result of the financial plan, not an input, it's an output. The plan tells us what the money needs to do, then we start talking about how the money should be invested to give us a reasonable chance of accomplishing it.

And a financial plan isn't something you create once. Put in a binder, forget about it. Life changes, people retire earlier than expected, they retire later than expected, they spend more, they spend less, children need help, parents need help, someone gets an inheritance, someone dies, someone gets a divorce, markets change, priorities change, tax laws change. In fact, Congress passes major federal tax legislation every two to three years while minor adjustments happen every single year. Oftentimes, as we just saw last year, changes can happen in the middle of the year.

The planning process is really the ongoing process of asking, given where we are today and where the world is today, are we still on the right path?

Investment Management Is Only One Part

That brings us to the second part of the relationship, investment management. And I wanna be really clear about something here. Investing has become very commoditized these days. You get an asset allocation anywhere. That means cost has come down for clients. That's a good thing, and that's a fantastic thing. You can buy an index fund for a few basis points. You can open an account from your phone, you can buy and sell investments without paying a commission. Access to diversified low-cost investments is dramatically better than it was 20 or 30 years ago. And yet, while investment costs fell dramatically, the advisory fee largely plateaued around 1%. Why is this?

I think what's happened is probably two different things happening at once. Instead of the industry just continuing to put pressure on the 1% advisory fee and lowering it, it instead stepped in to expand what the fee paid for and expanded the reach so that it would be more available for more people. People need help making financial decisions. And as investment management became cheaper and more automated, the role an advisor expanded beyond investment selection. Advisors increasingly began providing retirement planning, tax planning, estate coordination, insurance analysis, social security planning, cashflow management, behavioral coaching as part of the relationship.

I usually tell my clients jokingly that I'm a financial advisor when the market's doing well and a financial psychologist when the market's volatile. It's important to have that person to talk to when you might be tempted to make a drastic decision with your accounts. That's one reason the 1% advisory fee has proven resilient even while almost everything underneath it has gotten cheaper. Really it makes the investment selection that advisors can choose cheaper as well. So an active mutual fund isn't 2% expense ratio anymore. Research from Cerulea Associates have found that advisors are facing increased demands for more comprehensive services, particularly from high net worth clients.

Now I'm gonna give my perspective on this because I've worked pretty much exclusively with high net worth clients in the 15 years that I've been advising folks. I realize that the investment landscape is a lot broader than that. And I think it's an important distinction when someone says, why would I pay an advisor 1% when I can buy an index fund for a five basis points? You absolutely can. Buying the investments, the easy part. You still have to decide what you should own, how much risk to take, which investments belong in those accounts, when to rebalance, how to manage the tax consequences, how the portfolio changes as your life changes.

And no one knows more about your comfort level risk than you do. Losing money is a scary thing and it can cause us to make some drastic decisions. Making money can also change our behaviors. We might be more inclined to double down and take more risk or maybe you become more fearful of losing it simply because you've accumulated it. And that's really just the investment side of things. Now layer in retirement income, social security, taxes, Medicare, insurance, estate planning, everything else we talked about earlier, those decisions don't exist independently. A withdraw can affect your taxes, which could in turn affect your Medicare premiums.

A Roth conversion can affect how much you could withdraw elsewhere. The death of a spouse can change your tax filing status, social security income, Medicare premiums, cashflow, and the investment strategy all at the same time. And that's really just the tip of the iceberg. So can you do this all yourself? Of course you can.

Can You Do This Yourself?

Before deciding however, you should ask yourself three questions. Number one, do I have the expertise and discipline to captain the ship? The ship being my and my family's financial life. Number two, do I have a desire to make those decisions myself? And number three, do I have the time? This is where a lot of especially high net worth clients that I work with fall off a little bit. Maybe they have the expertise and desire. Maybe if they had the time, they would comb through investment books and seminars and become an expert on these sorts of things. And I think that's a noble pursuit.

However, when they're spending their time being the C-suite executive of XYZ or managing their home life, that's a big time commitment doing all this. And it's one of the reasons why in the Dalbar study, the average investor underperforms the market by a pretty wide margin. If your answer to all three of these questions is yes, you may not want comprehensive wealth management. You've basically put in the time and the effort to save that money. And if you manage your money just like the professionals, you might eke out the extra 1% per year. That's the big caveat. Do you manage your money like the professionals? But let's just say you do.

So if you've gotten to this point and that's you, I would say that's fantastic and follow my YouTube and bookmark my website so that it only enhances your ability to be informed on different parts of financial planning because there's always something you don't know, myself included. I think it's great when investors are empowered to take charge over their financial lives. However, if you said no to any of these questions, financial planning and wealth management should be a serious consideration. Now there's an important caveat to everything I've just told you.

Paying an Advisory Fee Doesn't Automatically Mean Planning

Paying an advisory fee doesn't necessarily mean you're getting financial planning. According to the Investment Advisor Association, fewer than half of SEC registered investment advisors report offering financial planning services at all. And the ones that do might not be offering it to all their clients. I've sat in hundreds of financial appointments where I'm offering some pretty basic financial planning introductory appointment and I can't tell you how many times the feedback has been, "My advisor never took me through this before." And I'm not really going too in depth yet. We're talking, "Hey, when do you plan on taking social security? Have you thought about when you wanna retire?

Have you thought about Medicare? How you're gonna bridge the gap?" Like some pretty basic questions and the answer might be, "Well, gosh, I never really thought about it." It's like, "Well, you should have. Hopefully your advisor goes through this kind of stuff with you." And I think that's where the 1% starts to become even more valuable towards your investment strategy, but also your financial life and the decisions you make. And some of the firms that are offering financial planning might not be offering it to all their clients. A lot of advisors to scale decide there's a certain dollar amount that they wanna provide those services for.

So if you're someone that might be on the lower end of their assets under management scale, you might feel like you're kind of left out. And I don't think that's an accident that you feel that way. I think advisors tend to get a little big for their britches, so to speak. So if comprehensive financial planning is what you're looking for, whether you're questioning the value you're getting from your current relationship or you're considering working with an advisor for the first time, I'd be happy to have that conversation. You can learn more at yachadvisors.com, follow my YouTube videos or send me a message. Let me know what questions you have.

So let's get back to the 1% fee and ask a better question.

So, Is the 1% Fee Worth It?

What am I getting for the 1%? If you're paying someone to manage your money, ask yourself what happens beyond the portfolio. Is your advisor helping you develop and maintain a financial plan? Are they helping you prioritize your goals? Think through taxes, develop a retirement income strategy, coordinate your estate plan and adjust when your circumstances change. And when life for the markets don't cooperate, do you have someone who understands your financial situation well enough to help you decide what to do next? So back to the anti 1% ads. The marketing strategy is to discredit one service to get you to pay for another. Maybe the $200 newsletter is helpful.

Maybe the $3,000 sets you on the right track, but mass mailings and the latest fund picks should be taken with a grain of salt when it's coming from someone who doesn't thoroughly understand your financial situation. So just make sure you're comparing the same things when you stack an investment, a product or a service against comprehensive financial planning. The value of the 1% fee is the planning, judgment, coordination and discipline behind those investments. And having a fiduciary who's accountable for helping you make the right decisions when those decisions matter the most.

Bryan Yach, CFP®, is a Wealth Advisor and owner of Yach Advisors. Yach Advisors provides comprehensive financial planning and investment management designed around the lives, goals and priorities of the families we serve.