Financial Advisor Fees - a surprisingly simple question to see if you're a good fit for an advisor

Sean discusses the simple question to ask potential financial advisors, to see if they might be a good fit for you. 

Transcript

Sean 0:01

In this video, I'm going to talk about the surprisingly simple question that you can ask about your advisor's fees that will help you get a sense of not so much how much the fees are, that's partly important, but the more important answer you're going to get is how does your situation relate to the existing clients that the advisor works with? So when you're thinking about how to pick the best advisor for you, I think one factor that a lot of people would never really think about is how does my situation and my profile, my amount of income or wealth, how does that compare to the advisors' existing clients that they're helping with their financial planning and wealth management. So if, for example, if you are going to be way bigger than the biggest client, you're going to be make up half the person's practice in terms of the revenue, that's good to know. If you're going to be way smaller or the very smallest client in terms of revenue to the advisor's practice, that's also good to know. So an advisor may not feel the need or be willing to disclose every little detail about their business to you and their other client situations, but here's this the surprisingly simple question I would ask. How much does your typical client pay you in fees? Again, how much does the typical client you work with pay you in fees? So there's a couple different ways they can answer this, and I'll go through that and what that might mean to you. If you have someone that's that's working more on a commission basis that tends to be compensated by transactions or through implementing a product like life insurance or long-term care insurance, if it's a commission-based or annuities, a commission-based business, they probably the advisor is not likely to know that off the top of their head because they don't necessarily think of total fees per client. They think of, well, I invest this much money into this product and I get paid this percent of that transaction. And so if I work with someone and we do a life insurance policy, most of that compensation is going to be in the first year at the beginning of that policy. And so the ongoing work with the client is not going to yield a lot of revenue. And so if you if someone doesn't seem to be willing to answer or doesn't know at all what their average client pays them in fees, it's possible they are more of a commission-based broker or advisor. And that's not necessarily a terrible thing, it's something to keep uh keep in mind. So that would be one answer. Another answer would be more generic and general, and trying to not really answer, say it depends, which is true. So, you know, I would understand if someone's not quite sure how to answer that question with no warning. Um, they might give you various ranges. So part of it might be they don't really track their business metrics that closely, and part of it could be they don't have a real comfort level with disclosing that information. And the third way would be they tell you an actual number. They say $7,000 a year, or $25,000 a year, or $1,000 a year, whatever the number is. If they deliver it confidently without too much hesitation, then hopefully it's an accurate number. So, what can you do with that information? Well, here's how I would think about that. Each person is going to be a little bit different, you as a potential client, in terms of what you would prefer. Some of us want to have that white glove, high-level service, where if we have a question on a weekend or at 7 30 in the morning during a weekday, we can get a hold of our advisor like that. If if you like the idea of being the top dog, the number one client of an advisor, and they say, Well, my average client um pays about $10,000 in fees through their assets under management or flat fee or other mechanism. If they say $10,000 a year, um, and that's um and and your portfolio, let's say you have a $30 million portfolio, and therefore you're gonna if you paid 1% a year, which you probably wouldn't, because that would be pretty high, that would be, but if you did, that's $300,000 of revenue. So if a typical client is paying $10,000 a year in the asset center management model, that'd be about a million dollar portfolio, and you have 30 times that size of wealth, you're likely to be that advisor's very favorite client, assuming you don't abuse the privilege of being the biggest. So if that appeals to you, that's good to know. Um, and if you find someone that you think has the capability, that you have a fit otherwise, that tells you something. Maybe you want someone where you're going to be their biggest client. Now, most of us as advisors, we're not quick to say, oh wow, yeah, you're gonna be my biggest client, unless the unless an advisor is very new in their practice. Um, because that just feels awkward to say, I've never worked with someone with this much money before. And that happens to all of us sooner or later, every everybody's biggest client was once not their client, unless it's a family member. Um, so so that's if if the answer is well below what you think your portfolio or your fee arrangement would yield to the advisor, that's good to know. On the flip side, at the other extreme, if you have that, if you're that uh if you're working with an advisor or talking to someone who uh typically works with entrepreneurs have sold businesses for 20, 30, 50 million dollars, and that's what they're helping people with for their typical household, and you only have two or three million dollars, and so therefore your either your portfolio size or the amount of fees you're paying per year in the two million dollars, let's say it's 20,000 a year, which sounds like a lot, and it is, but if the typical client is paying 200, 300, 400, 500,000 in annual fees through their portfolio or other mechanisms, that would be important to know because you would think if you have two or three million dollars, you would get a lot of attention, but that's gonna depend on what your advisor's other clients situation is. If it's a very large practice, even with sample-size clients, if someone has 500 clients, you know it's gonna be hard to get a lot of attention, even if you're right in the wheelhouse or even if you're above average. So um, and then if you come right in the middle, that's good to know. And and a follow-up question, if you say, How much did your average client pay? $7,000 a year, and I charge 1%. And if you happen to have $700,000 to entrust this advisor with, um maybe ask, well, how's if it's right in if you're right in the range, maybe ask what's that distribution like? Are they clustered together? Are they spread out? Give me a sense of that. Because if it's an average of 7,000, but you know, most people are 2,000 and one of them is 100,000, for example, you'd want to know that. You know, so you'd want to get a sense of uh you know as much as the advisors willing to share with you. And you know, I I think you would prefer someone that's a little more transparent and willing to answer these types of questions, and even if they're not willing to give you direct numbers, I think how they respond, like to any question, is going to tell you a lot about your comfort level with that professional. So that's it. The one really straightforward question to help you get a sense of where you would fit in the advisor's practice, which is how much does your average client pay you in fees? Whether that's asset center management, flat fee, commission, doesn't really matter hourly. Just ask what is the typical average fee and be quiet and see what happens. Thanks. We'll see you in the next video. If you think this is useful, hit that subscribe button and you'll get the next uh video when it comes out. Thank you.