In personal finance, it is well-known that success comes from winning the big battles, rather than amassing thousands of minor triumphs. Psychologically, it is hard to deny yourself over and over and over again. So use your limited willpower where it will make the biggest difference â€“ on the big expenses of your life.
In personal finance, it is well-known that success comes from winning the big battles, rather than amassing thousands of minor triumphs. Psychologically, it is hard to deny yourself over and over and over again. So use your limited willpower where it will make the biggest difference — on the big expenses of your life. For most people, these include the costs associated with housing and transportation. For many physicians, the cost of their advisory fees are also a large expense, and over the course of a lifetime, may even dwarf the cost of housing. Minimizing these costs will speed your way to financial independence, and allow you to spend more on people, activities, and causes that bring you happiness. It doesn’t take a genius to realize that paying your financial advisor twice as much isn’t going to make you any happier. Follow these steps in order to lower the price of your advisory fees.
1. Determine How Your Advisor Is Paid
Financial advisors are paid in a number of different ways. Some are paid via “loads” or commissions on the sale of stocks, mutual funds, or insurance products. Others are paid a percentage of your assets under management (AUM), such as 1% per year. You may pay an annual retainer fee, a set fee for a financial plan, or even an hourly rate like an attorney might charge. Many advisors will make money through more than one of these methods, such as earning commissions when they sell you life and disability insurance, but also charging you an AUM fee to manage your investments. If you can’t figure out how your advisor is paid, you may be able to look it up on the regulatory sites, here or here. Or better yet, just ask.
2. Determine How Much Your Advisor Is Paid
Once you have figured out how your advisor is paid, you can add up how much you are paying for the advice you are receiving. Without this knowledge, it is impossible to even begin a negotiation.
3. Determine a Fair Price For Services
Most physicians have no idea what the “going rate” is for financial services. The truth is there is a huge range in prices paid. Some doctors are paying $30,000 or more a year for services that are obtainable for as little as $1,000 per year. The “industry standard” for AUM fees is 1%, but there are advisors who will work for as little as 0.37-0.5%, and “roboadvisors” who charge as little as 0.15%, 1/7th of the “industry standard.” Many advisors charge $5,000 to $10,000 as an annual retainer, but some advisors charge as little as $1,000. Hourly rates vary from $100 to $500 an hour. The “fair price” is determined by the market, but if advisors are willing to provide these services for $5,000 a year or less, why pay $20,000?
4. Determine How Much You Are Willing to Do Yourself
Since financial advice and services are so expensive, you may find it well worth your time to do much of the work yourself. For instance, simple, but sophisticated investment plans consisting primarily of index funds can be automated and managed with little time or effort once set up. You will need to learn enough to be able to do this sort of thing yourself, but it does not have to be an “all or none” decision. You can use the services of an advisor for a few years until you get it figured out, and even after moving on can still pay for occasional “check-ups” with a professional to make sure that you’re on track.
5. Carefully Research Your Alternative(s)
Now that you know how you are paying, how much you are paying, the going rate for financial services, and how much you want to do yourself, you’re almost ready to start negotiating. But in order to negotiate from a position of power, you need an alternative. Just like your best chance for a raise when negotiating your salary is to have another job offer, you need to have seriously looked into another advisor in order to really get a discount on your advisory fees. When an advisor truly believes that you are leaving, but would stay if the price were lower, you might be surprised just how much he will lower his fees.
6. Negotiate From a Position of Power
Information is power in any negotiation, and now you have it. Negotiation doesn’t come naturally for doctors, who generally dislike confrontation. Your advisor has gone to great lengths to build a relationship with you, perhaps even a personal relationship. Severing it may be painful. It is best to keep the discussion strictly on business terms. (“It’s not that I don’t like you, but if I switch I can save $5,000 a year and as you know I could really use that money.”) If he tries to make it personal, I would suggest turning the tables. (“Since we’re such good friends, I’m sure you would be more than happy to lower my fees to less than I can get from Joe down the street.”) In the end, if you feel you’re getting good advice and good service from your current advisor, and if he is willing to lower your fees to what you would pay elsewhere, stick with him. If any of that is not true, at least you’ve already done the research to know where you should go.
Dr. Dahle is not an accountant, attorney, insurance agent, or financial advisor. He blogs as The White Coat Investor (link to http://whitecoatinvestor.com) and is the author of the best-selling The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing. (Link to http://www.amazon.com/The-White-Coat-Investor-Investing/dp/0991433106).