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‘I finally woke up to reality.’ I’ve been paying a percentage of my investments to a financial adviser for years now, but I don’t think it’s worth it. Is a 1% fee really fair?

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Is your financial adviser charging you a fair fee

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We recently got this note from a reader that we thought was worth diving into, as we get many questions from readers on whether adviser’s fees are worth it:

“After too many years of paying for oversight, I finally woke up to the reality that it cannot be in the investor’s best interest as long as the manager is rewarded for assets under management.”

Is this reader right? Well, firstly the AUM model — which stands for assets under management and is often a flat 1% of one’s assets — isn’t without controversy. And the answer to whether it’s worth it or not isn’t clear cut — and depends on what they do for you, what they charge, and how much work you want to do yourself, among other issues. Here are the pros and cons. (Looking for a new financial adviser? This tool can help match you with an adviser who might meet your needs.)

Some say AUM is never a really fair model — and instead say most financial advisers should charge on an hourly or per-project basis. “I am passionately opposed to the uncapped nature of the AUM model. It makes no sense to just pay higher and higher fees simply because your investments have gone up,” says certified financial planner David Barfield of Datapoint Financial Planning.

If you have a portfolio of $1 million dollars and you’re paying 1% in AUM fees, you’d pay roughly $10,000 per year for an adviser’s services. If that $1 million dollars grows to $1.5 million dollars, your fee would increase by roughly $5,000 per year to $15,000 per year.

Have a question or comment about your financial adviser? Email picks@marketwatch.com for advice.

And Shawn Ballinger, certified financial planner at Columbus Street Financial Planning, says a true fiduciary adviser compensation should not be tied to market performance. “The adviser’s compensation over time will increase given historical market performance. The assets under management model (AUM) has inherent conflicts, most notably when a client asks if they should pay off their mortgage with investments held with the adviser charging an AUM fee,” says Ballinger. (Looking for a new financial adviser? This tool can help match you with an adviser who might meet your needs.)

What’s more, he says, the industry has become used to meeting with a client once a year, providing an update on the economy and their portfolio, inviting them to dinner and charging 1% to manage their investments. “This simply doesn’t work anymore and people are starting to realize that,” says Presogna. And it’s also important to note that those with a smaller portfolio may have a harder time finding an AUM-based adviser. This Marketwatch Picks guide highlights when you shouldn’t be paying a 1% AUM fee and instead consider a flat-fee adviser.

That said, AUM advisers are often worth what you pay them. The amount of the fee and the value being delivered is worth considering, according to certified financial planner Eric Presogna of One Up Financial. “$10,000 a year flat fee or 1% AUM to manage someone’s life savings of $1 million dollars, build, monitor and update their financial plan, provide tax planning and preparation, estate planning, insurance, financial education for their kids and more, all of which is value-add to the client could be a no-brainer. I think it comes down to transparency on fees being charged and services offered,” says Presogna. (Looking for a new financial adviser? This tool can help match you with an adviser who might meet your needs.)

And Lynn Dunston, certified financial planner at Moneta, says there’s a substantial misunderstanding amongst consumers when it comes to asset-based advisory fees. “I am a fee-only planner and I work in a fiduciary capacity 100% of the time, and I can tell you that there are definitely circumstances where assets under management fees are not only appropriate, but actually better for the client,” says Dunston. If someone has very complicated finances that require a lot of time and work on behalf of an adviser, hourly fees can add up quickly and create a barrier between the client and the adviser, particularly if the client feels the need to cap the adviser’s time to achieve a certain cost.

James Kinney, certified financial planner at Financial Pathway Advisors, recommends asking yourself if an adviser paid by an hourly fee has his or her interests more aligned than an adviser paid by AUM. “In my experience, no. What I find is that my hourly clients tend to act first and ask for advice second. I think there is a built-in disincentive to asking for advice when you know it will cost you several hundred dollars per hour. On the other hand, if an AUM adviser’s portfolio loses 10%, their income goes down by 10% as well. That’s a powerful incentive to manage risk and return in a manner that largely matches up with the interests of their clients,” says Kinney.

Ultimately, there’s no one-size-fits-all answer — some people, like those who tend to be more experienced, knowledgeable and disciplined might work better with an hourly fee adviser while others are probably better off having a pro mind the shop. (Looking for a new financial adviser? This tool can help match you with an adviser who might meet your needs.)

Have a question or comment about your financial adviser? Email picks@marketwatch.com for advice.

*Questions edited for brevity and clarity.

The advice, recommendations or rankings expressed in this article are those of MarketWatch Picks, and have not been reviewed or endorsed by our commercial partners.

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