Ask Real Deal Retirement

My adviser moved all my savings into low-cost index mutual funds and ETFs. But I’m still paying him 1.5% a year for “investment guidance,” which seems a bit expensive. Can I get that guidance elsewhere for a lower fee?

      —James, Falls Church, Virginia

I’m sure there are financial advisers out there who will see you as a bit of an ingrate for repaying your adviser’s good turn of moving you into low-cost index funds by looking to abandon him so you can lower fees even more.

But you’re right to ask this question. Indeed, it’s one that investors and advisers alike will increasingly face as the move toward holding advisers to a fiduciary standard gets more attention. The basic issue: Whose interests are being better served in whatever arrangement you have with an adviser—yours or the adviser’s?

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The issue is more nuanced than the simplistic way it’s typically portrayed in the financial press (and in this video on the Department of Labor website). Yes, greedy advisers selling investments that pay them the highest commissions is a problem for investors. But it’s not as if advisers who charge a percentage of assets or flat fee rather than a commission are immune from conflicts of interest. Conflicts between advisers and investors can take many forms, and they can’t be eliminated completely. To determine whether an adviser is putting your interests first you have to look at the entire relationship.

In your case, your adviser has put you into low-cost index funds, so it seems very unlikely that your adviser is profiting unduly from the investments he’s picked for you. It’s possible, I suppose, that the adviser might be able to find index funds that have even lower fees than the ones he’s chosen. But if an adviser is really looking to line his pockets at your expense by putting you into high-commission investments, index funds wouldn’t be the way to go. He’d more likely select actively managed funds, which generally come with much higher annual costs (and, sometimes, marketing charges). Or he’d load you up with other investments that traditionally have onerous costs, like variable annuities. So the chances of a conflict between your adviser’s interests and yours where your investments are concerned seems, on the face of it at least, very unlikely.

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But that leaves the other major aspect of your relationship with the adviser: the 1.5% a year you’re paying for investment guidance. The relevant questions there: Are the guidance and any other services you’re getting really worth 1.5% of assets a year? And, can you find someone else to provide comparable services for less?

To answer those questions, you’ve first got to consider what is the adviser actually doing for that 1.5% a year. If he’s mostly creating an asset allocation for you (i.e., recommending the percentage of your assets that should go into the index funds he’s chosen based on your risk tolerance), monitoring performance and then rebalancing your mix of assets when necessary to restore your portfolio to its proper proportions, then 1.5% a year strikes me as a bit pricey.

Given the technology available today, creating and monitoring a portfolio isn’t exactly a huge time suck. It’s an activity you can put on auto-pilot for the most part, which is why many large mutual fund companies and investment firms have asset management services that charge well below 1% a year (not including the cost of underlying investments). And many “robo-advisers”—firms that use algorithms to allocate assets, monitor performance and fine-tune portfolios—charge 0.5% a year or less.

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Of course, I’m sure many advisers who charge 1% or more a year for investment management would say their fee is reasonable because they watch your portfolio like the proverbial hawk and stand ready to overhaul it at a moment’s notice to capitalize on changing market conditions. I’m skeptical that such an active investing style generates superior returns after adjusting for costs and risk. But the point is that, unless the adviser claims to be doing something pretty remarkable with your portfolio (and backing it up with just as remarkable results), I think it’s a challenge to justify paying 1.5% a year for investment guidance alone.

But if your adviser is providing a comprehensive range of services beyond asset management, then that 1.5% a year might be warranted. For example, maybe the adviser is helping you budget to assure you’re saving enough for retirement, coordinating your investing in workplace retirement plans with assets you hold outside your company plan and making sure you’ve got the right kinds and amounts of life, health and disability insurance. Or maybe he’s helped create a retirement income plan, ranging from when to apply for Social Security to the best way to draw money from your mix of tax-deferred, tax-free and taxable accounts so you don’t run through your savings too soon.

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Only you can decide whether you’re getting your money’s worth from your adviser or whether you’re overpaying. A good way to begin making that judgment is to have a sit-down with your adviser and express your concerns about the fee. If that request alone doesn’t move the adviser to show you, in writing, exactly what services you’re getting for your 1.5% a year, then ask the adviser to provide such a rundown. It could be that the adviser is doing more than you think—or perhaps he’s figured services into that 1.5% fee that you feel you don’t want or need. But unless the information he provides is so compelling that you realize that 1.5% a bargain, you can negotiate for a lower fee.

There’s no shortage of financial advisers, so don’t be afraid to interview a few others to see if you can get the guidance you need at a lower cost. And if all you really want is assurance that your money is invested in a reasonable way at a reasonable cost, then you may be better off signing up with a portfolio advisory service offered by companies like Fidelity, Schwab and Vanguard, or even with a robo-adviser. Going that route doesn’t mean you have to forego advice on other matters (whether to convert an IRA to a Roth IRA, developing a retirement income plan, etc.). By consulting one of the minority of advisers who are willing to charge by the hour or a flat fee for a particular project, you can pay for help on specific matters as pop up.

Bottom line: There are all sorts of ways these days to get all kinds of financial help at a variety of prices. Each has its pros and cons; none totally eliminate conflicts of interest. But ultimately, the onus is on you to explore the alternatives and compare prices to make sure you get the services you need at a price you consider fair.  (3/9/15)

Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at walter@realdealretirement.com.