I am 66, still working and have excellent health insurance. My company does not have a 401(k). I have an Individual Retirement Account (IRA) with about $120,000 invested. I contribute $272 per month, but my program fee is $136 per month. My contribution is 50%. Am I grinding?
There are two points to your question here. The first is about understanding the path. Your payment will be calculated. The second is to evaluate whether you feel the service you are receiving is worth what you are paying.
These are very important points. Once you’re signed in, you can decide if you want to make a change. But the bottom line is: I’m not saying you’re being shy. (Looking for a new mentor? This tool helps you match potential mentors.)
Calculating the payment
It is a good idea to check your statement and pay attention to the payment. As with any other service you use, you should know what you are paying for it.
While you can clearly see the amount, it may not be clear to you how the amount is determined. Your advisor would have been required to disclose this to you when you were a client. Look at the paper you were given. It will be detailed unless something is missing. Or call and ask.
Knowing (and understanding) your fees is good information. But I brought this up because of how you relate your monthly payment to your monthly contribution amount. This can be said is not How your payment is determined. (Looking for a new mentor? This tool helps you match potential mentors.)
Different types of payment
The amount you pay a consultant can be calculated in a number of ways. At a high level, Consultants may be paid by commission or fee.. Sometimes they are paid both ways.
Commissions If your advisor Receives commissions If you have any investment products, these will be based on your monthly contribution amount. But these are not more than 10% and are often very low. It is highly unlikely that this is your arrangement.
Payments. If your advisor does not receive commissions, you will pay them in the form of fees. There are several ways to calculate fees. It can be based on the assets you manage for you, on an hourly basis, an annual fee or a monthly subscription.
It looks like your advisor will charge based on the amount of assets they manage for you. It is usually expressed as an annual percentage of your account balance.
I think this is partly because it is the most popular method of calculating fees. Also, my experience tells me that it is a common fee that you personally share with the financial services firm that you use. If I had to bet, I’d say your fee is probably 1.35%, and you’ll notice the monthly fee fluctuates based on your account value. Again, however, this is confirmed by checking the papers or asking the consultant. (Looking for a new mentor? This tool helps you match potential mentors.)
am i running away
Next, there’s the question of whether or not you’re getting enough value for that fee. That depends on what the advisor does for you and how much it’s worth to you.
In the world of percentage payments, 1% is often considered as a standard. This makes 1.35% relatively high in comparison and people – myself included – often scoffed at it.
As a practical matter, however, 1% is typically for large accounts over $120,000. If you’re receiving a full financial plan and lots of communication from your advisor for about $1,600 a year, you’re getting a good deal. If it’s just investment management and you’ve never heard from them, you can probably find comparable services elsewhere for less. (Looking for a new mentor? This tool helps you match potential mentors.)
Of course, it’s not about the counselor’s feelings, it’s about your feelings. I recommend having an open discussion with your counselor. After all, this shouldn’t be a big secret. The advisor should explain what they will do for you and you should evaluate that value and compare it to what you are paying. If you’re satisfied with what you’re hearing and feel like you’re getting good value and don’t want to change anything, great, at least you’ll know. If not, you can keep looking for something that suits you better.
Brandon Renfro, CFP®, is a financial planning columnist for SmartAsset and answers reader questions on personal finance and tax topics. Have a question you want answered? Email [email protected] and your question may be answered in a future column.
Please note that Brandon is not a participant in the SmartAdvisor Match forum and he is being compensated for this article.
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