Is a 2% Financial Advisor Fee High? (My Honest Take)
A friend asked me this the other day. Shes been meeting with an advisor who charges 2% of assets under management annually. She wanted to know if that was reasonable.
My reaction: “Oof. Thats… on the high side.”
But then we talked about it more, and the answer got more complicated. So let me break down what I actually think about advisor fees.
First, Lets Talk Numbers
A 2% fee means if you have $500,000 invested with an advisor, youre paying $10,000 per year. Every year. Whether the market goes up or down.
Have $1 million? Thats $20,000 annually.
These fees add up over time in ways that are honestly kind of shocking when you calculate them out. Over 20-30 years, were talking about potentially hundreds of thousands of dollars in fees alone.
What Do Most Advisors Charge?
Heres the thing – 2% is definitely on the higher end. Most fee-only financial advisors charge somewhere between 0.5% and 1.25% of assets under management. The industry average hovers around 1%.
Now, fees often decrease as your portfolio grows. An advisor might charge 1.25% on the first $500,000 and 1% on amounts above that. So your “blended rate” ends up being somewhere in the middle.
At 2% with no sliding scale? Yeah, thats above average. No way around it.
But Wait – What Are You Getting?
This is where my initial “thats too high” reaction got more nuanced.
My friends advisor wasnt just managing her investments. He was also doing:
- Comprehensive financial planning
- Tax strategy and coordination with her CPA
- Estate planning discussions
- Insurance review
- Quarterly in-person meetings
- Basically 24/7 availability for questions
Thats… actually a lot. Some 1% advisors just invest your money in a model portfolio and send you a quarterly statement. This guy was way more hands-on.
Is that extra service worth an extra 1% per year? Depends on your situation, honestly. For someone with a complicated financial life – business owner, multiple income sources, weird tax situations – maybe yes. For someone with a straightforward W-2 job and basic investment needs? Probably not.
The Math That Made Me Uncomfortable
I ran some numbers for my friend, and this is what really got her attention:
Lets say the market returns 7% annually on average (pretty reasonable long-term assumption).
With a 2% fee, your net return is 5%.
With a 1% fee, your net return is 6%.
With a 0.5% fee, your net return is 6.5%.
Doesnt sound like a huge difference? Run it over 25 years with $500,000:
- At 5% net: grows to about $1.7 million
- At 6% net: grows to about $2.1 million
- At 6.5% net: grows to about $2.4 million
The difference between 2% fees and 1% fees over 25 years is roughly $400,000. Four hundred thousand dollars.
Thats not nothing. Thats like… a house. Or several really nice cars. Or years of retirement.
When Higher Fees Might Be Justified
Im not saying 2% is never worth it. Here are situations where I could see it making sense:
Youre getting truly comprehensive service. Not just investment management but tax planning, estate work, insurance review, the whole package. And you actually USE all those services.
The advisor is saving you money elsewhere. If their tax strategies save you more than the extra fee costs, its net positive. Hard to calculate, but its real.
Your portfolio is small. Some advisors have minimum fees – like $5,000 per year regardless of portfolio size. If you have $200,000, thats effectively a 2.5% fee. Sometimes a percentage works out better on smaller amounts.
Theyre genuinely outperforming. If an advisor consistently beats the market by more than their fee, theyre adding value. But – and this is important – most advisors dont beat the market consistently. Very few do. Be skeptical of anyone promising they will.
When 2% Is Probably Too Much
If youre mostly getting investment management. You can get solid investment management for 0.25-0.5% through robo-advisors, or even free through target date funds in a 401k. Paying 2% for just investment management is overpaying.
If you have a large portfolio. 2% on $2 million is $40,000 per year. Every year. Thats hard to justify unless youre getting an extraordinary level of service.
If you could get similar service elsewhere for less. Many excellent advisors charge 1% or less. They exist. Shop around.
What I Told My Friend
I suggested she do two things:
First, actually calculate what shes paying. Not the percentage – the dollar amount. Sometimes seeing “$12,000 per year” hits different than “2%.”
Second, get quotes from a couple other advisors. Not to necessarily switch, but to understand the market. If she could get similar service for 1%, she might be able to negotiate with her current advisor. Or she might confirm that hes actually worth the premium.
She ended up staying with him but got the fee reduced to 1.5%. Apparently just asking made a difference. Go figure.
The Bigger Question
Do you even need an advisor at all?
For basic investing – maxing out retirement accounts, investing in low-cost index funds, staying the course for decades – you really dont. You can do this yourself for almost free.
Where advisors add value is in the complicated stuff. Tax optimization. Estate planning. Navigating big life changes. Having someone to call when the market drops 20% and you want to panic sell. (That last one is more valuable than people realize.)
If your situation is simple, consider whether you need comprehensive advice at all. Maybe a one-time financial plan ($1,000-$3,000 flat fee) plus DIY investing is the better approach.
If your situation is complicated, an ongoing advisor relationship can be worth it. But shop around on fees. The difference between 1% and 2% is real money over time.
My Bottom Line
Is 2% high? Yes, compared to industry averages.
Is it always too high? Not necessarily – depends on what youre getting.
Should you at least question it and compare alternatives? Absolutely. Your future self will thank you for the extra money in your account.
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