Is it worth paying a financial advisor a 1 percent fee?

The short answer

A 1 percent fee is worth it only when the planning, tax and behavior help you actually receive is worth more than the dollars it costs, so start by putting the fee in dollars. On $1,000,000, 1 percent is $10,000 a year.

Percentages hide size. "One percent" sounds small. "$10,000 every year, for the rest of my life" is a decision. Once you see the dollars, the real question becomes simple to ask: what work am I getting for this, and would I pay that price for it if it came as a bill?

What does 1 percent cost in dollars?

Here is the plain arithmetic for a level 1 percent fee, before any fund expenses inside the portfolio.

Many firms use a tiered schedule, where the rate steps down on larger balances, so your blended rate on $2,000,000 or $5,000,000 may be below 1 percent. Ask for your number in dollars at your balance. You can test what that yearly cost does to your own plan in the retirement income calculator.

How much does a fee cost over 20 years?

The fee comes out every year, so it also removes the growth that money would have earned. The SEC illustrates this with a $100,000 portfolio growing at 4 percent a year for 20 years. Using those same assumptions, here is our arithmetic.

This is a hypothetical illustration, not a projection of any investment. It ignores withdrawals and taxes. The point is the shape: over long periods, a 1 percent fee can take a meaningful share of the growth. That is exactly why the fee needs to buy something real.

What are the ways to pay a financial advisor?

The SEC notes that an adviser's fee is typically a percentage of the assets in your account, but it is not the only model.

No model is right for everyone. Some people use a flat fee plan first, then decide whether they want ongoing help.

What should you get for 1 percent?

Here is a reasonable list to hold an ongoing fee against. You should be able to point to most of it in writing.

1. A written retirement income plan that says where each month's paycheck comes from.
2. A yearly tax review, including Roth conversion and capital gain decisions.
3. Social Security claiming and Medicare timing, including the IRMAA surcharge lookback.
4. A withdrawal order across taxable, traditional and Roth accounts, and help with required minimum distributions.
5. Beneficiary, titling and estate document checks.
6. Rebalancing and a portfolio matched to the plan, not the other way around.
7. A person who picks up the phone, and keeps you on plan, when markets fall.

If the honest description of the service is "they pick the funds," a 1 percent fee is hard to justify. If it is most of the list above, the fee is paying for work you would otherwise do yourself, buy piece by piece, or skip.

A worked example: Diane

Here is a hypothetical example. Diane is 64, recently retired, with $1,200,000 across an IRA, a 401(k) and a brokerage account. A 1 percent fee is $12,000 in the first year, about $1,000 a month.

Diane writes the dollar figure at the top of a page and lists what she expects to receive in year one: a decision on when she and her husband claim Social Security, a plan for Roth conversions before Medicare's lookback years, a withdrawal order for the next five years, a review of her beneficiaries, and a standing quarterly meeting. She asks the same question of a flat fee planner, who quotes a set price for the plan and leaves the investing and follow-through to her.

Neither answer is wrong. What matters is that Diane now compares two bills for two sets of work, instead of a percentage against a guess.

Does North Carolina change the math?

A little, and not in your favor. Since 2018, investment management fees paid from a taxable account fall under miscellaneous itemized deductions, which the IRS says can no longer be claimed on a federal return. North Carolina's itemized deductions are limited to mortgage interest and property tax (capped at $20,000 combined), charitable gifts, medical expenses, and claim of right repayments, so the fee is not deductible on your state return either. In North Carolina, plan on paying an advisory fee on a taxable account with after-tax dollars. If you live in the Triangle, this page covers how planning works locally.

How do you check what you pay now?

Every SEC registered adviser and broker must give retail investors a Form CRS, a short relationship summary that lists fees, costs and conflicts of interest in plain language. Two of the questions it suggests you ask are worth repeating word for word: "Help me understand how these fees and costs might affect my investments," and "If I give you $1,000 to invest, how much will go to fees and costs, and how much will be invested for me?"

Then add up the full cost: the advisory fee, the expense ratios of the funds inside the account, and any account or transaction fees. You can look up any firm or professional for free on FINRA BrokerCheck. If you want someone to lay your current costs and services side by side, a second opinion review is built for that.

The same question comes up the day you retire, when someone offers to move your 401(k) into an advised IRA. Your plan's own costs may be lower than you think, so compare them in dollars first; here is how to decide whether to roll your 401(k) into an IRA.

The bottom line

A 1 percent fee is neither a bargain nor a rip-off on its own. It is a price, and on a seven-figure balance it is a large one, so translate it into dollars and match it against a written list of work. Planning, tax decisions and steady guidance in hard markets can be worth paying for. Fund selection alone is harder to justify at that price. A good relationship should make that comparison easy to see.

What are you paying in dollars this year, and could you list what you received for it?

Find out what your own plan looks like before you decide what help is worth: take the free Retirement Reality Report.

Questions people ask next

Is 1 percent a lot to pay a financial advisor?

It depends on what you get and how much you have. On $500,000, 1 percent is $5,000 a year; on $5,000,000 it is $50,000. Many firms use tiered schedules where the rate falls on larger balances, so ask for the fee in dollars at your balance.

What should a financial advisor do for 1 percent?

At a minimum, you should be able to name the work: a written retirement income plan, a yearly tax review, Social Security and Medicare timing, a withdrawal order, beneficiary and estate checks, and someone who answers when markets fall. If you cannot list what you receive, that is the first question to ask.

Are financial advisor fees tax deductible?

Generally not on a federal return. Since 2018, investment management fees paid from a taxable account fall under miscellaneous itemized deductions, which the IRS says can no longer be claimed. North Carolina's itemized deductions do not include them either.

Is a flat fee financial planner cheaper than 1 percent?

Often, for larger balances, but not always. A flat planning fee pays for advice, and you usually carry out the plan yourself. Compare the total yearly dollars and the work each option includes.

How do I find out what my financial advisor charges?

Ask for the firm's Form CRS and Form ADV Part 2A, and ask your adviser to state your total yearly cost in dollars, including fund expenses and any account fees. You can look up the firm and the person on FINRA BrokerCheck and the SEC's adviser search for free.

When is paying 1 percent not worth it?

When the main service is picking investments you could hold yourself at low cost, and there is no planning, tax work or ongoing guidance attached. A fee also deserves a second look when you cannot get a clear answer about what it buys.