Is your financial advisor worth $600 per hour?

Posted by on July 29, 2009 in Investment Information

Larry MacDonald recently joined the growing chorus of writers who wonder why anyone would want to use an investment or financial advisor.  Certainly, in some contexts, people do need professional financial advice and I have always believed even the most sophisticated and stubborn DIY investors require financial advice from time to time, paid on an hourly basis, to provide some detached opinion on whether their investing strategy is sound and is being executed properly.

Accordingly, the question should not be framed as whether you need a financial advisor but whether they bring value to a particular investor? For example, a financial advisor who provides a 2nd opinion for $250 to a DIY investor with a 20 year investing horizon could bring value if their opinion was sound and it held credence through most, if not all, of that investing time-line.

However, if we answer the value question in the form of an hourly rate (once a lawyer, always a lawyer…), the findings could shock you.

Nothing in life is free. Financial firms and their distribution network of advisors and planners are compensated through hidden (in the sense they are not upfront like a trading commission) fees known as management expense ratios (MER). MER is typically expressed as a percentage determined by a products’ operating expenses divided by the average dollar value of the product. All mutual funds and exchange traded funds charge MERs. The MER is deducted before calculation of the products’ return.

I am going to use Million Dollar Journey’s example of the erosion of investment return based on higher MER; in his post, MDJ compares the costs of a  DIY, low MER portfolio versus an active mutual fund portfolio with a 2% MER per annum. I am going to assume the mutual fund portfolio involves the use of a financial advisor.

Using his assumptions (which he freely admits are overly optimistic as to rates of return), an investor investing in an active mutual fund portfolio is losing  $12,016 in fees  after 20 years compared to their DIY counterpart.  In other words, the loss is $600.80 a year, or $600 to make the math simple.  If we recategorize this $600 not as a MER but as the cost of  professional advice, how much value are you getting?

Let’s assume you have a bad financial advisor who calls you in for an appointment once a year for an hour under the same old routine: exchange some small talk, update on your situation, review your portfolio, top up your retirement funds, highlight of what’s hot and cue the sale pitch. That’s $600 per hour for the advice you just received.

Let’s say you do an extended lunch meeting for 2 hours. That is a $300 per hour tab.  If you have a good advisor who spends 3 hours, you are down to relatively palatable $200 per hour. Four hours a year results in your financial advice costing $150 per hour.

To put this context, here are average billable rates per hour for lawyers and accountants:

  • Average American lawyer (source: Incisive Legal Intelligence as of July 2009): $284
  • Average Canadian lawyer (source: Canadian Lawyer Magazine, June 2009): $231
  • Average American accountant (source IMOA, 2008) : $225 (no Canadian info found in limited time searching)

You have to remember that lawyers and accountants set their billable rate in an analogous manners as a MER  (the majority of which is advisor compensation). In essence, take your costs add in a desired profit margin, adjust for market conditions, and you have your billable rate/MER.

Setting aside performance, do you believe that approximately 2.5 hours of time with a financial advisor is worth 1 hour of your accountant’s time? It is, admittedly, an apples and oranges comparison.

But look at the value question both quantitatively and qualitatively. Time does not necessarily equal value but time spent is inverse to advisor indifference. Thus, is your advisor spending sufficient amounts of time with you to lower their “billable rate” to something reasonable?

More to the point, does their performance justify this billable rate? At least with accountants, you are minimizing taxes and with lawyers you minimize risk, facilitate the purchase of large assets, defend your civil liberties etc. For upwards of $600 per hour, does an adviors provide sufficient results which a DIY approach could not match or beat?

The question is contextual. Some great advisors are worth more than $600/hour but you never hear of them because they are so busy servicing their clients well.  But, is your advisor worth their hourly rate?

14 Comments on Is your financial advisor worth $600 per hour?

By MDJ on July 29, 2009 at 8:31 am

Thanks for the mention and for putting financial advisor fees in perspective. I have come to the conclusion that I’m in the wrong career. :)

By Finance Matters on July 29, 2009 at 9:29 am

That’s why people should hire a proper Financial Planner that will help them with everything from Investments, Insurance, Tax Planning, Education Planning, Mortgage Planning, Estate Planning, Budgeting etc. I am always available by hone or email to answer questions or research a topic for my clients. I relish taking clients away from these ” 1hr a year” advisors. I explain exactly how I am compensated and that the client should take advantage of my expertise as much as possible to get their monies worth of advice! I also offer free counseling and advice to my clients friends/families.

By MoneyEnergy on July 29, 2009 at 9:40 pm

Interesting way of looking at it… I also wonder why US lawyers are paid that much more on average than Canadian (or is the currency difference already factored in?). I’m a DIY investor, but if/when I were to reach six figures or more of networth, I’d probably feel justified getting certain types of specific financial advise on an hourly basis – probably from an accountant, though, rather than an investment adviser – unless it would be to enter a different class of investments I know little about. With all due respect to Finance Matters above, I don’t think it’s a good idea to give all of that to one single person for advice – I’m a big believer in second, third and fourth opinions on matters of such importance.

By Dan Yanaky CFP, CMA on July 31, 2009 at 9:07 am

As a professional financial planner [CFP] and a professional accountant [CMA], I will assist my clients with essentially everything that affects their financial position including many areas for which I receive no direct compensation:

- advising them on managing their debts;
- providing guidance on preparing wills and powers of attorney;
- providing options for estate planning;
- pointing out income tax credits/deductions they may not be aware they are entitled to;
- deciding whether to incorporate or not;
- assisting them in applying for OAS/CPP/Disability/EI Benefits; and,
- many other things.

Providing advice on how to invest their monies is perhaps the easiest part of my job, as I have absolutely no control over investment returns! However, my income is almost solely based on commissions from investments! I recently assisted a client on an income tax issue involving the Disability Tax Credit: he is to receive tax refunds totaling approximately $20,000. My fee: $0.

I strongly believe that everyone will benefit from professional advice at some point in their financial journey. The “do-it-your-selfer” just may not know how to do “everything” on his/her own! Just so you know: I do not change the brakes on my car; I prefer to hire a professional.

My advice for finding a financial advisor: look for someone who can provide the comprehensive advice/services you require. Look for advisors who have professional designations. While not everyone will agree: ensure the advisor giving advice on investing, complements this with solid Income Tax advice [what has more affect on your financial position: a MER that may be 2.5%, or income that may be taxed at 46%?] However, the most important thing: find someone with whom you feel comfortable and trust!

By Canadian CFP on July 31, 2009 at 10:05 am

When is the last time that you performed surgery on yourself? If your advisor is saving you thousands of dollars in taxes is it not worth the cost? Also ensure that you shop around and find someone who has professional designations and a reputable firm behind them. If someone promises you fantastic returns RUN do not walk out of there.
My clients all get estate planning advice as part of the package standard as well we set out their financial plan and review it constantly. If you are getting one hour a year out of your financial planner it is time to look for another. As for the DIY people good luck but you are still getting hit with MER’s on mutual funds and you are still getting charged to trade stocks you just aren’t getting professional advice.

By admin on July 31, 2009 at 11:22 am

Thanks for all your comments. Ultimately, as I indicated in the post, the question should not be framed as “should I get an advisor” but “what value do I get out of it.” In certain situations, it may be better to be a DIY and pay for an occassional 2nd opinion. In others it is not.

I am going to address in a future post the frustrations of any advisor as a defense for all good advisors.

By Jeff on July 31, 2009 at 11:30 am

I have worked as an advisor for almost 21 years. If I were to add up the amount of time I spend working on a client’s file, following up with them when they fail to do so, reviewing their income taxes, providing opinions on estate planning, tax strategies, and anything else they think of, I think my hourly rate would drop to $20-$30 per hour.

Remember when you first started working – and you wanted to start out in the right direction financially. I lose money over the first 1-3 years of many client relationships due to the amount of work involved relative to the money I earn. As Mr. Yanaky stated so eloquently, much of the work of the true professional advisor is in the non-monetary areas. we do this because it’s the right thing to do. I develop full financial plans (at no cost) for my clients and the glowing letters of praise I have received seem to justify the costs.

I know there are advisors who are in it for the money. If you want to figure out which one is which, ask one simple question.


That will provide the best answer for you. I have a small number of clients who want, expect and receive service that goes beyond the average advisor. I could choose to increase my client base by 10 times, but how would that affect my service performance. Our industry is changing and I welcome many of these changes. That won’t mean I will compromise my client’s best interests, by over-promising and under-delivering.

By Lise Tremblay on July 31, 2009 at 9:45 pm

When I worked as a financial advisor, I sold regular Mutual funds with 0% entry fees. I felt that the low % given to advisors who sold those was big enough if you take all your clients into account. And I never charged for rebalancing a portfolio. After a few disasters in the beginning of my career, I had a few funds/managers one can rely on, the most obvious in my mind being “Harbourg Growth and Income” managed by Coleman, now at CI’s. Did you know that a couple of weeks before the markets started to scramble down,this fund was 93% cash? That was quite a signal!

CI is one of the very few Mutual Funds Companies who let managers manage, without forcing them to buy something they don’t like just because the Fund Company bought a huge amount of it.

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By Sharon Williams, Wealth Advisor on August 2, 2009 at 7:33 am

Appreciated Dan Yanaky’s comments-very clear and concise. The fact is, as financial advisors, we are only receiving a small portion of the much maligned MER. The greater portion goes to the fund companies and managers who manage the investment and for any advisor working for a reputuable firm, they will receive, on average, somewhere between 32% to 48% of the portion of the MER that comes to their company for their clients. Most good financial advisors spend more time than just their client meetings doing work for them-there is ongoing review of client’s investments, financial planning for many different aspects of their lives, continuing education to keep up on the ever-changing world etc, etc. As Dan said, and I wholeheartedly agree, I would not attempt my own car repairs, try to install a new furnace in my house, or take out my own appendix. The fact is, everyone these days has a severe shortage of TIME. Most households have both spouses working outside the home, have children to look after, grass to be cut,laundry to be done…the list goes on. As a financial advisor, I spend anywhere from 35 to 50 hours a week at my job, to look after my clients. How much time does the DIYer spend on their finances, and with what expertise? I will also re-echo the sentiment of finding the right advisor for YOU-as with any professional, both personalities and services provided will vary-find the one that is a good match for you and you should have a long and successful relationship.

By Nevin on August 17, 2009 at 3:24 pm

Many financial service providers these days are advertising that they can offer easy debt settlement, debt negotiation, credit repair, or even bad credit history erase. However, Very Few of them are actually reliable.
Debt Management and credit management is much harder than people ususally expected.

By Sky on August 17, 2009 at 3:25 pm

I always believe there are too many traps behind many credit card service. But many investment advisor keep advise to use it to deal with bills.
Maybe after the credit crunch, people would learn some lessons and start considering about changing some of their spending custom.

By G Hughes on August 28, 2009 at 12:39 pm

The frustrating thing is that the public thinks INVESTMENT planning is FINANCIAL Aplanning. Investment planning is a very small part oif Financial planning. It is the same at the bottom as it is at the top of the money chain.
The people who are paid too large bonuses are usually not the best people for the job – they are just the best sales people.

By dj on November 2, 2009 at 11:20 pm

Ok,all you hard working CFP,would you like to go to the billable hour model? Not to many willing to do that, wonder why? What would be your per hour rate be?

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