Are Wealth Advisors Worth It?
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Table of Contents
What Does a Wealth Advisor Do?
Wealth Management Costs
Wealth Management Strategies and Considerations
Wealth Advisor Pros and Cons
The Bottomline: Are Wealth Advisors Worth It?
Wealth management for high-net-worth individuals is complicated due to the size and complexity of their portfolios. However, with the availability of low-cost brokerage services, automated investment platforms, and plenty of free financial information online, it is easier than ever for investors to manage their own money.
Still, wealth advisors offer specialized expertise, tailored strategies, and peace of mind, freeing up investors to focus more energy on other matters. But since wealth management costs can add up quickly, high-net-worth investors should carefully consider: are wealth advisors worth it?
What Does a Wealth Advisor Do?
Wealth advisors provide expert wealth management guidance. While different advisors have different offerings, services may cover:
Financial planning
Investment management
Property planning
Philanthropy
Tax services
Legal planning
Wealth Advisor vs. Financial Advisor
“Financial advisor" is a more general term that includes wealth management as one area of expertise. Financial advisors often serve clients across various income and net worth levels, while wealth advisors specifically focus on complex financial scenarios and cater to high-net-worth and ultra-high-net-worth individuals. As a result, the fees for wealth management services are generally higher than those charged by other types of financial advisors.
Wealth Management Costs
Traditionally, wealth management fees are based on charging a percentage of assets under management (AUM). Fees typically range from 0.75% to 1.5% annually, although it is possible to negotiate lower rates.
At first glance, this fee structure seems reasonable. For example, paying a 1% fee on a $5 million portfolio equates to $50,000 per year for professional oversight. However, as portfolios grow, the absolute value of these fees can become significant.
For retirees drawing on their assets, this fee can represent a substantial portion of their income. For instance, a retiree with a 3.25% withdrawal rate may effectively be giving away a large percentage of their after-tax "income" to an advisor.
Consider the following example for a $10M portfolio:
Annual fee at 0.75%: $75,000
Using 3.25% safe withdrawal rate: $325,000 annual withdrawal
After-tax income (assuming 25% tax): $243,750
Advisor fee represents: 31% of post-tax income
This calculation demonstrates why many investors reconsider their wealth management approach as portfolios grow or when transitioning to retirement income.
If wealth management fees seem burdensome, there are other options to explore, such as self-management or alternative advisory models.
Wealth Management Strategies and Considerations
Flat-Fee Advisors
Due to concerns about the high costs of AUM-based fees, some investors are turning to flat-fee advisors. These advisors charge a set annual rate, regardless of portfolio size, which often proves more cost-effective for those with higher net worths. A typical flat-fee advisor might charge between $10,000 and $25,000 annually, providing similar services as those offered by AUM-based advisors but at a lower overall cost.
Recent market data shows flat-fee advisory rates typically range from:
Basic service tier: $10,000-12,500 annually
Mid-tier service: $15,000-20,000 annually
Comprehensive service: $20,000-25,000 annually
For portfolios over $5M, this can represent significant savings compared to traditional AUM fees. However, service levels and access to private investments may differ.
Flat-fee models also appeal to investors who want to pay for advice without worrying that their advisor’s compensation is tied to the size of their portfolio. This removes potential conflicts of interest, as the advisor’s income is not directly impacted by the growth of the client’s assets. Additionally, flat-fee advisors might offer more transparency, as clients know exactly what they are paying for, with no hidden commissions or kickbacks from investment products.
The downside is that not all flat-fee advisors provide the same level of service as traditional wealth managers, particularly in areas such as private investment access or estate planning. High-net-worth individuals must carefully evaluate whether a flat-fee advisor can meet their specific needs, particularly when it comes to complex tax planning or multi-generational wealth transfers.
Passive Investment Strategies
Many investors are drawn to passive investment strategies, particularly those who want to minimize fees and complexity. Exchange-traded funds (ETFs), like Vanguard’s VTI (Total Stock Market ETF) and VXUS (Total International Stock ETF), offer broad market exposure at a fraction of the cost of actively managed portfolios. These index funds have lower management fees, typically less than 0.10%, and tend to outperform many actively managed funds over the long term.
A growing number of high-net-worth individuals are moving toward a simple asset allocation strategy, such as a 60/40 or 80/20 equity-to-bond portfolio. These portfolios can be set on autopilot, with minimal need for active intervention. This passive approach appeals to those who prefer simplicity and efficiency.
Direct Indexing and Tax-Loss Harvesting
While passive investing is an attractive option for many, some high-net-worth individuals opt for more hands-on strategies like direct indexing and tax-loss harvesting (TLH) to maximize tax efficiency. Direct indexing allows investors to purchase individual stocks within an index, rather than the index fund itself, providing greater control over tax management. TLH involves selling investments at a loss to offset taxable gains, reducing the overall tax burden.
These strategies can be particularly effective during high-income years when the tax savings from TLH can significantly boost after-tax returns. However, the complexity of managing a direct indexing portfolio or regularly implementing TLH can become overwhelming without professional assistance. This is where wealth advisors often step in, offering their expertise to manage these tax-efficient strategies on behalf of their clients.
Despite the potential benefits, direct indexing has its downsides. The administrative burden of managing hundreds of individual stocks, coupled with the need to constantly rebalance the portfolio to maintain target allocations, can be significant. Some investors find that the tax benefits eventually plateau, and the complexity outweighs the gains. This leads many to question whether they would be better off with a simpler ETF-based portfolio, avoiding the need to "manufacture" losses to keep the strategy working.
Private vs. Public Investment Opportunities
A significant aspect of high-net-worth wealth management is access to private investment opportunities, such as private equity, venture capital, or real estate syndications. Wealth managers often tout their ability to provide exclusive access to these deals, which are not available to the general public. However, some investors are skeptical of the value these private investments provide, particularly when compared to more liquid, lower-cost public market alternatives such as REITs (Real Estate Investment Trusts).
Public REITs, for example, are currently trading at a discount to private real estate markets and offer lower costs of capital. With debt rates as low as 3-4% for many large REITs, some investors find that public REITs are a good alternative to direct ownership or private real estate investments. The liquidity, transparency, and lower fees of public markets often make them more appealing, particularly for those who are wary of the layers of fees and potential conflicts of interest in private deals.
When evaluating private investment opportunities through wealth advisors, it is crucial to understand the return requirements needed to offset management fees. For example, with a typical wealth management fee of 0.75%:
Required outperformance: 4% above public market returns
Portion of portfolio needed in private investments: ~14%
Additional considerations: Liquidity constraints, higher complexity
This analysis helps explain why many investors are carefully weighing private vs. public market opportunities. Current market conditions (2024) further illustrate this dynamic:
Public REITs trading at ~20% discount to private markets
Major public REIT debt costs: 3-4% range
Private real estate facing higher interest rate pressures
New hybrid investment vehicles emerging
When Wealth Advisors Add Most Value
Certain life transitions often justify higher wealth management fees, including:
Post-Exit Transitions
Initial capital deployment
Tax strategy development
Portfolio restructuring
Risk management implementation
Market Volatility Periods
Behavioral coaching
Strategic rebalancing
Tax-loss harvesting
Opportunity identification
Complex Situations
International relocations
Equity compensation events
Business sale preparation
Inheritance planning
During these periods, the additional cost of full-service wealth management often pays for itself through strategic guidance and risk mitigation.
Hybrid Wealth Management
Many investors are adopting a hybrid approach to wealth management. Rather than fully outsourcing their portfolio to a wealth manager, they choose to manage certain portions themselves—particularly in areas like public market investments, where a simple, passive strategy can suffice.
This hybrid model allows investors to retain control over parts of their portfolio while still benefiting from professional advice in areas where they feel less confident, such as estate planning, private investments, or retirement planning. For example, some high-net-worth investors might use a wealth manager for quarterly portfolio reviews or long-term financial scenario modeling, while managing their own stock and bond investments via low-cost brokerage platforms.
The key is recognizing one’s strengths and weaknesses as an investor. For those who enjoy researching companies and keeping up with market trends, self-management can be a rewarding and cost-saving approach. For those who prefer to focus on their careers or personal interests, outsourcing certain aspects of their financial planning can provide peace of mind and free up valuable time.
Many investors opting for a hybrid approach work with wealth advisors when they are setting up asset allocation and deploying capital. Then, once things are established, they may limit the scope of the wealth management services they use or stop using them altogether. Wealth advisors can also provide extra help during key events such as retirement, a windfall, or navigating an exit.
Many investors are finding success with specific hybrid strategies that allow them to maintain valuable advisor relationships while reducing overall costs. One increasingly popular approach is the minimum investment strategy, where investors:
Maintain a smaller managed portion ($1-2M typical)
Retain access to private investments
Preserve the advisory relationship
Reduce overall fee impact
This smaller allocation often serves as an anchor for broader service coordination, where investors work with:
A primary wealth advisor for overall strategy
Specialized providers for specific needs (i.e. taxes or estate planning)
Technology platforms for day-to-day execution
Regular coordination meetings to ensure alignment
This structured approach allows investors to maintain key benefits of wealth management while significantly reducing costs. It's particularly effective for those who want to remain hands-on with their public market investments while leveraging professional expertise for more complex aspects of their financial life.
A Specialized Approach
Instead of relying on a single advisor to manage every aspect of their financial life, many high-net-worth individuals use specialized experts for different areas. For example, they might hire a tax planning CPA, a separate estate planning attorney, and an insurance specialist rather than relying on a generalist wealth manager to cover all these bases.
This specialization ensures that high-net-worth individuals get the best possible advice in each area of their financial life rather than a one-size-fits-all approach. It also allows for more flexibility in how wealth is managed. Investors can maintain control over certain aspects of their portfolio, while outsourcing more complex or time-consuming tasks to experts.
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Wealth Advisor Pros and Cons
So, are wealth advisors worth it? While the answer will, of course, vary according to individual needs and circumstances, there are some financial advisor pros and cons to consider when making the decision:
Pros
Peace of Mind and Convenience: Managing wealth for high-net-worth individuals is often intricate and requires substantial time and effort. Given personal preferences, lifestyle, or limited availability, it may be more practical to delegate these responsibilities to a professional firm. For those who lack confidence in their own abilities to manage certain areas, this also allows them to relax knowing that their portfolio is in the hands of a trained professional.
Access to Private Funds: In some cases, wealth managers offer opportunities to invest in private funds that aren't accessible to the general public.
Objectivity: Wealth managers bring an unbiased perspective to financial decisions, which can be particularly valuable in emotionally charged situations, such as legal matters or estate planning, where personal feelings might otherwise influence judgment.
Services: The broad range of services offered—such as tax planning, bill payment, estate management, tax loss harvesting, and access to exclusive investment options—can justify higher fees for some clients.
Better Returns: Studies show that financial advisors can increase returns on investments, although this is never a sure thing.
Cons
Concerns About Wealth Advisor Bias and Competency: Finding the right wealth advisor can be challenging, as high-net-worth individuals need to work with people they trust. Some also might worry about financial advisors presenting biased advice with the goal of earning more themselves. It is wise to shop around and get recommendations from other high-net-worth individuals when picking a wealth advisor.
Cost: Wealth advisor costs can add up quickly for large portfolios, and many high-net-worth individuals will eventually reach a point where the cost is not worth the value they are getting―particularly for those with the time, interest, and acumen to self-manage.
Lack of Oversight: Outsourcing wealth management tasks can make it easy for investors to avoid putting in their own due diligence, meaning there may be significant aspects of their portfolio that they do not understand. This lack of education and oversight can be concerning. Generally speaking, it is wise to not invest in anything one does not fully understand.
The Bottomline: Are Wealth Advisors Worth It?
When deciding whether a wealth advisor is worth it, high-net-worth investors should consider:
How comfortable am I managing my portfolio alone?
Do I have the time to self-manage?
How much will wealth management likely cost based on the size of my portfolio?
What fee model makes the most sense for me (i.e. flat rate vs. percentage-based)?
What wealth management services do I need?
Would a hybrid approach benefit me? Does it make sense to work with a wealth advisor temporarily?
Do I have any major financial transitions coming up?
For some high-net-worth investors, the peace of mind and comprehensive services offered by a wealth advisor are worth the fees. For others, particularly those in retirement or with a passion for investing, the costs may seem excessive, and self-management or a hybrid approach could provide better value.
Whether through low-cost passive strategies, specialized flat-fee advisors, or selective use of professional services, there are multiple paths to effectively manage wealth. The key is to strike a balance between cost, control, and complexity that aligns with an individual’s financial goals and lifestyle.
Discussing topics like these with fellow high-net-worth individuals can bring up invaluable perspectives and recommendations. Long Angle’s high-net-worth community brings together like-minded investors for discussions, events, and exclusive investment opportunities. Join Long Angle to get started.
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