(Reuters) - A few months ago Yves Colon and his wife Melissa had a number of retirement accounts from previous jobs scattered among different financial institutions, and only a vague idea of what to do with them.
"We really didn't have a sensible, diversified investment strategy," says Yves, 59, who teaches journalism at the University of Miami. "Even though we follow the markets casually and have done some investing, we weren't giving our money the oversight it really needed."
When they started searching for an adviser to manage their mid-six figure account, they learned that charges of 1.5 percent -- about $7,000 per year -- weren't unusual.
The good news for people like the Colons is that there are less expensive solutions out there, even as investors transition away from commission-driven advice to fee-only, or fee-based approaches.
More advisers than ever are now following some sort of fee-driven approach in which investors pay for the advice and management they get directly, instead of having those fees hidden in higher investment costs that show up as commissions. Fee-only advice is generally considered to be a more conflict-free approach, and individual investors are starting to appreciate that.
From 2007 through 2010, when the Dow Jones Industrial Average dropped a total of 17 percent, the average adviser's assets in fee-based accounts rose 24 percent, according to PriceMetrix.
But, as the Colons, discovered, those fees can be hefty, and, paradoxically, the less money you have to manage, the more it can cost you. In the world of investment management, size matters. "Larger accounts are usually more cost effective for advisers than smaller ones," says Patrick Kennedy, co-founder of PriceMetrix. "It's kind of like the financial services equivalent of getting a volume discount."
Indeed, half of portfolios in the $250,000 to $500,000 range pay annual fees of 1.5 percent or more, and one-quarter of them pay annual fees that exceed 1.75 percent, according to PriceMetrix. Those with $1 million-plus accounts fork over a much tamer 0.92 percent. On average, expect to pay fees of 1.32 percent of assets under management.
Now, a growing group of financial advisers are coming up with ways to charge half (or less) the amount of the industry average with flat fees. By doing so, they say they can shave $1,000 or more in charges a year for every $100,000 in the portfolio. Their services appeal to those who don't quite fit into the high-net-worth category, but who want complete oversight rather than just investment and allocation recommendations. An annual fee typically covers setting up the portfolio, phone consultations with an investment manager at least once a year, the cost of executing trades and periodic rebalancing.
The firm the Colons chose, Flat Fee Portfolios, is part of MACRO Consulting Group, a New Jersey investment advisory and financial planning firm. The service, which includes semi-annual phone reviews by a manager assigned to the account, costs a flat fee of $199 a month. As a result, the Colons now pay a shade less than 0.5 percent a year for investment management fees.
Accounts of less than $250,000, which pay $129 a month, get a pared down version of the higher-priced service.
Another low-cost firm, Troy, Michigan-based Portfolio Solutions, charges 0.25 percent of assets to assemble and manage a portfolio of index-based exchange traded funds and mutual funds. There's a minimum annual charge of $2,500 per household, and the firm doesn't accept accounts of less than
Another way to keep advisory costs low is to pay by the hour for just the advice you need. The Garrett Planning Network in Shawnee Mission, Kansas provides referrals to advisers who charge hourly rates. Consider an hourly plan if your finances aren't especially complicated, says Kent Grealish, partner at Quacera in San Bruno, California and a member of the national 329-member network.
Grealish, a former stockbroker with 38 years of experience, pegs the initial cost to set up a simple investment plan at around $2,400, based on his rate of $240 an hour. That comes to just under 1 percent for a $250,000 account. In subsequent years, when he needs to put in less time, the charge typically falls to $480 to $720.
"My clients only pay for the work I put in, not by how much they have in the account," says Grealish. "That makes a lot more financial sense for most people than the traditional assets under management model."
While most discount brokerage firms offer investment management services, their charges vary widely. With Fidelity Personalized Portfolios service, fees start at 1.5 percent on the first $500,000 in assets, and the service requires an investment minimum of $200,000. Vanguard charges 0.70 percent of assets on the first $1 million, but has a $500,000 minimum and $4,500 minimum annual charge. And if a discount brokerage firm has its own brand of mutual funds or ETFs, it's likely those offerings will figure prominently in their recommendations says Justin Nichols, manager of operations at Garrett.
Even if published fees appear high at first glance, there is often room for negotiating discounts, says Kennedy, especially if it's likely you'll be adding money to the account over time or are in a position to help build business through referrals. (Vanguard doesn't discount its published fees for investment management, according to a spokesperson. Fidelity has no official policy on negotiating published rates on an individual basis, but says part of the fee is credited to the account if the portfolio holds Fidelity funds or any of the funds in the firm's brokerage network.)
People with $25,000 to $100,000 accounts who want investment management have a more limited menu of options to choose from. One of them, E*Trade's Managed Investment Portfolios, has an investment minimum of $25,000 and cost 0.75 percent of assets a year for amounts up to $100,000. Another smaller investor option, MarketRiders Managed IRA program, charges an annual flat fee of $495 and uses index ETFs and mutual funds to implement its recommendations.
Of course, fees are just one thing to consider when choosing an advisory firm. Lower-cost services focus almost exclusively on investment management and may include automated programs, so they tend to work best for people who don't need lots of hand holding and have low-touch, simple financial situations.
"One of my clients who used to pay $12,000 a year for investment management told me he missed getting calls from his adviser every couple of weeks," Grealish says. "This guy was paying thousands of dollars for a lot of telephone calls he really didn't need."
The author is a Reuters contributor. The opinions expressed are her own.
Editing by Linda Stern and Beth Gladstone