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There are statistics I’ve seen that say people using a financial planner have more money than those who don’t. IMO it’s for the same reason some use a tax preparer even when their taxes are simple; it’s because they are terrified of things they don’t understand. Many won’t save without someone pushing them to do the right thing. So for those folks I think 1% is fair up to a point, but fees should shrink as assets increase. An hourly advisor is great but someone with little or no money to manage isn’t going to put out several hundred dollars or more for the advice. You have to be mindful of the fact that most people aren’t money nerds like we HD’ers.
Tax planning is the part of retirement that can get complex. I would think a good CPA paid hourly could be worthwhile for many. Percentage of assets to a “financial advisor”? No way. Never.
I felt a need to provide a resource to my wife if I should pass or become incapacitated. She has no desire or training in investments. The time to make this decision is before the event so I began my process. I explored several brokers and went to a course at a local community college sponsored by one. Our theories were aligned and a meeting was set up with me and my wife.
I then began the negotiation with the advisor. Why does it have to be 1%? So we arrived at a different solution. I pay 0.6% of “specific” assets that ends up being less than 0.1% annually. I continue to manage the portfolio but I discuss major moves periodically. He reaches out to me when he sees an opportunity or potential issue. Our understanding is the fee will increase as my capacity decreases.
No.
Let’s do some high-level math – 1% of AUM is an absurd expense with no tie to value created and no rational explanation. Think about it, if my Assets increase by 5% in any given year, taxes eat up roughly 1% those gains, inflation another 2% of those gains, providing me with a 2% return. Guess what, for the grueling labor involved in managing my money, my friendly financial planner takes 50% (or the 1% of 2% return) of my return with no risk, only profit. This single expense may be the single largest impediment to a secure retirement!
If you follow Oracle of Omaha’s advice, simply invest in a S&P Index, no work, no extra fees to someone who can’t beat it.
no because nobody takes care of you better than you…an old military adage KISS……..keep it simple stupid……..invest in a few mutual funds get 8% return be happy and just pay what ever taxes you owe and move on
Absolutely not worth it. Let’s say you wanted someone to manage your assets for you because you are too busy.
Option 1) You go to a financial advisor who charges 1% of assets per year
Option 2) You go to a financial advisor who charges a fixed fee per hour to review without charging you a % based on the assets you bring to the table
Option 3) You could just go to Vanguard and put all of your stocks into a target day mutual fund. Here your expense fees are .08%
https://investor.vanguard.com/investment-products/mutual-funds/target-retirement-funds
For people who want a low cost hands off approach. These target funds seem like the easiest way for people to set it and forget it.
Yes – because of circumstances we all are likely to face. Simply put, as one ages, the risk of cognitive decline increases. For many of us, our ability to manage our financial lives will become more difficult and burdensome. As we enter our 70s and if we make it to 8o and beyond, cognitive decline becomes a real issue. Establishing a relationship with a well-vetted financial advisor is facing this risk directly. The 1% fee is actually a form of insurance. Having a “second set of eyes”on one’s financial life can prevent costly if not disastrous mistakes. In the event that you are incapacitated or die, a financial advisor can step in and help your spouse or partner manage their financial affairs. For the readers of this blog, who are actively engaged in managing their investments and financial matters, the optimal time to hire a financial advisor is likely when one is in one’s early 70s, before there is a crisis and there is time to establish a solid relationship with the advisor.
I would say it depends. My elderly mother and my sister both use the same advisor who charges a 1% wrap fee. They have used this advisor for many years, and both feel like the service they receive is pretty much worth the fee. My mom grumbles about it at times, but she doesn’t want to actively manage her fairly complicated (especially around tax time) portfolio anymore so she just sucks it up and pays the fee. My sister has little interest in things financial, so she is fine with paying the fee.
Conversly, I have always enjoyed managing my family’s financial accounts, and since it has become more of a hobby/obsession for me, I would never consider paying a wrap fee. I do wonder at times if I should let a good advisor take a peek at our financial setup to look for possible problems. Maybe I will do that one day.
Why is the portfolio complicated? Probably so that the advisor can justify the fee, not because she needs it to be complicated. A simple three fund portfolio using low cost index funds is fine for most people, perhaps with a CD ladder for income.
No way. Paying 1% of fees can actually eat up to a third of your nest egg in retirement and end up with you having half of your potential retirement income
the Passive Investing Australia website has a brilliant step by step explanation of how this destroys your wealth
No. One would first have to define “GOOD” and that can only be known in retrospect. Everyone should invest according to their own interest and ability. Lacking either then a low cost index fund or 3 or even (shudder) a TDF would be better. An hourly fee-based advisor while making the transition to one’s drawdown phase might make good sense. I think paying for AUM is mainly applicable to the UHNW .
I recently calculated that if I had been paying a 1% AUM fee since I retired over twenty years ago I would be out more than $225,000, not counting the lost compounding,. It is inconceivable to me that I would have received anything approaching equivalent value. And that says nothing about the decades before I retired.
I pay a fee-for-service planner to run the numbers for me every few years – it cost me $1,500 last year. I invest almost exclusively in very low cost mutual funds, and occasionally check to see whether I need to re-balance. Very simple.
No
No, no matter what the size of one’s portfolio. I recall that years ago, some advisers wanted 2%, and then they “generously” lowered it to 1.5%. But don’t be fooled – even 1% is a lot if you have a decent sized portfolio, and advisers generally do the same thing for someone with $20M as $2M, for ten times more money. (And you will incent them to be “active” when that is generally recognized as being unproductive.)
My first experience with these people was with someone who facilitated option exercises for my employer, so he was holding some of my money at the time. He used his role in the exercise as a way to promote himself as a longer-term adviser. He stayed away from his fee percentage until I had to ask outright what it was. It was 1.5%. I listened to this guy, took a very close look at him, and decided then and there that there was no way THIS guy was going to take ANY slice of my money. I moved it all within a week.
No for 99% of us. See Chap 12 in Harry Sit’s concise 200 page: My Financial Toolbox: The Nuts and Bolts of Managing Your Money. Very practical, recent (Sept 2020), and full of useful information. And $10 for Kindle edition which reads fine even for diagrams, etc. I am 75, PhD in biostatistics, very interested in finance and I still picked up 8 new tricks and confirmed other items I was already doing. Harry also has a blog for late breaking news like I-bond purchases right now.
1% of your assets for investment management only? Nah, not likely. For real-life financial planning? To me, yep!
For context, I’m 39 and have paid the 1% percentage point for the services my planner, a CFP(R) professional, provides since 2006. She has been my rock for soooo many things over the years for things that have nothing to do with asset management. She and her firm have saved me and my family likely more than I’ve paid her, particularly tax planning and insurance (she does not sell). We have a real relationship with her that evolves so paying her on a continued basis is warranted because we don’t just “turn her on and off.”
Using the 1% as a proxy to charge for the complexity of your situation and how much planning you need seems appropriate to me (insert Behavior Gap here). Others not so much I guess. Humble Dollar readers likely are skewed toward “no” in my opinion. We cannot lose sight that many many people do not like this stuff like we do, and they’ll gladly pay a fee we view as silly. It’s when the fee is silly and mired in conflict of interest that gets my hackles up.
The flat-fee or fee-only argument is certainly a good one. Kitces and his folks have some stats out there about how most folks prefer their payment to an advisor comes out in the assets under management form (and never really seeing it come out) and not paying as an auto-draft or individual transaction. I dunno. All of em have their flaws. An advisor working on commission by selling me things has too much conflict of interest to me. So how about % of net worth, % of income using Line 9 of your 1040, a % of your NFT portfolio? Honestly if you’ve set a fair fee for fair work and it’s reciprocal, isn’t that what’s best for you?
I am a veterinarian and I view myself as a guide to helping people with their furry loved ones achieve the greatest return on emotional investment in the form of happy, pain-free, disease-free years with their pets. Achieving this is the pinnacle of what success looks like to me. I just recently completed the CFP(R) coursework and plan to sit for the exam in March; not so I can do a career change (but hey who knows), but so I can better understand the awesome things planning can do and so I can be a better guide and advisor for my patients. I cost more. I provide more. What Steve or Danielle or Filbert down the road charge should be irrelevant.
*I wish everyone could take the coursework. The breadth is amazing. The industry just hangs on managing assets and it’s hard for them to scale real financial planning. My opinions of course.
Matthew,
Like you, I also went through the CFP coursework. I did not sit for the CFP exam, however.
While the CFP covers many important topics, it did not impress me as indispensable. Better to have it than not, especially because of the fiduciary pledge. But application of the “fiduciary” is used loosely by many CFP, including those employed by the big brokerages like Fidelity, Schwab, etc.
I have been a DIY investor my entire life, suffering some significant setbacks along the way — and not maximizing tax benefits during low income years in particular (which are perfect for Roth additions or conversions) — that a good financial planner would likely have provided helpful financial advice. But 1% AUM fees are for those with $300k – $500k to invest. I would never recommend paying a 1% AUM fee under any other circumstances.
With ballooning account balances and complex financial decisions (getting out of a concentrated position) arising as I near retirement, I decided to engage a XY Planning Network advisor on a flat fee subscription basis. He is a CFP/CFA/Wharton MBA grad with 20+ years industry experience (Fidelity, Schwab, Goldman) before going on this own several years ago. He is sharp, a full fiduciary, and uses a suite of planning software products that personal investors do not have access to — such as eMoney or Right Capital; IncomeLab (tax planning, Roth conversions), and others. The fee was discounted from his normal $450 to $250/month, and I can quit at any time. The $3k/year investment has been well worth it so far, and costs less than 1/10 of a typical AUM fee — although I still manage the investments based on talking through my priorities and based on his recommendations.
Investing is simple math. So the first question needs to be “Do you need an advisor because you truly can’t do this yourself or are just “refusing” to do this yourself?
Our kids will tell you that I’m always preaching that nobody cares more about your money than you do.
I’m currently trying to “guide” my sister-in-law through the “advisor decision”. She has about $750,000 most of which is managed by a big investment house. The 51 (!!!) mutual and ETF funds they have her in cost almost $600/year. The advisor fee adds another $5500. Yes, that’s $61,000 over the next 10 years and $120,000 plus by the time she is 77 (!!!). And I haven’t even addressed the capital gains taxes as they rebalance monthly.
So if you insist on burying your head in the sand when someone utters the word “investing” then sure pay the 1%. Or suck it up buttercup, learn how to invest in a lazy portfolio, and pay yourself $6 grand a year.
In a word: EXACTLY!
No, if you follow the advice that over the long haul you can’t likely beat the returns from investment in no load Index Funds.
Only if it’s keeping you from making big mistakes. If we assume you were going to put your money in a Target Date Fund appropriate to your age, then under almost any scenario that 1% will cost you over 15% of your final portfolio balance. It’s a pretty steep cost to pay for 30 or 40 years.
If all they are doing is move you’re money around using a robo system, they aren’t adding any value. I would much rather pay a fee for the service provided rather than pay a percentage of assets.
No. There are fee-only financial advisors who can do the job equally well. Mine charged $1200 for three sessions, well under a percentage of my portfolio.
Only if your own investing impulses really need restraint and you have less than $1 million in assets. If you are prone to shooting yourself in the foot, you probably are costing yourself well more than 1% a year. Following the advice of an advisor may help steer you away from the typical costly mistakes many investors make.
This depends on your level of assets. The larger your financial assets, the more likely the answer to this question is no. A good financial advisor can be worth it if she 1) puts your interests ahead of hers; 2) does more than just manage your portfolio; 3) keeps investment expenses very low; and (especially) 4) keeps you from making major behavioral mistakes.
Interesting; however, think about this, if they work for a big firm Vanguard, Fidelity, Schwab, Morgan Stanley, Goldman Sachs, or any other of hundreds of fiduciaries, can they really “tailor” a portfolio to your needs other than following their internal investment committee portfolio recommendations? I doubt it and they will not let you decide where to invest the money, since you give over full investment discretion to them.
I told them (fiduciaries or non-fiduciary investment advisors) where they could go when I interviewed 15 of them back in 2016, before I retired. Even Vanguard (where I held my 401k and were the distributor of my defined benefit plan assets), would not allow me to “approve” where or how to invest my money, since their portfolio investments/diversification was based on their risk profile questionnaire, which is nothing more than a legal ploy to avoid liability IMO. Oh, and you pay that fee even if they hold some of your money in cash/money market. And, cash is an investment.
Food For Thought!
Right on! Also nobody mentioned the time it takes to manage a portfolio. I would rather be spending time with my grandchildren than going over financial information. Which you can’t get back no matter how much money you have.
You may want to rethink this logic. As mentioned by mytimetotravel, it doesn’t take much time to manage one’s portfolio, but it can cost a lot of time in working “extra hours” in the office/at the job to makeup for the 1% fee one pays a financial advisor. For example, it may take 10 hours or so of reading personal finance books to learn enough to manage your portfolio. This would be year 1. After you have the knowledge, it only takes maybe 1 or 2 hours per year thereafter to manage your portfolio. So, let’s pretend, for ease of calculation, John has a 1 million dollar portfolio. Based on your thinking, John would rather pay a financial advisor to manage it, so he can spend more time doing other things he enjoys (e.g., time with grandchildren). Thus, he pays $10,000 per year for this time ($1,000,000 x .01). However, lets pretend John decides to manage it himself because he learned that passive index funds (see SPIVA report) outperform over 5 plus years active managed funds and because he would actually save a lot of money and time managing it himself. Asssuming he spends approximately 10 hours in the first year to learn enough about how to self-manage his portfolio, what would his hourly rate be if he paid himself the 1% fee? His hourly rate would be $1,000 ($10,000/10 hours). John makes a lot less than $1,000 per hour at his job. John makes $50 per hour at his job. How many hours would John have to work to make up for this $10,000 fee? John would have to work an “extra” 200 hours ($10,000/$50 per hour) to make up for this 1% fee. 200 hours is equivalent to 5 “extra” weeks (200/40hr work week) of work to pay this 1% fee. So, if John really wants to “buy” time or have extra time doing other things, he just realized that it would only cost him about 10 hours to do it himself and about 200 hours (5 weeks of work) to have a financial advisor do it. John decides he would much rather spend 10 hours or so learning how to manage his own portfolio then an extra 200 hours of work. He also realizes this is only the case for year 1. After year 1 and spending 10 hours or so learning how to manage his own funds, then the time requirement for him to continue to manage his own portfolio drops considerably, to maybe 1 or 2 hours per year.
To summarize, paying someone else, like a financial advisor a 1% fee, to manage one’s portfolio actually often times does the opposite of freeing up time to do other things, because those people will have to work more in the “office” to make up for that 1% fee.
Once you set your asset allocation and choose a mix of low or no cost index mutual funds, all you need to do is rebalance occasionally. You could do fine just checking your balance a couple of times a year.