FREE NEWSLETTER
Go to main Forum page »
Suzie and I present a microcosm of the debate around financial advisors. I choose to use Vanguard and keep my costs low, whereas Suzie uses a former long-time colleague from her days in the banking sector who happens to be an independent wealth manager to operate her portfolio. To me, the portfolio seems unnecessarily complicated with an average fund fee of slightly over 1.5% in addition to a 0.5% advisor fee. This seems exorbitant in my eyes.
My wife’s portfolio is approximately 50% larger than mine but pays 900% more in fees. And no, I didn’t make a mistake with an extra zero. The difference in absolute fees becomes even more substantial as the portfolio grows. While my Vanguard fees benefit from the platform’s fee cap, Suzie’s fees continue to scale directly with the size of her portfolio. This illustrates how the impact of higher percentage fees becomes increasingly significant, dramatically reducing the potential for long-term compound growth on larger sums of money.
For simplicity’s sake, if I take a 7% average gross return, my portfolio will be bigger than Suzie’s within 25 years. If that doesn’t work as a stark reminder about the corrosive effect of fees, I really don’t know what will. (I got Google Gemini to work this out for me)
The question is whether the additional services provided by Suzie’s wealth manager justify the significantly higher cost, especially when simpler, lower-cost alternatives exist. Luckily for me, I’m in the privileged position that Suzie is my wife and doesn’t mind me logging into her portfolio’s access portal and nosing around. Our portfolios are substantially similar in makeup. I’ve a slightly higher equity allocation, and Suzie has more infrastructure and utilities, which I think is the reason it had slightly less volatility during the recent market turmoil. But our performance before fees is not much different. In fact, I’m performing slightly better, which might be my marginally higher equity percentage in play.
But I can categorically state there is no massive outperformance in the high-fee option.
“How could you have let this come about?” you may be thinking to yourself. In my defense, until very recently, I was consumed by running my business and, at the end of the day, it’s not my portfolio, although it’s intimately linked to mine and my wife’s future financial well-being. The fact of the matter is it’s Suzie’s portfolio.. But the question has definitely been on my mind to the extent it was causing me sleepless nights
I did what all married couples in a strong, loving relationship would do. I broached the topic, and we talked. I even used the figures in this article to illustrate my point, and thankfully, I’ve had some success. Recently, we sat together and opened an account with Vanguard for Suzie. It’s only been funded with the minimum opening requirements so far. I wait for my wife to gather the courage to speak with an advisor who was a long-term work colleague and friend about moving her funds from his business.
You can always just select your own stocks – then you are the charlatan! At least you know who to blame.
The overwhelming majority of these charlatans that call themselves advisors are just that; quacks. If you really cannot buy index funds on your own, do hire a fee based CFP
For people can’t or don’t want to self-manage, hiring a manager may be their only option. However, producing returns that will pay for these fees and produce reasonable net rates of return is very difficult. Active v. passive investing has been extensively studied and the consensus appears to be that, over time, passive management w/low fees will outperform active managers. Suzie may be more comfortable with her manager, but must also accept that there is seldom a free lunch in investing and that her returns may lag yours due to the 2.0% fee hurdle she must overcome before generating any net returns.
When my sister was alive, she was using a financial adviser who was charging her 1% on her assets. The adviser put her into individual stocks – – some ok, some not so. The not so ones included some bankrupt companies! After many tries at getting her to fire this adviser, she finally did and I took over handling her investments at no cost. My sister was very upset when she had to fire the adviser. I have no problem with firing an adviser and I hope your wife comes to her senses and does the same to this one.
I like to say “everyone has to eat” when I see an owl grab a squirrel from the tree. Given how many people I know who are “financial advisors” it makes sense they have to peddle products that have fees and charge fees. I have a basket of stocks, index funds and AAA & Government bonds that I manage myself – I prefer it that way even though I can concede to some self inflicted mistakes that impacted my returns. The most telling thing to me about the advisor business was how hard it was to find a decent reputable FEE ONLY person I could buy some time from to help me review my retirement projections … maybe if more people asked for that there would be a better market place of fiduciary, fee only advisors.
I’d like to read Suzie’s response to this post.
I was encouraged by a financial advisor to hire him because one large investment in my portfolio was tax-inefficient, and he could clear it up. I was also expected to agree to allowing him wide discretion in making investments for me with an aggressive objective. It would take 10-15 years to clear the tax inefficiencies with a matching bundle of individual investments, during which he would take as commissions at least half of the amount of the inefficiencies through annual fees. Retaining my half of the tax benefits depended on his investing success. Guess how I decided? Better yet, guess how fast I rejected the proposal.
Happy to hear your wife has heard you. There is NO reason in my understanding of your situation, that your wife should pay such exorbitant fees. Find an agreeable Trusted Advisor, Vanguard, Fidelity and others seems to be a great place to start. Happy you discussed this subject because I suspect you will save $1000’s if not $Millions. If you have doubts, just invest in an ETF of the S&P 500, like VOO from Vanguard, or other trusted companies.
I agree that Vanguard Advisors seems like the clear winner in this scenario, but I will offer that there are good flat-fee advisors out there that can be comparable to Vanguard’s fees (at certain asset levels) and provide solid advice in line with the Humble Dollar ethos. We retained one that would be familiar to readers here, and have been very pleased so far. While we were in good shape thanks to great advice discerned over the years from Jonathan and others on this forum, our advisor is helping us navigate some tricky stuff as I approach retirement and start selling back company stock. He and his team would also provide good guidance should I pre-decease my wife, since I’ve been on point for our financial planning throughout our marriage, and that gives me great comfort.
One of the issues here is whether a spouse wants to manage his/her portfolio. I currently manage my wife’s which is about half the size of mine. We are at Fidelity with all low cost index funds except she has some stock in Starbucks for reasons I can’t fathom. She doesn’t go there but it was a position from her high cost advisor that she had until the advisor dropped her like a lead balloon when the fiduciary rules came about. The reason that she was with the high cost advisor was that I was concerned that if I died she had no clue what to do and did not care to learn. She had a girlfriend with an advisor so she picked her. I started running the numbers but she liked her advisor. I wasn’t going to go there. It was fortuitous that the advisor dropped her and I just put everything except the Starbucks (I think she just likes owning part of a visible company) in the index funds at Fidelity. I think she’s currently 70% stocks, 30% bonds. If something happens to me now, she can probably let the accounts sit as rebalancing probably won’t matter. We are both retired and really don’t need our investments unless we end up in long term care.
Here is a past post about how the numbers work out. It is not the whole story of the benefits of a good advisor but it should not be ignored.
https://humbledollar.com/forum/the-silent-compounding-cost-of-a-1-fee/
My Vanguard advisor is great and has a 0.3% fee. My previous Wells Fargo wealth advisor charged 1% and offered some high fee products and gave me a portfolio that earned 2% less than my Vanguard portfolio. Firing him and moving over to Vanguard has given me large returns with low fees.
To quote John Bogle I believe, “you get to keep what you don’t pay for”, referring to high fees versus low fees
Mark: You are fortunate to have a working spouse who will listen to your concerns regarding her portfolio. I am glad she has taken the steps necessary to begin to transfer her accounts to Vanguard.
I can guarantee you that there is no way a “wealth manager” of any kind, from anywhere, can beat Vanguard (or Fidelity, or Schwab) when they are gouging their client for 2% in fees annually.
Having been intimately involved in training 1000’s of CFP, ChFC, CLU, and RICP candidates for over 15 years, the math is the math.
As a few others mentioned, planning for your financial future with your portfolio being separately advised is absolutely suboptimal. Good luck getting it all combined under one roof.
Even if you choose to use Vanguard’s PAS Program, the 30 basis points vs. 2% alone will enable your wife to increase her returns, to say nothing about stopping the endless bleeding in fees.
This article leads me to ask a question I’ve thought of lately.
Do financial advisors separate their roles? I do not want investing advice but I would be interested in tax, inheritance planning, etc
You may have luck simply finding an attorney who specializes in taxes and inheritance planning. We just did that. There probably are financial advisors that specialize in taxes, but usually a CPA or an estate planning attorney is all you need.
Some will do so, usually the single advisor firms who are trying to increase customer count. I had one talk to our retirement club here and he advised that he will handle non-investing subjects for a flat fee.
Thanks, Dan
Good luck with this.
Question Mark: Do you and your wife’s advisor also look at your combined portfolios from a total allocation standpoint?
No. Although he’s aware of my portfolio’s overall size and that it’s somewhat more aggressive than Suzie’s, I haven’t disclosed its specific details, and he hasn’t inquired. His cash flow and stress testing are conducted on the combined assets using Suzie’s risk tolerance, likely because he knows I have a more independent approach to retirement planning. But I get Suzie to ask him countless questions….. might as well get some value!
Seems like not knowing your allocation and reconciling the difference he can’t really give your wife good advice.
It seems like it would be similar you placing a bet on the outcome at the halftime of a football match (see we know some of your lingo) featuring the Irish National Team without knowing the present score.
David; Thanks for your excellent points. Reflecting on them overnight, I think it wouldn’t hurt if I engage more fully with the advisor for possibly more holistic and comprehensive advice whilst Suzie is still a client. I appreciate the perspective.
As for your analogy, that’s easy… they would lose!
You’re more than welcome. I’d be interested in your perspective on how the potential meeting went.
BTW, an easy bet huh?
I shall post on the outcome. Although it’ll be a couple of months when we head back down home.
Your title “The High Cost of Financial Advice: A Tale of Two Portfolios” gives me a feeling that your story might be missing something important. Any good financial advisor provides far more than portfolio management: holistic financial planning, tax optimization, estate planning and wealth transfer, asset protection and risk management, access to exclusive opportunities only advisors have, peace of mind and confidence.
You would need to go to a good sized firm to get all that. Most financial advisors cannot do all that on their own. They would need to have estate planning attorney on staff, a CPA, and insurance licensed professionals.
Interesting thought. We tried out an advisor (my wife’s parents use them), and while they had some advice, most of it was either pretty obvious, or contrary to what we believe, and it seems that many advisors (I went to a meeting with my parents’ advisor as well, and my employer has a Prudential advisor that we can talk to a couple times a year for free), don’t understand:
Lastly, I’m the treasurer for various non-profits, and one of them has a high-paid advisor and gets worse returns than my Vanguard/Fidelity funds, and isn’t really available for questions, and is too large for me – I have to explain who I am every time I call.
I don’t know enough about tax optimization, so it would be good to learn more about that (I know the basics, and my current strategy (in the earnings phase) is to max out the HSA, 1 Roth 401k, 1 401k, and an additional 25% from the self-employed “employer” portion into the pre-tax fund, and then 2*Roth IRAs, and assuming early retirement, will start moving pre-tax funds into the Roths when at the 12% tax bracket. (So, I’m figuring that is decent, at least)
But, for the non-profits, where tax optimization doesn’t matter at all (I think), I don’t think we are getting *any* value from the advisor, and I’ve been planning on moving the money to Fidelity, and I think I will print out this article for the organization to assure them I know what I’m talking about.
Thoughts?
Exactly right. I came here to say the same thing. Many people focus on portfolio performance. A good advisor’s value cannot be really be quantified. We choose the middle ground between quasi DIY at a brokerage like Vanguard and AUM but we get holistic advice from a flat fee only advisor who charges on a retainer basis. Investment management is second to planning and advice but it is in mostly a few passive index funds.
My spouse and I have built portfolios based upon our individual earnings. However, I added to her annual Roth contributions from time to time so she could maximize these; she DCA’d into her traditional retirement account first.
Her Roth was self-directed but four years later the School District changed the list of “approved” brokers for her 403b. I always considered this a ploy to direct fees to specific firms. At one time Vanguard was on the list but was removed by the district. So, she had two 403b’s; one with Vanguard and one under the management of a broker approved by the district when they removed Vanguard.
Of course, the District made zero contribution to these retirement accounts, basically directing employees to spend via higher fees.
Her fees were higher with the non-Vanguard broker, and that broker preferred actively managed funds. No surprise there. The composite of all of her ETFs and mutual funds had an average fee of 0.49%. One “balanced” fund charged 0.92% and another fund 0.97%; they represented 32% of her portfolio. Others charged fees of 0.25% to 0.58%.
I’ve repeatedly suggested that she transition to low cost ETFs. That would give her a small annual gain simply via the reduced fees.
I run three sets of numbers for the family portfolios: “ours”, “hers” and “mine”. The one that really matters is “ours” which is a combination of all. This is also run through Quicken’s “Lifetime Planner” and other tools.
Each of us has traditional retirement accounts, a Roth and a brokerage account. We are aware of the performance of each and various sub-groups. In fact, the reason to run separate numbers is to provide an indication of how our slightly differing approaches perform. However, G has followed my lead with ETFs or mutual funds as “ballast” for a foundation enhanced with individual stocks. Her equities are about 55% growth.
When G retired she shifted her brokerage 403b to a self-directed IRA. That eliminated a small annual fee.
Luckily many years ago I came across some life changing books from John Bogles and others. Those books have shielded me from all the nonsense and fluff in the financial media.
List your top 3 books please
Mark, I wrote of this before you became a contributor. I have a similar situation with an advisor who is a friend of mine. I worked briefly as an advisor, and when I left that business and started my tax prep business, I transferred my IRA to my friend Dustin. Dustin began to refer his clients to me for taxes, contributing greatly to my success as a tax preparer. About ¼ of our funds are still with Dustin, as I feel it would be disloyal to leave him. The difference is that Dustin only charges me .35%, and the investments are ETFs. It seems to me that Suzie’s friend is taking advantage.
My other thought is of the state of Ohio’s teachers pension. Ohio has been paying advisors millions in fees to manage a portfolio that contains all sorts of esoteric investments. An investigation of the fund revealed that simple low cost investment vehicles would have out performed the pros.
The Ohio Teacher’s pension fund is where my mom’s pension came from too. Would be nice if they switched to something lower cost so they could pay out more to the teachers. That being said I am grateful she has a pension as I do not (the problem I see with most of the annuities as they are not inflation adjusted and only have a 10 year payout guarantee – like the ones at TIAA when much of my money is as I am university faculty and that is what many colleges and universities use).
Liz, regarding annuities, check out options at a place such as Fidelity. You will find single premium immediate annuities that offer lifetime and survivor payouts. While they don’t have COLAs, it is possible to buy one that rises by a fixed amount each year, though that option can be costly.
0.035% or 0.35%? I’d have said the former scarcely would cover his costs and regulatory compliance.
Good catch BB, it’s .35.
Dan, I feel the same, hopefully we’re heading down the right path now.
The friend / old colleague scenario certainly does make things a little more difficult, but sounds like you’re on the right path to simplicity and low cost.
We use an advisor here in Australia, but on a flat fee basis, no percentage of AUM. Mainly for the purpose of tax minimisation and advice on our self managed superannuation fund.
“Suzie uses a former long-time colleague from her days in the banking sector…”
It’s hard to convince someone that there are other alternatives. A retired acquaintance uses a large bank to manage his retirement portfolio only because there was a family connection to a retired VP at that bank. This person pays exorbitant fees, and they are aware of that, but they feel safe where the funds are. Sometimes you’re stuck with higher fees because you don’t want to break the friendship or family connection.
My grandmother used Mellon Bank which has high fees. When she died my dad took his share of the money and invested it using someone who worked for an large investment firm. His sister left the money with the bank. Dad came out way ahead (no idea how the mix of the funds were invested between the two).
How come there’s an advisor fee as well as an AUM? I thought the AUM was the advisor’s fee. Not that I’ve ever paid one. That friend thing is a trap that Edward Jones is infamous for.
Apologies! Silly me. The 1.5% is the average annual underlying fund fees and the 0.5% is the AUM fee (advisor fee) sorry about that.
I’m just fascinated you write in terms of his and her portfolios and her and mine advisors.
I’ve been beaten up on this before, but I just don’t get it. But just another of my old ways of thinking.
Our entire net worth is ours. Only out of legal necessity are the IRAs in other than joint accounts.
Dick, you and Connie have had one long and successful marriage, and I think that has to color the way you think about your assets being one big pot of money.
The view from people who have survived a divorce or two can look very different. Many marriages fail due to money, so it’s natural to keep things separate the second time around. Chris and I kept our own accounts for about 16 years. We each held up our own end, and didn’t need to question each other’s spending.
These days we’re finally down to joint checking and brokerage accounts, but I totally understand why others keep things unconnected. After all, if it ain’t broke, don’t fix it.
I suspect you are right. I see it as a matter of trust.
Dick – Here’s another beating. Your world view prefers to think in terms of your existence and no one else’s. I’m sure I speak for a minority of HD subscribers – – – but this is the second marriage for both my wife and me. We both have children from our prior marriages. We maintain financial separation to eliminate “who owns what” discussions in the future. The only thing that is “ours” is home upkeep account, joint expenses, and experiences. Everything else is kept separate. What you view as a legal necessity is a practical necessity for us. We have wills and trusts that spell out what happens when one of us croaks. Our home is in a trust that provides a life estate for the survivor (likely her) and the division of sales value when the time comes.
You’re right, my view is a marriage is only ours.
These were my thoughts exactly. From day one and for the last forty eight years all finances through good and bad times are always”ours”.
Our money accounts are one plan not three. I am thankful to say we’ve never had an argument over money…. But we have had every other argument there is to be had
Before we got married my wife of 45+ years joked that “what’s hers is hers and that what yours (mine) is hers!”.
Actually we always had joint accounts, except for our IRAs.
We both have the same attitude towards money and, like you L H, have never had an argument over it.
Also like you L H, we’ve probably had every other argument there is to be had.
At least we’re both Cubs fans :-;
Our net worth is also ours. But it doesn’t distract from the point that Suzie runs her portfolio in a totally different way to me and at the moment pays very high fees.
But nothing seems “our” portfolio. One pool of funds.
Not criticizing, just not something I understand for a married couple. I know your approach is quite common.
If they weren’t separate portfolios, I wouldn’t have been able to make the comparison 😂
Can’t argue with that. Have you kissed the Barney Stone lately?
Not in a few years. Suzie is an acceptable substitute 😂