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Worth Asset Management Fees?

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  • Worth Asset Management Fees?

    A lot has been said re: educating yourself in managing your own money, low fee index fund investing, maximizing tax advantaged strategies, fee only based hourly advisors,etc ..... basically you can do all this yourself, diversify with low cost broad market based funds, and don't pay anything extra.

    However if in position of high net worth (>5-10M of retirement/non-retirement assets), no liabilities/outstanding loans, maximizing all retirement avenues, fully funded 529 plans and still with strong cash flow, would finding an appropriate financial advisor for high net worth families/individuals often working for %age fee for AUM (assets under management) make sense??

    I am looking for access to non-public non-marketable equity positions (private equity real estate, direct lending, opportunistic funds), purchasing annuity/lottery payments for fixed income revenue stream, and non-market correlated, low volatility, more recession proof investments that could not get access to otherwise.

    Quoting 0.8% AUM fees in addition to management fees paid for underlying equity positions

    Thoughts from the group on if wise to go this avenue or still with basic vanguard like index funds which is simple enough to do and regularly rebalance?

  • #2
    0.8% is 40K on 5MM.......

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    • #3
      So you think an advisor can beat the market for you? I'm not necessarily anti-AUM model, I just wouldn't support your decision for the reasons you listed. An advisor is typically most helpful in one of three ways:
      • Developing a plan that accounts for the underlying goals, resources, and spending/saving habits the investments are intended to support. This in order to know if you're on track and how to make the best decisions to reach those goals,
      • Behavior management, and
      • Reducing your workload
      Financial planning, investment management and CPA services for medical professionals | 270-247-6087

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      • #4
        I am looking for access to non-public non-marketable equity positions (private equity real estate, direct lending, opportunistic funds), purchasing annuity/lottery payments for fixed income revenue stream, and non-market correlated, low volatility, more recession proof investments that could not get access to otherwise.
        Most financial advisors don't give much advice on private investments. I suppose if you could get really high quality advice/analysis on them a significant fee could be justified. Whether you pay that as an AUM fee or a flat fee doesn't matter much, just so long as you know what the fee is and feel it is less than the value you are getting and can't get similar qualify advice elsewhere for less.
        Helping those who wear the white coat get a fair shake on Wall Street since 2011

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        • Sparky
          Sparky commented
          Editing a comment
          thanks for all the responses. Its not the "advice" that justifies the payment, some of that is simple access to these investments as well.

          For example, how does an individual get access to large private equity fund markets- typically I think they are advertised to large pension funds, endowments, super high net worth family offices, etc. OR you can get a piece of the action (typically 250K minimum) with a firm advising high net worth clients who want this access and pooling the money of those interested.

          I think the advisors in these cases, do the due diligence on many investments they are approached with and all the vetting for you as part of their fee structure .

          A friend of mine got access to and eventually invested in a lottery annuity for 200K principle- paying 8% annualized over 5 years from the State of Texas lottery commission via such arrangements with his advisor. How do you even get these without special access??

      • #5
        I find this type of discussion interesting because of the investment process/considerations change after having a certain level of net worth relative to what helped you get that level beforehand.

        A couple of points to OP:
        a. Congrats, being in a financial position to consider the question asked.

        b. My concerns with the approach you are contemplating;
        1. Appropriate vetting of 'financial advisor' in light of assets you are targeting. There is a lot more room for less than totally honest folks in the types of asset(s) mentioned.
        2. The reason for the types of assets your are seeking 'non-market correlated, low volatility, more recession proof...' with an AUM makes it significantly more difficult to archive a reasonable risk-adjusted return.
        3. A 'family office' relationship would be a better approach to access these type of assets without the worry of vetting (say Northern Trust). The issue is that even at 10 million of investable assets would be challenging when 30 to 50 million is where a family office starts to make sense.
        4. .8% seems low for an AUM for these types of assets exclusively and very high if all your assets are included.

        c. Correlation is always a moving target/figure and IRR shown is always for the first dollars in an investment idea.

        d. Hatton has spoken about this a couple times I believe, but an 'investment club' with a set of individuals whom are able to commit a total and/or a certain amount to an investment idea/strategy. The club meets and everyone vets with sub-committee's setup to do a deep dive into potential investments requiring additional due diligence. If you have the time/inclination, will allow you to learn alot about how these type of assets are evaluated and valued.

        e. Cash or Muni's potentially fit the bill or low volatility, non-market correlated, recession-proof as an investment(s).
        Last edited by ajm184; 01-15-2020, 08:22 AM.

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        • #6
          honest question:

          why?

          in such a position I’d park something like 5 years worth expenses in fixed income, the rest in boring cheap equity index funds, and worry about nothing

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          • Tim
            Tim commented
            Editing a comment
            For some, it’s no longer really about returns or risk management. It can simply be enjoyable or an element of humble brag.
            “A friend of mine got access to and eventually invested in a lottery annuity for 200K principle- paying 8% annualized over 5 years from the State of Texas lottery commission via such arrangements with his advisor. How do you even get these without special access??”
            It’s a neat little story. But behind the scene is a network of connections in managing public assets mired in the “good old boy network “ that is buried with some extremely lucrative fees. Lottery and the Permanent Endowment Fund are two recent examples. I am not criticizing the 8%, it could have been 4%. It was limited to $200k, so the “crumbs” handed out won’t move the needle. The ability to raise these funds justifies extremely lucrative advisor/management fees.

            It’s a nice conversation piece. Won’t move the needle for the investor or the advisor. The money is in the fees, not the rate of interest. It’s behavioral finance, look how important I am. You can’t run a portfolio on it though. Fun, exciting, feels good and a good story.

          • Sparky
            Sparky commented
            Editing a comment
            The "why" is the long term picture regarding financial, estate, tax, and asset management. We are a physician couple in our early 40s, have no liabilities, college education done and saved for via 529s, maximizing retirement plans as much as we can (1M total thus far since earning income as residents at age 26) and are still avid savers- saving 300-350K annually after taxes and expenses with a net worth approximating 10M. I think we are doing everything "right" by being savers, building net worth, maximizing our gifting out of our estate each year, etc.
            But we need certain level of advisors (accountant, legal, financial, estate planning) as we will certainly hit estate tax limits with our life expectancy, growth of net worth, and adding in life insurance death benefits. And we have malpractice and creditor risk. With continued luck, our net worth will be significantly higher by retirement.....So we have committed ourselves fairly complicated planning with family LLPs, spousal SLATs, ILITS, Irrevocable trusts for the kids, etc etc etc. We dont want to pay a dime of estate tax.

            We are NEVER looking to "beat the market" - in fact a cool 5-7% annually would suit us just fine. A good mix of index funds can give you that but we like income generating, cash flow generating, low volatility non-market correlated investments as a part of our portfolio (25-40%). I hate the market volatility and would easily give up a 20% up year to avoid a 20% down year. It seems to me that some of the reason for significant wealth in this country is that some people never really lose- even in a down turn recession market- they continue to make single digit positive returns year after year. I think how you invest is a major reason why.

          • Tim
            Tim commented
            Editing a comment
            @sparky,
            My comment was geared to the $200k deal tapping into “deals” only available by paying fees.
            You point about estate taxes and profession advice is 100% valid. That is purely a question of which legal entity owns the asset, not the deal.
            You are looking for PE deals that normally involve substantially more risk that produces a greater return and/or a longer term period of illiquidity. On top of that, the Lottery bond deal implies a desire for safety.
            Equity- public/private
            Debt - public/private
            Decide that asset classes
            The non-correlated is your preference for tilt. Choose the best available vehicle. Raising private equity is a business. Government bonds are the safest, but that’s why they pay so little.

            Now for estate taxes. I hope you fail miserably and owe a ton. Not for the tax, but you ended up just being too dang good!

            An alternative is the George Steinbrenner plan. The NY Yankees passed to his family estate tax free. Sometimes luck beats an army of advisers. The estate tax had lapsed at the time of his death.
            Best wishes.

        • #7
          I think if you pay those $40k/year fees then eventually you'll get access to some 8% return private investment. By then, all those fee's you've paid would have made more than 8% probably

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          • #8
            two different problems, the estate tax issue you see prompting you to get into FLPs, trusts etc and then the alternative investments. Not sure what one has to do with the other.

            If you anticipate having too much money then why the want for cash flow generation? Equities that don’t throw off a lot of tax drag and get a step up in basis are pretty hard to beat

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