By Dr. James M. Dahle, WCI Founder
It has been a long time since I have written much about financial advisors, a frequent subject on this blog in the early days. I have a serious conflict of interest there, given that I have a large number of advertisers that are financial advisors, even if they account for a relatively small percentage of the revenue of The White Coat Investor, LLC. Choosing who can go on my financial advisor recommendation page has given me more heartburn over the years than any other aspect of this business. I have left a lot of money on the table there and maybe I should have left even more. Part of the issue is that there are no perfect financial advisors.
Today, however, we're going to talk once more about how to find a good financial advisor at a fair price. I am often accused of being anti-advisor, but that really isn't true. I'm anti-bad advice and I'm anti-overpriced advice, but I have no problem with good advice at a fair price. There are four main methods of paying for financial advice, and some advisors use two, three, or even all four methods. They are:
- Asset Under Management (AUM) Fees
- Annual Retainer Fees
- Hourly Fees
Financial Advisor Commissions
The problem with number one is that the conflicts of interest are so large that even good people cannot withstand them for an entire career. The worst investment (and insurance) products carry the highest commissions. They have to in order to be sold. So your advisor is constantly faced with the dilemma of sending your kids to college or sending his kids to college. That's too much to ask from your advisor. Paying for advice in this manner is not only likely to cause you to end up in high cost, poorly performing investments, but you are also likely to switch between them way too often, generating additional costs and lowering returns.
The problem with number two is not necessarily that the advice is bad. There are some conflicts of interest involved in this model including:
- Incentivized against recommending you pay down your student loans instead of investing
- Incentivized against recommending you pay off your mortgage instead of investing
- Incentivized to recommend too high of a savings rate
- Incentivized to recommend too low of a retirement withdrawal rate
- Incentivized to recommend ill-advised IRA rollovers if they are paid on IRA balances but not 401(k) balances
These are relatively minor conflicts of interest compared to those introduced by paying commissions in my opinion. Plus, these fee-only advisors generally have a fiduciary duty to you and frankly, know a lot more about investing than the salesmen. So I have always been okay with you using an advisor who charges AUM fees.
The problem, however, is these advisors often charge too much for that good advice. How much is too much? Well, if you can get the same quality advice for much less elsewhere, you are paying too much. Since you can find good advice for a four-figure amount per year, I see little reason to pay a five figure amount. That's why AUM fees have always been my second least favorite way to pay for advice.
I have sold ads to advisors who charge AUM fees for years and continue to do so. About half of those on my recommended advisor page charge AUM fees. They may also offer some or all services for flat or hourly fees, of course. At the beginning of this site, I simply could not find enough advisors that charged flat fees or hourly fees anywhere, much less the local advisor that readers often asked for. They simply weren't out there and I had to recommend someone.
The other dilemma is that financial advisory firms charging flat fees tend to not be as profitable as the ones charging AUM fees. The entrepreneur in me has great respect for an advisor who can manage to convince clients she is providing a great value at $50K a year while other advisors are charging $5K for similar advice. Those sorts of fees also provide a lot of money to buy ads, like those I sell here at The White Coat Investor. The investor advocate in me, of course, feels an intense set of guilt at the idea of sending a reader to an advisor who potentially could be charging them $50K a year at some point.
Doing the Math on AUM Fees
So I have always recommended that my readers actually do the math each year if their advisor is charging AUM fees and ensure that they are getting more value out of the relationship than the cost. I didn't think that was really all that hard, but maybe I was asking too much. Today let's actually do some math using the fee schedules of a couple of real but unnamed advisory firms as examples. Here's one:
AUM Fee Schedule
- <$250K 1.75% AUM
- $250-500K 1.5% AUM
- $500K-$1M 1.25% AUM
- $1-2M 1% AUM
- $2-3M 0.9% AUM
- $3-4M 0.8% AUM
- $4-5M 0.7% AUM
The nice thing about this firm is that they will take you with zero assets and give you advice. If you have zero assets, and you are paying an AUM fee, that's a very nice price, at least for that year. But let's do the math on how much that advice will cost you each year as your assets under management grow. Remember that most advisory firm fee schedules like this one “fill the buckets,” so even if you have $3 Million, you are still paying 1.75% on your first $250K. This is what the fee schedule above really looks like.
As you can see, you don't have to get very far down that list before you are paying a five-figure amount in advisory fees each year. I never recommended the asset management services of this particular firm because I thought those fees were too high. Let's take a look at another firm whose asset management services I actually have recommended.
- <$250K 0.78%
- $250K-$2M 0.72%
- $2-4M 0.58%
- $4-5M 0.48%
- $5-10M 0.43%
- >$10M 0.33%
This is obviously much lower than average and dramatically lower than the firm above. They will also take you with zero assets, which is really important for doctors since the time they need the advice the most is in the beginning when they don't have much. An advisor with a $500K or $1M minimum isn't very useful to most docs in those early years. So what do these fees actually add up to?
As you can see, those fees are dramatically less than those of the first firm. How much lower? The math is elementary.
It is pretty easy to see why I chose to recommend the second advisor but not the first, no? Especially if you compound the difference in those fees over decades. That said, I think a halfway decent physician saver probably ought to fire both advisors by mid-career. In the first case, the fees hit a five-figure amount at an asset level of around $700,000. In the second case, the fees hit a five-figure amount at a little under $1.5 Million. For a physician saving $50,000 a year and earning 8% a year on it, those figures should be hit approximately 10 years and 16 years out of residency respectively. Another alternative to firing the advisor, of course, is to negotiate a cap on fees. At that point the advisor is faced with a tough decision–either do the same work they did last year for the same fee or lose $10K in revenue. I suspect many will choose to cut you at least a partial reduction in fees. But I have zero problem with you using that advisor while you learn to manage your own assets or even until the fees add up to an onerous amount and am perfectly happy to recommend them and take their advertising dollars.
Flat and Hourly Fee Advisors
However, my preferred methods of paying for financial advice are flat annual fees (typically for investment management) and hourly fees (typically for financial planning.) Doctors, lawyers, accountants, and many other kinds of professionals are paid this way, why not financial advisors? Can you imagine charging your patients an AUM fee? Insane, right? But does it really take a lot more time to manage a $1M portfolio than a $100K portfolio? Not really. Perhaps there is more risk there if the advisor screws up and gets sued. Perhaps there are a few more accounts to manage. Perhaps a slightly higher fee can be justified. But a 10X fee? No way. In addition, an AUM arrangement really isn't fair to the advisor when you have a small portfolio. 1% of $10K is only $100. How much time do you really expect from a professional for a mere $100?
To be fair, at a low level of assets, it can be cheaper to use an advisor charging AUM fees than one who charges a flat annual retainer. Nearly all of the flat fees charged below are four-figure amounts, but there is still a lot of variation there. For ease of reference, consider one who charges a fee of $7,500 per year. It is the same fee when you have $50K as $5 Million. Let's compare that to what you are paying the two AUM advisors above.
As you can see, up until an asset level of nearly $500,000 with the expensive AUM advisor and a little over a million with the cheaper AUM advisor versus the flat fee advisor, you're actually paying less by using an AUM advisor. How long will it take to get there? Well, it depends mostly on how much you save and a little on how much you earn. But saving $50,000 a year and earning 8% per year, we're talking about 8 years and 13 years respectively. That could take even longer if the advisor is only charging AUM fees on your taxable and Roth IRA accounts and not your 401(k). You just have to do the math each year to know.
Best Flat Fee or Hourly Rate Advisors
At any rate, I thought today I would highlight the advisors currently on my recommended list who do not charge any AUM fees whatsoever. Over the years I have slowly acquired these advisors. They tend to be very fee-sensitive and really don't buy very many ads from me. But they're doing some awesome work and I think they deserve some recognition for it. None of them knew this post was coming and while all have paid me to advertise, none paid anything extra to be written about in this post. I have listed them in a completely random order. Since this post is all about getting a fair price, I'm just going to focus on the fees today. If you want to learn more about these firms visit the Recommended Financial Advisors page and actually read the application they had to submit to me in order to advertise here. The other benefit of doing a post like this is that listing them all out like this makes it really clear to see what the going rate is for high-quality financial advice–a four-figure amount per year. It's amazing how few doctors know what financial advice should cost.
- Student Loan Planning Only: One-time fee of $500 ($750 for two borrowers)
- Financial planning only: $100 per month ($150 dual-earner) for trainees, $1.000 upfront plus $200-250/month for attendings
- Financial planning and investment management: Starts at $1,000 per quarter ($4,000 per year)
If you can get an advisor so dedicated to his craft for $4K per year, why would you ever pay $40K?
- Comprehensive Financial Plan – $3,000 plus a minimum of 12 months of ongoing planning support
- Financial Review for Long-term DIYers – $1,000 plus a minimum of 4 months of ongoing planning support
- Ongoing planning support – $125 per month
One of the fun parts about Aptus is they are actually positioning themselves toward people who want to do it themselves but don't yet feel comfortable. They want you to fire them and consider that a sign that their work is successful. But at just $1,500 per year, you can see why many of their clients don't.
- Flat monthly fees start at $165 per month ($1,980 per year)
Yes, the fees start there and yours may be higher, but when you start that low they can go up quite a bit and stay within a four-figure amount.
- Student Loan Review – $250
- Financial Plan – $1,000 – $3,000
Ongoing Financial Planning
- Resident/Fellow – $50/month
- Financial Planning – $200/month
- Early Investors (<$500K in AUM) – $350/month
- Foundation Builders ( $500K-$1M in AUM ) – $675/month
- Financially Independent (>$1M in AUM) – $1,000/month
This fee schedule is a little more complex and even a little AUMy, but it's still quite low and there is a cap on it at $12K/year. Bear in mind those ongoing services include tax services, which most advisors do not include (or even do).
$3,000 base fee +
$0-1,000 income based fee +
$0-1,000 net worth fee +
$0-10,000 AUM fee.
So total possible fee is $15,000 per year and many (income < $500K, net worth < $500K, AUM < $600K) will be at $3,000.
This one might be the most complex fee structure of any I've seen and includes a fee based on AUM, but given it has a cap, I added it to the list as it is pretty similar to CMG above.
- Hourly rate: $210 ($200 for Boston University docs)
How much time do you need? You'll need to burn through 50 hours before you hit $10K. I manage my parents' portfolio in about an hour a year. Yours will probably take longer, but chances are good you'll need less than 50 hours, especially if you do some of the work yourself.
- Annual fee: $1,000-5,000
Perhaps the longest financial advisor advertiser on my site, the first time I learned about their fees I couldn't believe it. “You're really going to manage someone's money for just $1,000 per year?” “Yes, yes we are.” And they do a darn fine job.
- Annual fee: $9,500
I love the “one-fee” approach here. Are the fees from your AUM advisor starting to add up? Switch advisors and put a cap on them.
- Financial Checkup – $3,000
- Trainees – $500 upfront plus $625/quarter
- Basic – $1,000 upfront plus $1,250/quarter
- Premium – $1500 upfront plus $2,500/quarter
- Concierge – $2,000 upfront plus $3,750/quarter
The fees are flat and ongoing fees range from $5-15K. Unless you need “concierge service” (includes tax prep and an annual on-site visit), it should be easy to keep the fees to less than $10K per year.
- Hourly: $200/hour for a la carte projects
- Comprehensive financial planning (including asset management): $1,200-$12,000 per year, generally $200-300 per month.
They will do just investment management for an AUM fee (1% up to $1M and 0.25% above that) but I suspect most people will be better off just going “full service” for a four figure amount anyway.
- Annual fee: $3,600-$9,600
Hate AUM fees? Litovsky hates them more. Really a focus here on small practice retirement plans.
- <500K 1% of AUM + financial planning fees
- $500K-$1M $5000
- $1-3M $7500
- $3-6M $10,000
- $6-10M $15,000
This one might look at first glance like an AUM fee schedule, but if you dive deep you see that you'll still be paying no more than 10K per year until you have more than $6M under management. For most docs, that will be your entire life.
$100K-$1M: $1,000 to $10,000/yr
>$1 million: negotiable for physician clients
A little bit AUMy, but you're definitely under $10K up to $1 Million and with a little negotiation hopefully can stay there.
There you go. 19 great fee-only, fiduciary firms that will manage your money without charging you AUM fees. It is okay (and perhaps even better early on) to use an advisor charging an AUM fee, but you must do the math each year to make sure you are still paying a fair price. At a certain level of assets, you can get at least as good of advice at a lower price by using one of these advisors charging flat annual or hourly fees.
What do you think? Do you agree it is okay to use an advisor charging AUM fees? Why or why not? Who are your favorite fee-only firms that don't charge AUM fees? Comment below!