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:
- Commissions
- 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.
AUM Fees
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.
AUM Schedule
- <$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.
Overpaying for bad advice is like kissing a stingray–you don't really want to make a habit out of it. There are so many fairly-priced good advisors out there, there's no reason to use a bad one or pay too much.
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
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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.
Wrenne Financial Planning
- 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?
Aptus Financial
- 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.
Physician Family Financial Advisors Inc.
- 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.
CMG Financial Consulting
One-Time Services
- 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).
WealthKeel
$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.
Fisher Financial Strategies
- 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.
FPL Capital Management
- 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.
Clark Asset Management
- 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.
Fox & Company Wealth Management
- 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.
Panoramic Financial Advice
- 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.
Litovsky Asset Management
- Annual fee: $3,600-$9,600
Hate AUM fees? Litovsky hates them more. Really a focus here on small practice retirement plans.
Integrity Wealth Management
- <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.
Navigo Wealth Management
<$100K: $1,000/yr
$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!
Good post, Jim. I think that it is great you are highlighting firms who are trying to do conduct business with the least amount of conflict.
I had a post earlier this week (Wednesday) that discussed why I thought some financial advisory models are better than others.
I think the following is the gold standard of advisory models (and up until this point I haven’t recommended any advisor on my site who doesn’t meet it):
-Fee-only (No commission)
-Fiduciary (obligated to do what is best for you)
-Flat Fee (over an AUM)
-Experience working with people like you (e.g. physicians in this case)
I can get behind an AUM fee in certain individual cases, but anyone that participates in such a system needs to know where the conflicts are. You listed several, and I list some others in my book (The Physician Philosopher’s Guide to Personal Finance).
P.S. I need to go find some pop-corn for the comment section that might happen below!
TPP
I have an advertiser who was trying to start working in a new state (WA I believe) and was told he could NOT charge via a flat fee model. Crazy eh?
Wow. How did that advisor get shut down on going flat-fee?
I am a Washington State advisor (I don’t specialize in doctors) and you are correct. Wa state regulators have just recently come down definitively against retainer, after having many of us register in the last several years. They accept AUM and hourly. Now, if your fee is less than 2% of AUM, they don’t seem to care how you calculate it. It’s quite frustrating because it, quite obviously, incentives us to work with people with assets (generally, late career folks), as opposed to income (generally, early to mid career). It also disincentives advisors in other states to register here. All in all, reducing the availability of advisors in this state who can serve the huge population of people who don’t fit an AUM model. I used to have a retainer model and am having to move to a combination of AUM and hourly, so maybe you can cut us poor, poor Wa state advisors some slack because we don’t have much choice!
I know who you are talking about. Kind of crazy, IMO.
I think that an AUM is okay in some instances, but people have to truly understand how it works to know where the potential conflicts exist.
Maybe that would be the “silver standard” ?
I’ve been “on my own” since I stopped using Ameriprise Financial. Their advisor charged me $1000 a year and they had an AUM fee that was 0.75%.
When they moved it up to 0.9% “and got rid of their 12b-1 fees,” I walked and took over my own portfolio at Fidelity. From 1994-2010, I managed my own money. Ameriprise put me in their proprietary mix for “moderately aggressive” and rebalanced the portfolio as needed. Later when I got up to larger numbers and had them switch to “moderate” and then saw how much money they were taking out at the 0.9% rate, I couldn’t stomach it.
Now Fisher Investment has been after me to go back to an AUM model with 1.25% fees. I don’t think I can stomach that either, but I did get my ass kicked in 2018…but then again so did most.
My portfolio has rebounded from the late December debacle, and I have to decide whether to keep doing it myself or get help again. I can say that many of my individual stock picks have been poor, so I won’t be doing anymore of that. I know WCI is not a fan of individual stocks, but I own Disney, Apple, JPM Chase, Micron, Johnson and Johnson, Blackrock Financial, Amazon, McDonald’s, Abbie V, AT&T, LuluLemon, and several individual REIT (O and LADR).
I’ve become a “collector” of bets instead of sticking to an allocation.
I have 60% US stock, 5% Global stock, 15% bonds, 5% International bonds, and 15% alternative and REIT. All my individual stocks are in the 60% number but the rest are index funds or ETF.
This closely follows my story. I was using Ameriprise as well, mostly on a recommendation from my parents. I was “tagging along” to my parents financial advisors since I was very young, but when I started making some money and saw the amount I was getting charged, the value just wasn’t there. I’ve always been far more financially literate than my peer group, but the sales pitch of not being able to manage your own finances worked for a bit. As the assets grew, the fee grew and the service didn’t grow. Our “checkins” seemed to only be one-on-one product sales meetings.
How do I know that I got it right by firing my financial advisor? The “letter” that I got telling me that I’m making one of the biggest mistakes of my life and I won’t realize it for decades to come, and that I’m not smart enough to see that far in the future and how his plan was the best for me…
Can’t think the finance blog community, and WCI and POF in particular, enough for creating a resource that has been a huge help!
You will notice there are no Ameriprise/Edward Jones/Northwestern Mutual etc associated “advisors” on my list. There are far worse things than paying an AUM fee for good advice.
WCI: Out of curiosity, why the exclusion of popular mainstream FAs? You haven’t used any of the FAs (listed or not), so why the presumption that WCI advertisers offer better value or advice across the board than someone who happens to work at Edward Jones, et. al?
Many – if not all – go through the onerous CFP certification along with earning Series 7 licenses, etc. The depth of financial information covered is substantial and the AUM fees are in line with the post. Those sound like solid credentials for providing financial advice to the vast majority of readers.
Have you seen any of the financial plans/portfolios coming out of Edward Jones, Merrill Lynch, Northwestern Mutual etc? I have. I have yet to see a good one. I’m sure there is one out there somewhere, but until then, I’ll stick with recommending people that I know know their stuff. And yes, people working for all of those firms have applied to advertise with me. I did not take their money and they are not on this list.
Nope, everything I’ve heard has been second hand from friends and family. I recently talked a new retiree out of using EJ by buying them four personal finance books from Amazon (including WCI). He’d already done a terrific job managing their finances over the years and really just needed a bit of assurance.
It’s been a long time since I’ve felt the need to sit down with a financial advisor myself. Although I do recall one high-end FA in Chicago with a fantastic apartment overlooking Lincoln Park. An entire floor for himself with a home office in the midst of being completely renovated. Quite the posh setup. Although I suspect those surroundings would have the opposite of the intended effect for me nowadays (e.g. the fabulous book title “Where are the customers’ yachts?” comes to mind).
The purpose of an advisor isn’t to “keep you from getting your ass kicked in years like December 2018” it’s to keep you in there so you get the recovery in Jan/Feb 2019.
If you can’t come up with a good plan and follow it (and given your “collector” status that may be the case) it’s worth paying a fair price for good advice, whether via a flat fee or an AUM fee.
Fantastic resource. It is nice to see the fee schedules listed for the majority of big players out there for financial planning.
I too never got how AUM advisors can still get high net worth clients. Those fees start getting outrageous very quickly and as you pointed out it does not take that much more effort to manage 1 million as it does 10 or 100 million. Plus conflict of interest is always an underlying concern that will never go away. If they get paid by the amount of assets under management they will want to keep that pile as large as possible even if it is not in your best interest.
I am starting to look into estate planning. It would be amazing if you have a similar type post on that subject and what to look for and who you recommend.
Estate planning varies incredibly by state, so it would be a ton of work to keep up a list of recommendations there.
Bear in mind an advisor with a fiduciary duty (like most fee-only, AUM charging fees) MUST do what is in your best interest by law. So any bias should theoretically be subconscious. Of course, in order to do that, the advisor would have to recommend you fire him at some point and go somewhere cheaper. I know at least one advisor who actually does this!
Bravo! Let’s come right out and say it: in a world where incentives matter, non-AUM Fee-only Financial Planning has fewer conflicts of interest. Regulators can’t get their act together and enact a real Fiduciary standard, so physicians should vote with their feet and do what is in THEIR best interest. As Jim says, no one is going to care about your money as much as you do.
As both a physician and fee only planner that mostly charges AUM fees, and who is on your recommended financial advisors list (but now second class I guess)-I think your post has some merit. But a few comments:
Selecting firms that charge a flat fee as being superior choices seems hasty and foolish to me. No one knows their value more than the firms themselves and what they offer for the flat fee. They have to be profitable time wise-and if the fee is flat, their time spent on a client will be as well. Every firm I know has an “overhead per hour” for staff and other costs and to think that you get the same time and attention from someone limiting their price may be an error you don’t want to make.
All fee only planners have to pick a way to charge. Most pick AUM for a good reason. When you invest in a mutual fund or in ETFs, you pay AUM fees that tend to stay flat. Every planner I know charges less AUM as portfolios increase (my clients pay only 0.25% a year on amounts over 2M)-a reflection of:
As a client’s assets increase, their financial issues tend to become more complicated and financial choices have more impact. I’m not talking about just investing (which is marginally more hard with larger portfolios), but the many aspects of financial planning that are harder with more money-asset protection and estate planning come immediately to mind.
The planner has liability for mistakes. Bigger portfolios are directly proportional to bigger mistakes.
So, just like you pick out your other trusted advisors-picking one by the fee as the major criteria is not a good recommendation. I certainly would not pick my estate planning attorney, criminal defense attorney or even a home contractor just on this. I’d seek out recommendations for good advisors from peers and from a personal interview. I’d certainly insist on a fee only Fiduciary with reasonable fees, which can include a small increase in fees for a larger portfolio. Respectfully, Steve
Steven-
Not sure that me recommending flat-fee/hourly rate advisors over AUM charging advisors is new at all.
Here’s a 2015 post: https://www.whitecoatinvestor.com/my-two-least-favorite-ways-to-pay-for-advice/
Here’s one from June 2011, the second month of the blog: https://www.whitecoatinvestor.com/12-things-you-should-know-about-choosing-a-financial-adviser/
So if you’re “second class” around here because you charge an AUM fee, you’ve been second class for a long time, long before you started paying for advertising.
The said, you are correct that simply charging a flat fee does not remove ALL conflicts of interest. I agree with you that a flat fee charging advisor is incentivized to spend as little time on the account and with the client as possible and has little incentive to make sure performance is good. I also agree that consequences of actions with larger portfolios are more significant (and costly if you or your insurance has to make them right).
I also agree that most firms reduce the AUM fee as they go along. HOWEVER, in my opinion they reduce it far too slowly and they still charge the full fee on the first million (or whatever until the first break point.) Now if someone wanted to charge 2% on the first $100K, 1% on the next $400K, and 0.2% on everything above there, I’d be impressed. But the way it usually works is 1% on the first $1M, 0.9% on the second million, 0.8% above that or something.
Your discount is one of the best I’ve seen- 1% on first $1M, 0.5% on second $1M, and 0.25% above that. But even there, on a $5M portfolio, I’d be paying $22,500 a year. Basically, you’re saying your work is worth four times as much as that from someone like Ryan Inman who would charge me $6K a year. I find that hard to believe. Maybe you’re better, but FOUR TIMES BETTER?
So you would be cheaper for the first $600K in assets and above there, I’d save money switching. Even if you were twice as good, I should still switch when I hit $1.2M. That’s the problem with even a relatively steep discount like yours.
I am compelled to stand up for Steven Podnos MD CFP. He has been an advisor for a long time and I’m sure he has learned a few things that many of the younger planners haven’t. I would guess he is one of the early MD-turned-CFP advisors. There is a lot of value in that.
With a $5M portfolio for the AVERAGE physician (not you, who has made finance into a career) and who needs comprehensive planning, you don’t have to be 4 times better to earn such a fee. You just have to be a little bit better to make the added fee worth it. I’ve been a CPA for 40 years. There are so many more things I know and so many more experiences I’ve had than those who are in their 30s that I would cringe putting someone with a large portfolio or complex needs with a planner who is still cutting their teeth on new clients. My toolbox has many more tools developed over many experiences and situations than it did 30 years ago.
Just as I would gladly pay far more for a complicated surgery with a surgeon who has handled my situation 100 times than 10 times (even though the system doesn’t work that way), I believe that there is an unquantifiable factor that working with an advisor with many years behind them can offer. Of course, in any profession, it is difficult to tell the GOOD people with experience from the ALMOST as good people. But, as a general ROT, there is a definite benefit to working with someone who is much more experienced than someone who is much less so.
If an experienced advisor can save that person or increase his/her net worth $50k with the added knowledge, and that is not so difficult to accomplish, you bet it’s worth the extra fees. If it is apples to apples, of course not. But given what I know about Steven, I bet he brings the experience to the table to make it worth it. This is your money. It is dangerous to use fees as your only yardstick.
I agree Steven is one of the good guys. That’s why he’s on my recommended list.
I also agree that a little gray hair is a desirable thing in an advisor, although it’s an even worse “single criteria” than fees are. You have to look at the whole picture.
I suppose you’re also right that the larger your portfolio/income, the larger the difference small nuances can make and thus justify a higher fee. But as you admit, all else being equal, apples to apples, better to pay less than more. In the early years, if the advisor will take you without a minimum, that’s usually an AUM model. After the first decade or so, that’s a flat fee model.
I agree that you have to look at the whole picture.But my point is that you don’t make the decision solely on whether the advisor is flat-fee or AUM. IN GENERAL (wish I could use italics and bold here!), flat fee is probably where you want to begin. But, even after the first decade, it’s not necessarily the rule.
And I also agree with the comment that, if you are looking for a minimum AUM fee in the early years when you have multiple decisions and a complex, changing situation, you aren’t going to get a lot of face time for $1k/yr AUM unless that advisor has little experience and is really hungry for new business. The math makes it impossible. “How much” varies, of course.
In the first year, if we were charging by the hour, our fees would be double. But that’s because we do many things that the lower-cost advisors just don’t have the time or experience to reach the comfort zone of helpful advice. I think it’s well worth it, of course. To others, it may not be perceived as necessary – and that’s perfectly fine. Different strokes. Every planning engagement is different but, in some ways, the same.
And I color my hair.
A problem with that gray haired advisor is that one might go through three or more of them in an investment lifetime as they age and retire. You’re at risk at every transition.
I went through that when my dentist retired and sold his practice. We had issues with the new guy and finally had to move on. I felt like I was getting the straight scoop on recommended procedures from the first dentist. I suspect I was oversold by the new guy maybe because he had a lot of payments to keep up with.
Yep, and when prospective clients have asked about that, I’ll tell them, “at least you’ll have gotten 5 – 10 years of the best advice you’re going to get.” Could do worse or I could be around even longer. Of course, we and, I assume, any good planner will have a transition plan who is already getting to know the clients and involved in the whole process. That question should always be asked.
I’m curious what your opinion is of Vanguard’s Personal Advisory Service. Here’s a non profit that charges 0.3% flat rate (and only uses Vanguard funds). I’ve talked to Vanguard about this and they confess to limited access to their advisors on the phone, a lack of continuity with any particular advisor, and marked constraints on what advice they’ll give due to compliance issues.
A physician with a five million dollar portfolio pays my firm 0.4% a year and gets the continued attention of someone with thirty years of medical experience and twenty plus years of financial experience. They get the same person with unlimited access and no constraints on what I’m willing to discuss. I’d call that the bargain of the century.
After five million, they are paying (actually over 2M) me less than Vanguard would charge them.
Obviously it’s a very low asset management fee, but given what I’ve been told by those who have used it, it’s basically asset management only. You’re certainly not going to get help figuring out what to do with your student loans or help choosing a retirement plan for your practice or assistance lowering your tax bill etc. That said, it’s probably better asset management advice/service than you’ll get from a lot of advisors.
0.4% of $5M isn’t much more than 0.3%. No doubt about it. I suspect you also provide a lot better service/product to a doc with a $5M portfolio than the Vanguard personal advisory service. That said, I think you both charge too much to a doc with $5M. Sure, 0.4% sounds like a very low fee, but if you actually do the math it’s $20K a year. I know of 19 firms I could hire that would also provide me excellent service for less than half your fee. So if you’re the bargain of the century, what do you call them?
Again, no one knows their value more than they do.
“Again, no one knows their value more than they do.”
That statement is fundamentally economically false. Concerning coming from a financial services guy.
One client with a $5M portfolio may get a ton of surplus from paying you 20k/yr. Another may do far better themselves for not paying you 20k. I can assure you my investment returns crushed yours last year and the last five years, how would you have known your value to me (it would have been negative) better than me?
Your hostility towards financial planners is evident. Your focus on investments and “performance” in a real world that lets us know that beating the market indexes is almost impossible just makes my point that you don’t need an advisor to pick an asset allocation. That is relatively easy and free in many areas.
The value of an advisor is in many other areas that are mentioned in some of my other posts below. Not everyone needs that, but many can benefit-maybe even you!
For sure. And an advisor may only need 50-100 clients. They don’t have to convince everyone their value is greater than their fees, they just have to convince 50 people. I don’t think it’s that hard for most advisors to find 50 people that really need an advisor and are willing to pay them 1% a year. Look how many are out there doing it?
Doesn’t it drive you mad that we have this professional obligation to do what we think is in someone else’s best interest and when we step out into the real world all that hard work is rewarded by droves of people trying to take advantage of you?
This was a fantastic breakdown of conflicts of interest and how pervers incentives can whittle away at your retirement portfolio.
And that amongst the chaff there is a way for people to get fairly priced advice. Kuddos to those people who are intentionally pursuing what I can imagine being a more difficult path for their own success. and who have the same professional fiduciary responsibility that we aspire to. It must take more hustle to build a client base with thousand dollar fees then it takes to spear a few whales.
@StevePodnos
“Selecting firms that charge a flat fee as being superior choices seems hasty and foolish to me.”
– And thinking firms that charge more are a superior choice seems hasty and foolish to me.
“Every firm I know has an “overhead per hour” for staff and other costs”
– Any paying that overhead for their fancy office, country club dues to entertain clients, and their own inflated salaries doesn’t benefit the client at all. Just because a business has overhead costs doesn’t mean it provides a value for the client.
“All fee only planners have to pick a way to charge.”
– All businesses have to pick a way to charge. Sometimes better competition comes along and offers a superior value and drives the legacy business out of the market.
“Most pick AUM for a good reason. ”
– And that reason is…it maximizes revenue for them and most clients are bad at math not realizing that such a tiny number adds up to be really large over the years.
“with more money-asset protection and estate planning come immediately to mind”
– Sure. Absolutely agree. But, most of the folks these fee only FPs are catering have NW of a few hundred K or a couple mil. Not much need for estate planning when you’re worth 300k. Those are also services anyone can pay for a la carte when they get to the point of having enough $ that it matters.
“I certainly would not pick my estate planning attorney, criminal defense attorney or even a home contractor just on this.”
– Sure. But you don’t need to pay the biggest national white shoe firm to defend a speeding ticket, and just because you pay for the highest priced contractor in town doesn’t mean your new construction won’t have a pipe in the foundation burst.
Cost isn’t the only thing that matters. But when it comes to FAs, it’s pretty challenging for prospective clients, especially novices, to ascertain the value proposition otherwise. The cheapest guy may not do a great job. The highest priced guy might do even worse. That’s why the best thing to do is educate yourself and pay for a la carte services as you need them/find them to be worth the cost.
I don’t have a fancy office or country club dues. Most of my peers don’t either. You might be thinking of brokers and not Fiduciary planners. I find fee only planners to be a relatively frugal bunch.
I also did not imply that picking a planner that has higher prices is a good strategy-I recommended seeking peer recommendations and a personal interview. It may not be always easy, but that’s how one should pick all their trusted advisors.
A la carte financial planning is fine for many people. But it does not compare to having a long standing relationship with a trusted advisor.
I am fortunate to know my clients’ personal and financial lives over time, and that knowledge continually helps me be a better advisor to them.
I am a long-term DIYer who has done pretty well. I am comfortable now at age 60 managing our affairs for maybe two decades more. But at some point, I may not be up to it or my wife may have to take over. For that situation, I am beginning to think it would be well to have a pro looking over my shoulder now and establish a trusted relationship with an advisor for the future need. Aptus caught my eye from the list above. Their costs look like something I could tolerate. I will check them out, plus some others, to see if there is a fit longer term.
The only reason I read this post was to start to explore possible support for our advanced years. I suspect there is a substantial niche there for advisors to support the aging boomers, but short of the full advisor agenda until the need arises. As a long-term DIYer, I don’t see myself giving up control of my portfolio any time soon. But it seems a good idea to have someone watching the accounts for transfers to Madoff or things like that. I likely will need a back-up system eventually.
Wanted to add:
One needs to understand financial planning issues fairly well to do a well-informed selection of advisor. I can do that now, but maybe not 20 years from now. If my wife had to take over tomorrow, I doubt she would have enough knowledge to avoid the bad actors.
I agree there is more value provided there for an elderly person. Aptus (like all of the firms on this page AND on my main list including those charging AUM fees) is a good firm.
Via email:
Interesting post. What is never stated in discussion of AUM fees is the fact that the investor never writes out a check for the fee; it is always subtracted from AUM. If the physician with 2M invested had to write out a check for 25K each year, especially years when she realizes her money didn’t match the stock market, she would think twice – Why am I paying this firm 25K? It’s psychological. Because the money is simply subtracted, with no requirement on the investor’s part to physically pay the money, the AUM firms can perpetuate insane fees for very little work.
Two other points need mentioning. The typical “1%” fee of AUM is more likely 2-3%, when you consider the NAV of products often sold by these firms (stock funds with much higher fees, say, than a Vanguard ETF), and also additional tax from churning individual investments. One thing is guaranteed: compared to investing in a broad, very low cost ETF or mutual fund (VTI, for example), the fees incurred by the investor will be greater than the stated AUM management fee, whatever the advertised percentage is. My own experience from talking with physicians is they have no idea of the actual, real fees they are paying vs. just buying and holding a broad based Vanguard or Fidelity fund. Of course if the advisor is used for other purposes than simply investing, the physician may still feel the fee is the advisor is worthwhile. I just think the entire industry would be transformed (and considerably diminished) if the investors actually had to write out a check for the real expense each and every year.
A significant number of our clients get business advice from us and pay us with checks quarterly. All clients get an itemized quarterly bill regardless of how they pay. Complete transparency.
Most fee only planners use the same extremely low cost funds that DIYs use-I’d guess my average stock fund cost is under 0.1% a year.
There is no question that you don’t need to pay an advisor for an asset allocation in this day and age. That’s free from many places. But you may wish to pay an advisor for the discipline of staying invested when things are scary, and to keep greed from steering investments. Also to help with avoiding business and financial mistakes. You also might value advice on retirement planning, asset protection, insurance, educational planning, estate planning, etc. That’s what you should be paying an advisor for.
Vanguard has some good material on advisor “gamma”-the long term increased return a good advisor can supply for those individuals who don’t want to spend significant time being their own financial planner.
Steven-
You might be surprised what most fee only planners who apply to advertise here use. MANY of them DO NOT use the same funds that most DIYers (and you) use. That’s why they aren’t listed on my page.
I found Vanguard’s gamma material to be a little oversold and conflicted as discussed here:
https://www.whitecoatinvestor.com/value-of-an-advisor/
The problem with things like that (like Wade Pfau’s whole life insurance white paper that he was paid by an insurance company to write) is it has a reputable name but is used by less than reputable companies to justify their practices.
I was disappointed that Wade Pfau did that, because he has done so much good research in the financial planning realm. However, I also assumed this type of stuff would happen given he went to work for the American College, which is, I believe, is heavily funded by large financial firms.
I have enjoyed Michel Kitces’ multiple podcasts and writings on his Nerds Eye View Blogs, if someone wants to nice breakdown of the “how advisors get paid and how the industry appears to be shifting to non-AUM models for GenX/Y/Millenials” just google “How To Profitably Price Fee-For-Service Financial Planning” Michael Kitces. His blog is for financial advisors, but just hugely interesting to learn more from an “inside-the-industry’ view.
OF course, WCI remains my #1 source of info and entertainment!
I believe that every investor needs to know the total cost of their portfolio’s expenses and fees but very few actually do. The industry does not make it easy to see. Are you keeping a spreadsheet on the annual expenses of each mutual fund, index fund, and actively traded fund in your possession? It’s easy to calculate. Don’t expect complete transparency from anyone. It is easy to feel smug about the 4-figure adviser fee that you are paying until you do the math and find that you have slipped well into the 5-figure arena.
Only through education and discipline can you get a handle on this. Four years ago a chunk of our portfolio had expenses/fees of 2.5% plus (thanks Morgan Stanley and the CFO who recommended we use them) but that has been reduced to 0.19% today. Gee, I really miss that Christmas card I used to get each year. Education and DIY are your best friends.
Regarding conflict of interest: someone told me once that you (and other financial bloggers) actually have a conflict of interest when recommending against advisers because then people traffic your site for financial advice. I thought he had a good point. Maybe that should be one of your stated conflicts – will help to balance the conflict to recommend advisers for referral fees.
Conflicts all around…
For sure I have conflicts of interest. I discuss them in the state of the blog each year. Here’s this year’s edition:
https://www.whitecoatinvestor.com/state-of-the-blog-2019/
What’s more, unlike ALL of the advisors on my list, I have no legal fiduciary duty to you. Legally/structurally, I have more in common with a commissioned whole life salesman/loaded mutual fund salesman than a fee-only advisor.
I don’t get referral fees from any advisors at this time. They’re all flat fee ads for them. But I certainly get paid by many including ALL of those mentioned on this page and those participating in the comments section.
By the way, that wasn’t a criticism. Just a comment – I hadn’t previously considered a possible conflict in recommending against advisers. I think you do a great job disclosing your conflicts and providing unbiased information.
Let’s be real, the reason AUM fees persist is because of what the business schools and behavioral economists label the “low saliency” of the fees. Just like the Feds withold taxes from your paycheck before it hits your hands, the AUM advisors extract the fees from the accounts, on a pre-approved schedule, so the client never has their attention called to it.
That it. Every other argument is window dressing. It’s the lowest-friction method of collecting the largest fee. It is a FANTASTIC business model for them. But as I’ve read elsewhere, if your business model relies on your clients not being able to figure out easily what they are paying, then you’re choosing to have a pretty shady business. And it is a choice, because other compensation models are out there.
Maybe some AUM advisors are more direct with the billing, but not most. And that is why I get angry at the industry for tolerating, even apologizing for this garbage AUM fee. Just switch to hourly billing like accountants, lawyers, architects, and other professionals who hold themselves to a higher standard.
Until then, financial planning will remain an industry and not a profession. And there are other voices in the industry who state the same, such as Bob Veres and Michel Kitces.
Rant over.
To be fair, the only model worse than this (and commissions) is health care! At least you can find the price pretty easily by looking at an ADV2. Try that at your local hospital.
The one benefit of paying your fees out of your IRA is you can pay with pre-tax dollars. That’s nice.
Agree with you that, in the words of an advisor friends, “AUM fees are the best passive income there is.”
Oh, I don’t defend the way we pay for health care in this country. It’s a burning dumpster fire for sure. And badly, badly in need of reform, in many ways. And even with charge master lists now “public” there is no way anyone (patient or doctor) can reasonably estimate the costs they will incur. Terrible. But incredibly difficult to reform due to massive changes required in multiple regulatory systems, entire industries (insurance), and so many other things. Reforming health care payment is one heavy lift.
Which does not excuse a financial services payment structure which is not only clearly conflicted but also easily, EASILY converted to a more clear system by which you pay by the hour, or retainer, or a capped total annual fee. Of which there are many models to follow, and which doesn’t require any change on the part of legal structures or regulatory agencies. Advisors in fact choose to flip broker-dealer to pure RIA all the time, and then alter payment models when they want. It may be somewhat disruptive for them, but 100% doable.
No excuse. This is just people providing an important service to Americans which needs to be done very well and is highly valuable, and then choosing to bill for that advice like some flim-flam artist. It should be embarrassing for both the advisors who charge that way and the industry as a while.
Notably missing from the compensation list is pay for performance i.e. advisor takes a flat percentage of PROFITS above and beyond the initial investment (or any equivalent metric demonstrating he/she is actually doing something useful for the client). Given the endless reports showing professional fund managers universally lag behind a generic basket of index funds, the question becomes exactly what value is the financial advisor providing? You already know that it won’t be better portfolio performance since they can’t overcome the drag of their own fees.
Things FAs can offer: basic financial literacy, retirement projections, insurance recommendations, hand holding during market downturns.
Almost all of which is readily available from a $15 book nowadays. The big exception is hand holding. If you’re the kind of person who needs to check their retirement portfolio several times each month, you’ll almost certainly benefit from a long-term FA. Otherwise, even for people allergic to learning about personal finance, I’ve never understood maintaining a paid FA relationship beyond a handful of years. There simply isn’t that much practical knowledge to learn about investing for the vast majority of people – even those with doctor sized portfolios. Other personal financial planning services that are useful – estate planning, living wills, trusts, tax minimization – aren’t available through FAs in the first place.
It would be great to see a prologue to this post explaining the FA value add for the fees that WCI is generally against paying for in the first place. He’s probably already written several of them over the years and could simply include links. I’m a bit skeptical that a guest post would accomplish the same without turning into a propaganda piece. Most of those I’ve read tend to highlight one or two astonishing client successes along with a horror story that’s been stretched to the point of ridiculousness.
The question shouldn’t be how to find a good FA for a fair price.
It’s how to evaluate whether they’re doing anything useful after Year 1.
You mean like this one?
https://www.whitecoatinvestor.com/value-of-an-advisor/
I don’t think a pay for performance is a bad way to pay for investment management. Many real estate funds/syndications are on a 1% + 20% of profits (with a 10% preferred return) kind of scale. That does add up to a fair amount though. Very rare to see for an advisor putting together a portfolio of index funds though. And really, why should that be a surprise? Beating the market isn’t the value they’re providing.
I think it’s a terrible way to pay for financial planning.
Exactly. I figured you already had something in the cabinet. 😉
Fascinating article and subsequent commentary. It was nice to see the fees charged by different FA firms, as this info is rarely published. It is surprising to see such a large compensation range.
As a side note, many/perhaps most middle class and affluent financial advisor clients will see their costs rise significantly, since the TCJA went into effect. The elimination of the miscellaneous deduction and the increase in the standard deduction may impact many who pay for financial advise and tax preparation assistance. Assuming you itemize, the amount you pay for these services that exceeds 2% of AGI, is no longer deductible. Perhaps this is not a bad test to consider; if you are paying more than 2% of your income to a financial advisor, you may be paying too much.
Although some advisors using the AUM model might emphasize their shared risk with the client, as a practical matter, over the longterm, most well managed investment portfolios rise. From 1948-2014 the worst 10-year return of a basic 60/40 portfolio was 2.44% and the best was 16.04%, so in this example, an AUM compensated advisor would see this range of compensation increase automatically, plus/minus the impact of funds added/subtracted from management. For most 10-year periods these increases would be greater than inflation. I personally have never felt comfortable with AUM fees for this reason. Just because the market goes up, does not mean my advisor should get a raise, nor should I necessarily pay less, if the market declines.
What do you mean rarely published? It’s published by EVERY licensed financial advisor in their ADV2.
https://www.whitecoatinvestor.com/form-adv-ignore-it-at-your-peril/
I agree that the “shared risk” argument for an AUM advisor is kind of silly since the advisor makes more with beta and contributions and really only contributes alpha.
“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.”
I am a DIYer, but I used Aptus a couple of years ago just to review everything and make sure I was on the right track. I thought they were absolutely excellent and worth every penny. It was not only very reassuring that I was doing the right thing, but it reassured my husband that he can trust all of this to me. She also pointed out that I was paying too much for life insurance, pointed me to term4sale.com and effectively saved me her entire fee for the year. Now I just stay the course, but plan to hire her again n a few years when I anticipate my finances changing.
The Fisher sales pitch essentially emphasized that they pick individual securities (not just a handful of stock and bond mutual funds) and that, historically, Fisher and his team have beaten the index “net of all fees” for decades.
I know I kept pace with the S&P 500 index from about 1997 to 2013, didn’t sell anything in 2008-2009 when I lost about 45% of my all stock portfolio value. That was back when I had about $500,000 and it dropped by about $225K…
Now that’s it’s about 1.2 million…I’m a bit more afraid at times, like when it dropped $180,000 in late 2018. I’m 55 years old now and cannot “make it up” with more work and want to retire from full time work in about 4 years.
It’s not a huge nest egg for a 25 years in medicine. Clearly I should have been saving more. Luckily, I have a pension that is worth $25,000 a year from age 60, and will have no mortgage at age 59.
Based on reading all of this, I’m thinking “no” to the Fisher fee of 1.25%…that’s $15,000 in year one and with me putting $85K away per year…by year 4, it’s about $19,250 a year in AUM fees. They would have to beat the market by 1.25% every year in a portfolio designed to return an average of 7-8%.
Can anybody here comment on that pitch that Fisher “beats the index net of all fees?” Like, I don’t believe it or theyd be running a trillion dollar private hedge fund. So how are they able to say something like that – what is the angle they are playing to say that?
Yes. What they mean is not what you think they mean. As with legal language, there are many nuances in the language of investment managers/firms allowing them to say something that can be shaded to have a very different meaning from what you understand in black and white – and still not be technically lying.
I do not believe they are able to do this and I don’t think anybody else does, either. Except maybe the clients who keep hoping. Understand, you never know if what they are trotting out is true – there is no way to know except in discovery in a lawsuit or if you work there.
More info here on Fisher’s record:
https://www.cxoadvisory.com/4808/individual-gurus/forbes-evaluates-ken-fishers-stock-picking/
https://www.fool.com/investing/general/2016/04/22/chances-are-youre-outperforming-these-3-well-known.aspx
https://s2analytics.com/blog/billionare-ken-fisher-is-buying-but-his-track-record/
Lots of people say that, but they don’t guarantee it going forward for a reason. Sometimes it’s a backtested model. Sometimes they just lucky in the past. Sometimes they’re actually skilled. Sometimes they don’t count fees, taxes, commissions etc. Don’t know the specifics on Fisher, but when it starts at 1.25%, I kind of know what I need to know already.
Surprised you’re only “thinking no.” That would be a pretty easy call to me given how easy it is to get advice for half that price. Picking stocks isn’t a winning strategy, even for Fisher. Plus, a 1.25% fee is a pretty significant barrier to overcome. You get no benefit until they beat the market by 1.25%, no small feat in the long run if you look at the data for mutual fund managers.
@huckleberry
“That was back when I had about $500,000 and it dropped by about $225K…Now that’s it’s about 1.2 million”
So, you haven’t saved an additional dime since 2009? That 275k in 2009 would be worth about 1.1M today if all you got was S&P return since then.
I’d worry less about Fisher investments returns and more about not spending every dime you make.
So easy to cherry pick results to “prove” performance results over a given timeframe. It’s a sad aspect of the mutual funds industry and lack of governance that such BS can be used for marketing purposes. Only the Bernie Madoff’s (and insider trading schemes) can legitimately claim market beating performance over decades after drag.
One of my all-time favorite stock picking scams is brilliantly simple. Send out a letter to 10,000 random potential investors with money to burn offering your oh-so-special stock picking methodology with one amazing prediction. Half the recipients hear it’s a guaranteed winner. The other half hears it’s a guaranteed loser. Wait long enough for reality to happen and send a similar follow-up type of prediction letter to the “winning” half touting your success and offering yet another “guaranteed” winner/loser stock. Repeat a few times.
You end up with a small group of wealthy people who have heard the guru make several stock picks in a row with 100% accuracy. Even more brilliant is telling those excited investors that the current fund is (unfortunately) closed for new investments. So sad. Until a few weeks or months later (and another 1-2 correct stock picks) when a new fund is launched and they’re invited to participate as “founding fund participants” or some other wonderful honorary title.
So slick. And really not too different from how IPOs are sold for those who’ve seen one put together from the inside.
if you invested 1 million when buffett first invested in l942 in the sp500 and paid 1% Aum, 77 years later the sp500 was worth 5.3 billion while the money invested with a 1% AUM fee was worth 2.65 billion
FEES MATTER!!!! big time
PLAN VISION $96/yr Online planning Mark Zoril
Anyone hear about this
I like Mark, but it’s hard for me to believe that most advisors can really do the job well for $96 a year. I mean, it costs a fair bit of money to deliver good service and I think $96 is below what I’d expect to pay. We’ll see how long that sort of thing lasts.
Got two emails today from advisor friends asking “How come I’m not on the list in today’s post?”
Answer to # 1- You don’t advertise with me.
Answer to # 2- You charge an AUM fee.
I guess that’s why Harry’s site didn’t make the list, even though he’s acting more like a broker than an advisor.
https://adviceonlyfinancial.com/
It isn’t a list of websites that help you find an advisor. It is a website that helps you find an advisor. Kind of a difference there.
Plan vision can become the vanguard of financial planning
Having read all of this and the links provided on Fisher, I’m going to keep managing my own money.
I will be selling some of my individual stock positions and refocus on my allocation and low cost index and ETF investments.
I’ll just keep reading and learning and will check out some of the other companies linked here with lower fees.
As Andrew Tobias says “TRUST NO ONE”. All advisors have some conflict of interest
D
Are there any advisors use a simple 7-10 mutual fund indexed portfolio?
I have seen portfolios from advisors that are so complex with dozens of funds/individual bonds/etc
If they show you how SIMPLE it is, they are shooting themselves in the foot!
Ken, many fee only advisors use simple single digit mostly indexed low cost mutual funds in their models (me included).
The value of an advisor is not an asset allocation-you can get that free now in many places.
The advisor’s value (if you want or need it) is unemotional disciplined investing for the long term, helping you to avoid mistakes, and a broad range of trusted advice on the many other areas of financial planning that can make or break your financial life: estate planning, insurance planning, retirement planning, asset protection and more.
I agree there are many terrible portfolios put together by advisors. But there are also lots of good advisors putting together portfolios like the one you describe including pretty much every one on this list.
One thing all of the anecdotal evidence and statements such as “my returns crushed yours” (how could anyone take that seriously?) ignores is that placing trust in yourself and your abilities may be misguided. Trust yourself to care about what happens with your money but the trust might be misplaced when you are considering what to DO with your money.
Those reading this blog and following this website are encouraged to DIY, probably more by other armchair investors than even Jim. In some instances, many, perhaps, that leads to a false sense of security that all you have to do is read the comments, take a course, and you’ll easily be able to manage it all. True for some, not true for others.
Jim boasts that it takes him about an hour per year to manage his parents’ finances. This from the person who has created a whole industry of physician bloggers and has devoted countless hours to studying the topic. I don’t doubt him, but I also believe it is a mirage that it is possible for the average consumer without intense education and involvement.
Yes, it is quite possible to DIY, but the implied simplicity may seem as such simply because you don’t know what you don’t know and, even if you have a higher level of knowledge, you don’t know how to optimally complete the puzzle.
Physicians have much more money to play with than the average middle class investor, meaning that they can make many more mistakes and not run out of money in their lives. You can take a more casual attitude toward your missteps because you’ll still have enough even if you buy a few million in whole life ins or change from PSLF to loan payoff or even if you buy a house that is double what you should have paid.
If your mistakes mean you can reach FI 10 years earlier when you could have gottten there 15 years earlier with appropriate advice, is that acceptable? Only you can make that choice.
Complicating the decision is the issue that many advisors know little more than their clients who have studied the material. I well understand that it is difficult to know what to do. The list of advisors on the WCI site is a decent starting point. Even there, you might find questionable or inexperienced advice (impo), but the chance of doing so is greatly lessened than with a google search or going through a list of advisors in your vicinity – even limiting to fee-only. Again, fee-only is a great way to narrow down your starting point, but it does not weed out the great from the good from the harmful.
Bottom line is I don’t have a clear-cut recommendation – there is not one. But I do recommend you treat the idea that anyone – even a busy dual doctor couple trying to manage schedules and nannies – can or should do this, even if you just “love” personal finance. it’s not all about the portfolio – that’s really the easiest part.
You do not know what you do not know and EVERY situation is unique and personal. I continue to learn and it comes from the variety of situations I encounter from working with clients. (Ok, and from @spiritrider 🙂 )You can get a lot of the basics and a fairly thorough understanding of finance as it applies to the general public but not necessarily of the nuances of your specific situation. Tread carefully and cautiously.
It is true that there is a bias on both sides. A DIY doctor may know a bunch of successful hobbyists and assume that most docs can do it themselves. An advisor may see disaster after disaster and think no doctor should ever do it themselves. The truth is likely somewhere in the middle. More details here:
https://www.whitecoatinvestor.com/competent-diy-investing/
https://www.whitecoatinvestor.com/how-to-be-a-do-it-yourself-investor/
https://www.whitecoatinvestor.com/8-reasons-you-should-be-your-own-advisor/
https://www.whitecoatinvestor.com/can-you-do-it-without-an-adviser/
https://www.whitecoatinvestor.com/value-of-an-advisor/
Bottom Line is that any doctor or any educated person can learn to be a DIY investor, do their own taxes if desired, plan their retirement strategy, etc etc etc
The problem for many is that they use a poor advisor and do not realize it
I have seen many convoluted advisor portfolios on Bogleheads and one from a friend of mine
“Bottom Line is that any doctor or any educated person can learn to be a DIY investor, do their own taxes if desired, plan their retirement strategy, etc etc etc”
This broad generalization, along with your perception that the few portfolios and tax returns you have seen mean “any doctor can do it” is all I need to know that you don’t know what you’re talking about, bordering on ignorance. It would be no different if I generalized that “no doctor can do it” – we would both be wrong. I have seen far more huge and expensive mistakes (both DIY and professionals) in 40 years than you are ever likely to be exposed to – but that doesn’t lead me to conclude it shouldn’t be attempted by anybody. Just not by everybody.
@jfpx
“I have seen far more huge and expensive mistakes (both DIY and professionals) in 40 years than you are ever likely to be exposed to”
Undoubtedly you have. Sounds like a great idea for a series of posts! I suspect many readers would be interested to hear some of the stories of how an advisor saved someone a ton of money. It’d give weight to the hand-waving assertions of ‘value beyond asset allocation’.
“Any doctor can do it”; that means that any doctor has the basic intelligence to do it. That is a correct statement. WCI estimates that 80% of doctors hire an advisor. That means those doctors do not have the interest or time to do it, and therefore should hire an advisor, rather than making a half-a’d attempt at DIY. IMO, most doctors who wish to DIY should at least hire an advisor to review their initial plan and approach.
That is not the main point of this article, which is advisor fees. Here it seems that the entrepreneur in WCI has won out over the investor advocate in him when setting his 10k cap on annual fees. 5k would seem more reasonable.
It’s easy enough to pare this list down to those charging < $5K in all circumstances. It would be a very short list.
a few mistakes will far outweigh the costs to pay AUM fees over your investing career
assume aum will be obsolete shortly as investors become more educated