[Editor's Note: This is a guest post from John D. Craig, JD, CPA. He has two blogs, here and here. We have no financial relationship.]
Most financial advisor fees are excessive and should be reduced. This article will focus on retirees with a net worth of $1 million or more. It has been estimated that there are about 10 million households in the US with a net worth of $1million or more, excluding primary residence. A large percentage of these engage the services of financial advisors.
Case Example
The Client
The client, Bob, graduated from a good university and has had a successful career. Bob worked his way to upper management, and was somewhat knowledgeable with respect to personal and company finances. Bob contributed the maximum to his 401(k), and invested separately in a taxable account; his investments are now worth $2 million. He has had a mixed history of self investing and use of investment advisors; some good results and some horror stories. Bob is now retiring and he realizes he needs to get serious about his future financial planning.
Bob reads a couple of books and some articles on financial planning. After some soul-searching he realizes that he might have enough financial savvy to do his own financial planning; however, a) that would take a lot of time and effort doing what he feels is a disagreeable task, and b) he is not sure he trusts himself to make the best decisions, particularly in difficult times. He decides to hire a financial advisor.
After much thought he reaches the following conclusions regarding the choice of financial advisor:
- He has learned that investment advice is not about stock picking, but about selecting the right mix of funds or ETFs for his specific situation. He is not sure if any value can be attributed to picking among diversified funds.
- He does believe that he needs the other services provided by financial advisors including: asset allocations, risk management, tax planning, behavioral coaching, withdrawal strategies, etc.
- He is willing to pay the going rate.
- He wants to hire an advisor that he likes and trusts. He is willing to hire the best. He does not want to hire a robo advisor or a discount firm where services may be limited.
- He wants a fee only advisor who does not get commissions or kickbacks. He understands that even the large national firms will work on a fee only basis.
- He wants to be sure that all necessary services are taken care of, and he will give advance approval to do whatever is necessary.
- He is aware that some advisors charge on an hourly basis or fixed fee, but that the majority of advisors, particularly the largest and most reputable, base their fee on a percentage of assets under management.
- He does not want the hassle of vetting hourly fees, and is willing to go with the typical top advisors who will charge a percentage of AUM, provided the fees are reasonable and do not exceed the industry standard.
The Advisor
The advisor, Ted, works for a large reputable financial planning firm. He has a CFP and 15 years of experience. Bob was a perfect prospect and he assured Bob that: he was not a stock picker, but does add value through picking the appropriate funds; he and his firm have the necessary expertise for providing all necessary services; he is subject to a fiduciary standard and can produce recommendations from satisfied clients; his firm's standard fee is 1% of AUM, which is on the low/average end of the industry standard, and .25% will be deducted quarterly from AUM.
Bob and Ted are a perfect fit. Bob signs on and he is very pleased with Ted and the services he receives.
So Where's the Problem?
Bob is getting excellent service and he is happy; everything is taken care of, and this is a no-hassle arrangement. Ted enjoys working with Bob. Bob clearly made the right choices in both deciding to hire a financial advisor and in choosing Ted. The only problem here is that Bob is paying an exorbitant fee for the services he is receiving. It is true that Bob is simply paying the industry standard fee, and Ted is only charging the 1% of AUM fee, which the industry has approved for many years. Perhaps neither Ted nor Bob understand how excessive the fee is.
The financial planning industry is enormous — trillions of assets being managed and billions of fees earned. The industry has changed a lot over the years. Its beginnings were with the large commission-based stock-picking firms. At that time it may have been logical to tie fees to the assets under management. Today most agree that there is little or no value generated by stock picking (and likely additional cost), so the industry has moved to providing services such as those listed above. All of these services are somewhat generic in nature. Learning the skills of a financial advisor takes much less time and effort than, for example, learning the skills of an attorney or CPA. Here we have assumed that Ted performs these skills very well and does an excellent job in relation to his peers.
So let's take a look at how Ted's fees compare to those he would charge if based on an hourly rate as charged by attorneys and CPAs. Let's assume that his hourly rate is $250, which is generous in comparison. Bob's 1% fee is $20,000 per year and this would convert to 80 hours of Ted's time. How much actual time do Ted and others in his firm spend on providing services to Bob each year? First, all of the time spent obtaining Bob as a client and later entertaining Bob doesn't count. Second, much of the report preparation and analysis is done by lower level staff and clerical personnel. In the first year it is possible that 20 hours of staff time was spent at, say, $100/hr. Maybe in the first year Ted spent another 20 hours on meetings with Bob and technical analysis. On an hourly basis, that totals to $7000. It is hard to imagine how the total fee could ever reach close to $20,000. In the second and subsequent years the hours spent could easily be less than half of the hours spent in the first year, yet the annual fee remains the same (or increases if the portfolio value increases).
Of course, Ted could disprove these assertions by providing a detailed schedule of hours spent, as is often provided by attorneys. This won't happen. Instead the focus is inevitably on the spurious justification of value provided. For example, the advice: “Defer taking your Social Security benefits until age 70”, might result in gaining Bob $100,000 during his lifetime. Bob was not aware of this benefit, but Ted and most of the 200,000+ financial advisors in the US can give this advice off the top of their heads. The value may be $100,000, but what justification would there be for charging more than $100-$200 for that advice?
In this example, Bob did the right thing by hiring Ted as his financial advisor. Bad apples exist in all service industries, but we have assumed Ted provided excellent service and did so with integrity. Bob likely received value, both financial and psychological, in excess of the fee that he paid. Despite this, there is simply no justification for the exorbitant fee. The work is skilled but it is highly generic. The only logical fee structure is hourly based, or possibly a fixed annual fee tied to estimated hours. Since Bob dislikes the idea of vetting monthly hourly fee bills, he would probably prefer the fixed annual fee. Such fees would be tied to estimated hourly fees and revised annually, but with periodic justification of the fees based upon hours actually expended.
Conclusion
Hiring a financial advisor by a retiree is often the best choice. In most cases a qualified FA will provide value in excess of the fees paid. Today there is no logical justification for basing the fee on percentage of assets under management. The typical 1% of AUM fee is exorbitant. The only logical fee arrangement is one based upon hourly fees similar to the arrangement used by attorneys and CPAs.
[Editor's Note: The information in this post won't be new to long term readers of this site. I have long maintained that if you're going to hire an advisor, that advisor should be fee-only and preferably paid on a flat-fee or hourly basis. That is tricky, since most advisors, even most good advisors, charge on an AUM basis. Part of that is because that is the way it has always been, and partly because “AUM fees are the best kind of passive income there is.” One workaround is simply to calculate out the AUM fee each year, and compare it to a flat annual retainer or hourly rate. If it is still reasonable, then you need do nothing. If it is not, then it is time to either negotiate or move on to another advisor who not only gives good advice, but also does it at a fair price.]
What do you think? Do you think the AUM model is a good one? How do you pay your advisor? Do you like that method or would you prefer something else? What is a fair price for a year of financial advice and/or investment management? Comment below!
It might be a good deal for a resident or new attending to use a financial advisor with account under management fees, since they don’t have much in assets. This can get them set up on the right course. After a year or two they can go off on their own and save the lifetime fees for themselves.
However, these young investors are the most prone to making bad decisions on expensive life insurance sales pitches, which can be as expensive as any fee structure.
Any compensation model which is based on a percentage of something is suspect. This includes talent agents (10% of your salary), personal injury lawyers (30% of settlements), real estate agents (6% of sale price), financial advisors (% vary) and maybe even index fund fees. The work done for these fees is often valuable, but that value is not in any rational way proportional to the amounts on which it gets calculates. Selling a $2 million home is not twice as much work as selling a $1 million home. Managing $2 million portfolios with index funds is not twice as much work as managing $1 million With index funds. And managing an index fund is not really a mathmatical function of how much money you invest. An index mutual fund has fixed expenses that have to divided up somehow, but the $200,000 I gave them to invest did not generate twice the expenses as the $100,000 you gave them.
All of these fee models are “TRADITIONAL.” History is full of horrible examples of practices which were long justified with “TRADITIONAL” These include slavery and the subjugation of woman and minorities. In short, “TRADITIONAL” is not a justification, it is the opposite. “TRADITIONAL” is a confession that there is no “justification.” Unless the “just” part of justification refers not to “justice” but to “JUST the way it’s always been done.”
The problem is that in many of these reimbursement models there is no easy substitute. Take the examples of the personal injury lawyer or the real estate agent. If you try to use an hourly reimbursement model the incentive is wrong. A big quick settlement or a fast selling house sold above asking price should be rewarded somehow, not punished. A financial advisor who grows your portfoio more is looking to be rewarded more for doing so. The problem is that what financial advisors add IS much much much more closely aligned to the hours they work than the money you save.
Same tired arguments, consistently flawed.
1% annually for a good advisor who recommends broadly-diversified, tax efficient, low cost portfolios based on solid (modern) academic research and who provides ongoing perspective and discipline to help their clients stay the course is more than worth it. Worth it because, done right, most investors under this model will come out ahead by more than the fee compared to alternatives with much greater peace of mind and family continuity along the way.
The %-fee arrangement, along with the fiduciary standard ensures that the interests of the advisor and client are aligned. Debts are repaid prudently and assets are consolidated when the individually-directed portfolios contain the best available investment funds and make management of the portfolio simpler and more efficient.
Fixed-fee models cannot make the same claims: the emphasis is on checking off boxes of planning minutia that justifies “hours spent,” the portfolios have to be watered down to recognize minimal future advisor influence o the client (how many investors will opt to pay more in a bear market for a review or even know when it’s time for one until it’s too late?). And the advisor is incentivised to find as many one-off planning projects as possible (up front fees are always the most lucrative) knowing the investors will soon be left flapping in the wind. The same significant behavioral costs that DIYers pay will also be a factor here, with only marginally better allocations.
Eric,
“1% annually for a good advisor who recommends broadly-diversified, tax efficient, low cost portfolios based on solid (modern) academic research and who provides ongoing perspective and discipline to help their clients stay the course is more than worth it.”
– Getting a payday loan to make a car payment may be “worth it” compared to losing the car but still be an abysmal option compared to another type of loan. Said differently, your statement above would be no less true if you substitute “$3,000 annually” for “1% annually”, and the former option will, for most viewers of this blog, save at least hundreds of thousands of dollars over a lifetime compared to the latter.
“The %-fee arrangement, along with the fiduciary standard ensures that the interests of the advisor and client are aligned.”
– Nonsense. If my mortgage is at 7% and my student loans at 8%, the advisor’s interests are that I not withdraw the money from which he is profiting to pay off those loans, despite that fact that such a move is almost certainly in my best interest. If he is getting loads or other fees as kickbacks, or selling me insurance, etc. our interests are even more at odds.
“Fixed-fee models cannot make the same claims: the emphasis is on checking off boxes of planning minutia that justifies “hours spent,” the portfolios have to be watered down to recognize minimal future advisor influence o the client”
– I think you have it backwards. The “watered down” portfolio is, on average, less costly with the same returns as a fancy one. It is the AUM manager who feels compelled to add costs by engineering an artificially complex portfolio (my relative’s portfolio has 128 holdings; mine has 2; net of fees, I’ve out-performed her 5 years in a row) to intimate to his client that the client is incompetent to do what his advisor is doing.
Eric, you stated ” a good advisor who recommends broadly-diversified, tax efficient, low cost portfolios based on solid (modern) academic research and who provides ongoing perspective and discipline to help their clients stay the course is more than worth it. Worth it because, done right, most investors under this model will come out ahead by more than the fee compared to alternatives with much greater peace of mind and family continuity along the way.”
As I stated in this article, I agree with this statement. The article example assumes that, ” Bob likely received value, both financial and psychological, in excess of the fee that he paid.” Many people are better off using an advisor than DIY; this is true even though the individual may be capable of DIY.
Where we seem to disagree is with your suggestion that, unless incentivized by the high percentage of AUM fees, advisors will scam their clients in order to maximize fees. You can see in the article example that Ted, the advisor, ” provided excellent service and did so with integrity.” Reputable attorneys and CPAs who are paid on an hourly basis provide the best service they can for their clients (that is how they become reputable). It is my guess that most financial advisors are not scam artists, but, they too, will do the best they can for their clients regardless of the fee structure.
I don’t buy the “aligning of interests of the advisor and client” claim. I think you can argue “you get what you pay for”, but any advisor can be great or terrible independent of whether they are AUM vs fixed fee. Advisors know that generally speaking, they are going to get more fees out of AUM and since that is the industry standard that is what most do. However, that does not mean that a fixed fee only advisor gives worse advice or will result in a worse performance. I would guess that a well-experiened, excellent fixed fee advisor will generaly set their fees at a level that is worth it to them with regards to supply/demand and would potentially be similar to an AUM. The hard part is trying to sell “$10,000 annual fee” vs “1% of assets” seems like the $10k will be a whole lot more expensive even if the opposite is true.
We’ve disagreed about this issue for some time and argued about it a number of times and probably don’t need to rehash the same arguments here. I don’t expect to ever convince you especially given that is how you are paid.
I think there are arguments to be made for an AUM advisor, but I don’t think you’re making them very well.
For example, one argument is that in the beginning it may be cheaper for the investor. For instance, if a 1% advisor will take you at $250K ($2500 a year) and a flat fee advisor charges $5K a year, you’ll actually pay less in fees initially. The AUM advisor looks at this as deferred compensation or an investment because most investors won’t leave, even if a smart one might.
Another argument is that people won’t hire an advisor where the fees are too obvious and they physically have to look at them or write a check frequently. AUM fees remain somewhat opaque and thus easier to pay psychologically, even if they’re higher. So the argument goes that an investor who truly needs an advisor and would be better off with one won’t hire one if he actually has to write a check to pay the fees. Better to hire an AUM than no advisor at all. Of course, this argument can be used for commissioned advisors as well.
Another argument is the socialist argument. The richer you are the more you can afford to pay and should pay for your financial advice. The rich client subsidizes the poor clients so the advisor can stay in business and help as many people as possible.
Perhaps the best argument is it doesn’t matter all that much for many people. If you’re paying $5K in flat fees or if you’re paying $5K in AUM fees, it’s really all the same.
You could also argue that AUM advisors, because they can make so much more from a single client, can have fewer clients and thus spend more time with them whereas because the flat fee guy only gets $5K per client per year the only way to scale is to get more clients. Basically a get what you pay for argument. Not that strong of an argument in my opinion, but maybe others are more convinced.
Another great argument is that the best advisors want to make the most money and that the way to make the most money is to charge AUM fees. If you want the best advisor, go with an AUM fee. A variation on the get what you pay for argument.
But I think the “value argument” is pretty weak, as can easily be seen by applying it to a physician. I saved a life last night. How much should I charge for that? The value is priceless, at least hundreds of thousands. But the fair price is just a few hundred dollars including the E&M fee, the critical care fee, and the intubation fee. It’s 2 or 3 times my hourly pay and it only took me an hour or so, so I thought it was pretty good compensation. But you can’t charge by value. That’s stupid. It’s just as stupid with financial advice.
Your other argument, that financial advice is different and worse if you pay hourly, is also very weak. Two competent, fiduciary advisors who get paid by different models aren’t going to offer substantially different advice.
Hard to say what Eric’s source of income could be…the point that is often pressed in this website is that regardless of whether you choose DIY or an advisor, you still have to pay attention to some degree. Nobody cares more about your financial future than you. So much is spent talking about investment fees (which should be minimized as much as possible) but from my observations it is discretionary spending that hampers most people’s net worth. Unconsciously spending without any improvement in happiness drains a much larger percentage of income every year than 1% AUM fees. An advisor that could help somebody stick to a comprehensive financial plan is much more powerful. The hourly or flat rate advisor has much more interest in helping clients in this way. The AUM advisor only wants that retirement account to do well. The worst scenario is the advisor that charges the flat fee for planning AND the AUM for investment management. More focused articles on conscious spending and budget keeping (ala MMM but for physicians) would hold great value for your readers WCI.
Anyone knowleable knows a 1% fee is crazy, you are paying 15% of your profits based on a 7% return
Like I gave told others, you need to become financially literate ASAP
Take the financial literacy quiz. Google it and check if u r literate
Nice post John. As an adviser with 20+ years in the business, I agree strongly with your position. If an investor wants financial planning guidance, they can buy that completely separately from “investment management.” There is no reason at all that at these levels of compensation they need to be lumped in together. A financial plan, even for those that have $1 Million or more simply doesn’t take all that long to do. If an investor wants to work with an adviser, they should ask how much they charge for the financial plan and how much they charge to manage money. If the adviser says we charge .50% or .75% or 1% for everything and won’t break the two out, they should press them to break it out and charge for each one separately.
Also, if an investor wants to use an advisor that charges AUM and simply wants help with investment management, they should ask for the firm’s investment recommendations and market calls they have made for the last 3 years, or 5 years, or 10 years. Also, ask for an explanation of each change that was made and why it was made and how it worked out. See if they will provide anything on this at all. If an adviser or firm is promoting the notion that they can outperform, even with their additional fees, a boring portfolio of low-cost, well diversified index funds, then they should clearly provide their track record of performance. In fact, I think an advisory firm should list all of their market calls and asset re-allocations right on their website. Why not? This is what they do for their clients – why not display their brilliant forecasting and expertise for everyone to see. If you are going to purchase this service from a firm, you should be able to clearly see all that they have done in the past – and not just the calls that were right – but all the calls.
I’ve never met an advisor on a AUM fee schedule who was worth the AUM fee… EVER! Fee based lets you know what you are getting…
AUM fees are an old school traditional auto pilot that is only great for the advisor… (But he does have to feed his family.. just need paying for all of his vacations on my dime… I have not encountered one who was worth the cost…
Via email:
This is half the story. The real, actual fee is closer to 2-3%.
1% – fee for AUM
@1% – annual fee for mutual funds that will likely be chosen by financial advisor; this compares to LESS THAN 1/10 of 1% for broad-based index fund from Vanguard or Fidelity.
Another fee – impossible to know but there nonetheless, for “hidden costs”, e.g., tax consequences of churning; fees that may be charged for buying some mutual funds; fees that may be charged for exiting some mutual funds;
This is a no-brainer. If people using FA’s had to write a check every year for the total extra fees they are paying, compared to a broad-based, low cost index fund, they would likely quit after the first year. Especially when they realize their account did no better than the S&P 500. I have very smart friends who are completely clueless about what it costs them year after year in excessive fees. Consider a 5 million dollar account, not uncommon among retired doctors. That’s AT LEAST $100,000 extra every year compared to putting the money in a low cost index fund. $100,000 a year over 10 years is 1 million dollars in excessive fees!!!
I agree FAs can bring value, especially when people are uncomfortable with self-investing and don’t even know where to start. But 10s of thousands of dollars year after year after year is crazy. It would never happen if people had to actually write our a check for these fees. Imagine if doctors charged patients a percentage of their net worth year after year for their advice and care. Or lawyers. Or accountants. No one else gets away with this.
And yet, it seems like many people pay that much (and more), which I find astonishing. A slightly different but related issue-nothing puts doctors to sleep faster than a discussion of what they are actually paying for their 401k.
When, being on the Benefits Committee, I asked our 401k brokers whether , by charging us close to 20% of our (possible) returns based on his AUM fee, he’s willing to share at least 5% of risk, I got a blank stare from one of them and a nervous giggle from another.
to the emailer,
It is baffling why a FA continues to use mutual funds with ER of 1%. Under AUM model, one would think the FA shares the incentive to use low cost index ETFs.
WHY? I speculate the reasons include:
1) the psychological thrill of playing the big shot with fund managers. “I manage $750 million in central Iowa and would like to talk to you………” to Bill Gross of PIMCO. etc.
2) FA inability to admit to self that his fund picking over the past decades was a suboptimal method. He hangs on to the thrill of picking a few winners among the many losers.
Bingo – my first 401K plan I set up for my practice used an adviser that charged 1% and used mutual funds with an average ER of 1.5% or so. Even in the days of 8% gains this is a huge portion of profits going out the window for very little value.
Jim, all excellent points that you make and most are discussed extensively in my blog; just to reiterate a couple points.
Even when the individual is very intelligent and financially savvy, it still often makes sense for a person to hire a financial advisor, for reasons stated here and in my blog.
Attorneys and CPAs have been successfully charging hourly-based fees for hundreds of years. Fees are charged for all time expended on client service matters, and the most qualified charge the highest hourly rate. However, I suspect many clients truly hate vetting hourly bills. Remaining clueless of amounts paid makes life much simpler, and it seems many opt for “ignorance is bliss”. Jim, I agree with you that there is no reasonable justification for this. An annual fixed fee might be a reasonable middle-ground solution, provided it can be reasonably justified in terms of actual hourly fees, and provided it is revisited each year.
Of course aum is a goal sham but again it comes down to a lack of financial literacy
All you need to know can be learned in one hour
Doctors used to make so much dough that they did not worry about issues like this
But their income is probably 1/2 of what is was 30-35 yrs ago
Investing is like coding. At first you think you should pay someone else to do it. You eventually realize you need to know it. There is little to no evidence that financial advisors steer people in the right direction or even keep them on course. If you call your advisor about the stock market they just sell you an annuity to shut you up.
I agree with the spirit of the article, but I think it overestimates the number of hours an AUM adviser works on your portfolio. Based on the estimate of $7k in billable hours, anyone with a portfolio under $700K should choose an AUM adviser over a fee only adviser and then switch when the fee only adviser becomes cheaper. The problem is many people would not switch and it’s hard to justify a fixed fee adviser when beginning investing.
In response to the e-mail comment, any type of financial adviser–fee only or AUM–could put you in high expense mutual funds and it wouldn’t violate any fiduciary responsibility. If you know enough to realize you’re being overcharged, you probably can do it yourself.
If you run into anything complicated, consult a tax accountant or estate lawyer both of which are paid by the hour.
Most consider advisors paid by AUM as “fee-only” as well.
If Bob is able to find the same competence and level of service for less, by all means go with the less expensive service. Then he doesn’t have to worry about what Ted charges or whether it’s excessive, in the same way I don’t care what Tiffany charges for its jewelry. It must be worth it to those who buy it. I’m not in that market. If Bob doesn’t seek out alternatives I don’t see how it’s productive to only point out that Ted charges several times more than CPAs and attorneys for a different type of services.
Harry, the purpose of the article is to explain why Bob, an intelligent and financially savvy individual, does hire a financial advisor like Ted. Your comments are logical, but fail to account for the typical behavioral propensities of many retirees. Jim writes: “I have very smart friends who are completely clueless about what it costs them year after year in excessive fees.” As a retiree, I also know many who are clueless about fees.
The above article attempts to show the logical process used by Bob when selecting Ted. Harry, it is easy for me to understand why all these smart people do chose the AUM fee advisors, even though your caveat emptor comments make perfect sense. The current situation will continue until the HNWI become fully aware of the excessive fees and address these matters with their advisors. Consider Jim’s clueless retired doctor with the $5 million account; he has the bargaining power to make a difference. Hopefully this article and all the good advice on the WCI blog will help start these discussions.
if you are financially illiterate the advisor you choose is basically meaningless
Unfortunately these doctors will lose hundreds of thousands over their career
Vanguard has advisors and its cheaper but still costly
Thanks for breaking that down! Great comments here too.
White Coat-I am transitioning from using Vanguard Bond funds to a bond ladder/CDs for fixed as I enter retirement. Plan to utilize a money manager to build the portfolio. Equities in Vanguard Index funds at Vanguard. What is a reasonable AUM on a bond portfolio of $1,000,000 if the manager already gets paid with the bid/spread purchasing the bond?
Thanks, CB
Well, that’s a great question, and I probably don’t have enough information to answer it. The least expensive way to do individual bonds is to simply buy treasuries yourself at auction and hold them to maturity. No expense ratios, bid-ask spreads, or AUM fees. Given how easy that is to do, I wouldn’t be willing to pay someone else very much at all to manage individual treasuries for me.
Since you only have a million dollar bond portfolio, if your desire is to invest in corporate bonds, I’d probably recommend just using a bond fund. The additional diversification and management is well worth the low expense ratios you can get at Vanguard and I think the risks of using a bond fund instead of individual bonds are overblown.
So that leaves munis, where I think a reasonable argument can be made for both individual bonds and hiring an expert to manage them. Like with anything in life, your goal is to get competent service at the lowest possible price. At a certain price, I’m sure you would agree you would rather either go the individual treasury route or the muni bond fund route. Also, remember that with lower yields, if your yield is only 3-4%, and you’re paying a 1% AUM fee, that you’re giving away 1/4-1/3 of your return. You take all the risk and only get 2/3 of the reward. So I think if you’re going to pay a fee, it ought to be significantly less than 1%. The further below 1% you get, the fewer people you will find willing to do it for you at that price.
One of my advertisers, Kon Litovsky, is a big fan of managing an individual muni portfolio. He is also a big fan of flat fees. That’s probably a very good combination for what you’re looking for. You would have to ask him what he would manage that portfolio for, but it wouldn’t surprise me if he would do it for $4-5K a year, or maybe even less. That’s the equivalent of an AUM fee of 0.4-0.5%. I wouldn’t expect to be able to find someone willing to do it for much less than that. Whether he can add that much value to you really depends more on you than the nature of the investment.
Financial advice is expensive stuff, even when you go to the lowest cost providers. The cheapest option is always doing it yourself. But that’s not always the right choice. It’s probably not even the right choice for most people.
Good luck! Let me know what you decided to do and what you found.
Thanks White Coat. The 0.4-0.5% AUM is what I am finding however teasing out clear answers on the bid to spread makes for an interesting discussion with brokers. I want a detailed breakdown on my cost for every bond purchase to be perfectly sure the money works hard in this low rate environment and ends back up in my pocket.
Will circle back once I finish my research.
Thanks,
CB
just buy bond funds from vanguard and cds from them as well
no need for a money manager for bonds and a crazy fee
he will be taking 15% of your gains minimally
think it out
Vanguard charges .3% AUM, so for the novice with a million or two it is probably worthwhile until he becomes financially LITERATE
Vanguard management is a great option. Approx. 13 years ago I was burned by a financial advisor (actually a conman) who convinced me to move my retirement funds under his management. He then proceeded to charge me every which way he could: 12b-1 fees, unit investment trust fees, expensive front load mutual funds, etc.. On top of that, he churned my accounts to generate more fees. Once I finally caught on, I moved all my assets to Vanguard. I’ve been a DIY ever since and am comfortable with this responsibility. Fortunately, Vanguard offers free financial plans for accounts w/ assets over $1,000,000. I will occasionally pay for a financial plan (hourly fee planner) outside of V’s annual plan. My current need is for tax (combined w/ financial) planning. The best source: our tax accountant – who knows your tax situation better? Unfortunately, once he discovered the size of me & hubby’s assets ($2.6, excluding house), he relentlessly badgers & bullies me (the family bean counter) to move our assets under his management. I feel under siege and am considering changing tax accountants, though he is very good. BTW: in 2015 he joined a financial planning company, in addition to running his tax business. I don’t see a way around this conflict of interest. We need advice from our tax accountant to have a complete/comprehensive financial plan. But we will keep asset management w/ Vanguard, separate from our financial planning/advice. Any suggestions?
Have found bond portfolio purchasing/pricing muddy to say the least. Will only work with brokers that spell out cost on each trade exactly. The AUM piece is also variable. Have found zero to 0.5% . Lower AUM usually has higher per trade cost amortized over the life of bond—-short is cheaper and more common in this environment.
Thanks, CB
I have an obvious example of AUM paid FA giving BAD advice perhaps since it benefited him if we do the wrong thing.
A few years back when we had less money we met a charming interesting FA with a local TV show who met with us for several introductory meeting/planning sessions. He explained his career plan is to get 100 clients with $0.5m or more and charge 1/2 (or 1?)% AUM and so make $250K per year. We were willing to be one of those clients until I pointed out to my husband that the man wanted us to sell out of our tax deferred IRAs and put it into his company’s funds, ignoring the tax burden that would put on us that year (ie we would have about $50K less as soon as we paid taxes on that transfer and he had totally ignored that $50K loss).
Perhaps he wasn’t just an AUM FA since the company also had some costs to its funds. I forget if they were very high but think we already knew about “load” funds and they were not that- might though have been annuities….
I believe we dodged a bullet there.
There is no price too low for bad advice.
I think an important consideration is the actual AUM fee. Rick Ferri’s fees are at 0.37% for the first $3M and 0.2% for money above that. That is in the same ballpark at the Vanguard Personal Advisor Services AUM Fee, which is at 0.3%.
These AUM fees are far lower than the 1% fee in the example. The fee for Mr. Ferri’s AUM fees would be $7400 and Vanguard Personal Advisor Services AUM fees would be $6000 on a $2M portfolio. These fees coincide with some of the fee only figures mentioned above as reasonable fees. WCI mentioned above that AUM fees may be similar to fee-only advisor fees; this is especially true if the fees are far lower than the 1% in the example.
The big issue for me is that a DIY portfolio with Vanguard or Fidelity that would have no AUM or fees other than the expense ratio could have no more than a 0.1% in expense-ratio yearly cost, and would be only $2K per year. That is a logarithmic difference compared to the $20K of the 1% AUM fee in the example. Those types of difference affect compounding interest greatly.
The point above by Ken about the percent of growth is very important too. An AUM fee of 1% is a large percent of growth on a $2M portfolio; it would be $21,600 for 8% growth in a year on a $2M portfolio–about 12% of gains. But in a flat earnings year/year with slight loss, the percentage could be far higher, or you’ll be paying even when you have a loss.
I feel much better about managing my own investments with a simple portfolio. The difference in cost is enough for me. I will come here for my “stay the course” encouragement during the next economic downturn. It comes down to how much you value what WCI says: “you get to keep what you don’t pay for.”
There is no doubt that the least expensive management is self-management. A discussion like this is primarily for the 80% of docs who don’t have the knowledge or discipline necessary to do that and lack the interest or ability to get them. I know it seems stupid to those of us managing our own portfolios to pay somebody else $5K a year to manage our money. I guess my point is that if you’re going to pay somebody to manage your money, make sure they’re doing it well and see if you can’t get them to manage it well for $5K instead of $20K. I’m less particular about whether you pay them $5K as an AUM or a flat-fee, although I think it is very rare for someone to be paying a $30K flat-fee, but not that rare at all to be paying that as an AUM fee.
Those here that are well aware that costs do matter are well ahead of the game
I am not about to pay anyone 15k to manage my index funds
What could he possibly offer me other than lunch
Harry Sit, this is a further reply to your comments above and on your The Finance Buff blog. I know you are a very smart guy, and not a shill for the financial advisor industry, so I must conclude that I failed to make myself clear.
The FA industry is vast and they have successfully convinced the broad public that 1% AUM is the going rate and that any qualified FA will charge that. Almost all qualified successful advisors do follow suit. There are over 200,000 FAs in the US, almost all singing the same song. Even the less qualified follow suit because they know they might simply be out of business if they charged on an hourly basis. Therefore, there are very few FAs, particularly qualified FAs, who do not charge %AUM. Bob will have a tough time finding an alternative FA that will charge on an hourly basis, and who he is convinced is as qualified as Ted.
As a HNW retiree, perhaps I can better get into the head of other HNW retirees. Many retirees simply don’t realize the true dollar cost of what they are paying. You may think that, since this is so obvious, they deserve what they get for being so stupid. I disagree; this is a typical behavioral issue, even among very smart people. Another common behavioral matter is the disdain by many for vetting monthly hourly fee bills. “I don’t want to have to think about financial matters.” Most of these people don’t frequent blogs like WCI that attempt to set matters straight.
Harry, you may now be thinking: “Craig, all you have done is describe the market where the rules of supply and demand apply.” No. What I have been describing is a beautifully orchestrated sell-job by a multi-billion dollar business on millions of retirees. Next, you may be thinking that the fee structure is much less egregious with respect to the non-HNW retirees, and that may be so at lower levels of AUM. But with respect to the HNWI, this simply is not the same as preferring Tiffany over discount jewelers. Those individuals with a net worth of, e.g., $3m would be much happier applying the (substantial) excess fees to grandchildren’s 529 plans or charity.
So what should be done? First, HNWIs should be advised about the egregious fee overcharge. This is not easy when you consider the message is being conveyed by blogs like WCI that are pitted against the massive FA industry. Second, think what would happen if several $3m+ AUM clients went to their advisors and said: “I like working with you, but will no longer pay the excessive %AUM fee; let’s discuss the services and hours in detail and see if we can agree on a more acceptable fee.” Would the advisor turn away the client and his fees, which likely would simply go from exorbitant to substantial? I think not. Now we are talking true market supply and demand.
Some advisors would turn the client away, while others would not. Most successful advisors, that have multiple $3M+ advisors, have little marginal utility for additional money. Yes, losing $50-100K in revenue sucks, but if you’re already making $2M, it’s not that big a deal, especially after tax. But I agree with your general principle that there is plenty of room for negotiation, and far too few clients actually doing it. And even when an advisor has many clients paying less than 1%, he’s still probably advertising the 1% fee in case there are people dumb enough to pay it. That’s no different from any other business. I get paid different amounts by different insurance companies for the same E&M code or the same procedure. Obviously I’m willing to do it for the amount the most savvy negotiator will pay, but if someone is willing to pay me twice as much for it, heck yes I’m going to take their money.
” And even when an advisor has many clients paying less than 1%, he’s still probably advertising the 1% fee in case there are people dumb enough to pay it.”
I don’t know how common that sort of variable fee structure is, but just think if the cocktail party conversation shifted to “…nobody pays the full 1%AUM fees anymore…”
I bet most AUM advisors who advertise a 1% fee have at least one client paying less simply because he negotiated it. He’s probably still paying 0.8% or 0.9%, not 0.4%, but it’s better than the full rack rate.
And the moral of that story is: Drop the % AUM fee structure altogether — negotiate a flat fee or hourly rate, but in all cases a fee based on time spent and service provided.
as stated previously, there is no more involved managing 2 million versus 5 million
The scale should slide down with increased assets as obviously most portfolios grow with time
imagine an AUM on 10 million-OUCH!!!!
if an advisor had three 10 million dollar clients paying 1% AUM, he would be doing better than most docs, don’t you think