By Dr. James M. Dahle, WCI Founder
One of the most important aspects of choosing a high-quality financial advisor (a catch-all term I use for a financial professional who functions as a financial planner and/or an investment manager) is to make sure they are a fiduciary, FEE-ONLY advisor. These are critical (although not sufficient) aspects of ensuring you are obtaining good advice at a fair price. There are four methods of paying for financial advice:
- Commissions
- Asset Under Management (AUM) Fees
- Annual or One-time Fees
- Hourly Fees
The Problem with Financial Advisor Commissions
I do not believe it is wise to hire an advisor who charges commissions. I feel the conflict of interest is simply too great, even for a really good person, to allow for good advice under this model. In the short-run, this is often the least expensive way to pay for advice, but in the long-run, the fact that the advice is usually less than ideal makes it the most expensive option once you take the opportunity cost of the bad advice into account.
That does not mean you cannot purchase financial products such as insurance or a mortgage from a commissioned agent such as an independent insurance agent. However, when you go to do so, you need to recognize that the agent is incentivized to sell you as expensive of a policy as possible. So it might be wise, if you need advice, to determine the type, amount, term, and features of your insurance policy with a fee-only advisor PRIOR to going to the agent to purchase the policy. The agent is often the most knowledgeable person about the ins and outs of policies, of course, and can help you determine which policy to buy and help shop you around to the various companies so you end up with the best deal.
But this is not the same as getting good financial advice. Mistaking a commissioned insurance (or mutual fund) salesman for a real financial advisor is a common mistake among white coat investors. Note that these advisors are often called “fee-based” advisors and that this is very different from a “fee-only” advisor. A fee-based advisor charges both fees and commissions, while a fee-only advisor charges only fees.
What Is Assets Under Management (AUM) Fee?
My second least favorite method of paying for advice is an Assets Under Management (AUM) fee, a percentage of your portfolio paid to the advisor each year. The main issue with AUM fees is that they can grow to a ridiculous sum. For example, if you were paying 1% of a $500K portfolio ($5,000 per year), that's probably a fair price for good financial advice. But when the portfolio grows to $5 Million ($50,000 per year)? I'm sorry, you're being ripped off. Even if you're receiving more value than $50,000 per year, it's still a rip-off because you can get just as good of advice for 1/10th to 1/5th the price.
The Problem with Financial Advisors Using Asset Under Management Fees
A more minor issue with an AUM fee is that it is generally just subtracted from the account, usually on a quarterly basis. This method of payment, rather than writing an obvious, large, painful check each year, causes people to be a little less conscious about overpaying for advice. Other criticisms of the AUM model include the fact that an advisor is incentivized to roll money into accounts they control and charge for (such as an ill-advised IRA rollover), to not pay off mortgages or student loans, and to not offer advice or service on employer-provided retirement accounts.
These issues have caused some in the financial blogosphere to avoid recommending advisors who charge AUM fees at all, for example, The Physician on FIRE and The Physician Philosopher. In a recent Saturday WCI Network post, The Physician Philosopher wrote:
With an Assets Under Management (AUM) model where you pay financial advisors a percentage of your assets each year. You never directly cut them a check. It is swept out of your assets unbeknownst to you every quarter. At 1%, which is the industry standard, that is going to cost you a boatload (A boatload = millions of dollars).
For example, at 1%, of your $3 million dollar IRA in retirement, a 1% AUM will cost you $30,000 per year. Compound that on 6% interest for thirty years and you’ll begin to get an idea of how big of a number AUM costs you.
My assistant editor, who often writes the “SEO Blurb” for the posts, came up with this one for the post:
Run for the hills if your advisor is charging an AUM fee. A good financial advisor is a flat fee-only fiduciary without the conflict of interest.
and my social media person, who writes the tweets promoting each new blog post, used that line in a tweet:
Boy did I catch some (completely appropriate) flack for that, since it really doesn't represent my view on AUM-fee charging advisors. Here are some examples:
Why I Take Money from AUM-Charging Financial Advisors
While I think the best ways to pay for advice are an hourly rate for financial planning and a flat annual fee for investment management (although they also have their own conflicts of interest), I certainly do take advertising money from advisors who charge AUM fees and have for years. Over the years I've been blogging, the AUM fee has become (probably deservedly) more and more maligned, so I thought today it was important for me to explain to my readers WHY I have advertisers that charge AUM fees and WHAT they should do about that if they are looking for an advisor or perhaps already have one who charges an AUM fee.
Stuck between a rock (high fees) and a hard place (doing it yourself)? Better think thin.
The most important thing is to not throw the baby out with the bath water. First, realize that an AUM fee is a DRAMATIC improvement over a commission-based model. It is a FEE-ONLY model. You are paying a fee (and unless you're really ignorant a fee that is relatively easy to discover and calculate) and you are generally getting minimally-biased advice.
Second, one great thing about an AUM fee is that in most of the important ways, it aligns the advisor's interests with yours. The advisor wants you to have a bigger investment account. You want to have a bigger investment account. She works hard to get you to save more (which most people need to do.) She works hard to get you a solid return, because it further grows the account. These are good things.
Third, keep in mind that many of the “good guys” in the industry and many of your favorite authors either once charged or are currently charging AUM fees. William Bernstein, MD. Rick Ferri. Bill Schultheis. Larry Swedroe. Vanguard. Paul Merriman. Need I go on? Many of the most experienced advisors “grew up” in an era where the bad guys charged commissions and the good guys charged AUM fees. It's harder to find the combination of gray hair and flat fees than you think. Certainly, there is little incentive for those advisors to change their model now that they have a practice full of clients who are apparently fine with that model.
Fourth, there is a transition afoot in the field. There are more and more advisors charging flat fees and hourly fees every year. But they're still a minority of fee-only advisors, and 8-9 years ago when I started blogging, finding one of them that actually worked with dozens of doctors AND was interested in advertising was well nigh impossible, especially when their practices filled within a year of advertising with me. So when readers asked for a recommendation, where was I to send them? It took a lot of work to come up with 30 or 40 firms that were fee-only, fiduciaries giving good advice to doctors at a fair price at any level of assets. When The Physician on FIRE made his recommended list, he had the luxury of choosing 10 firms from the 40 I had put together over years–a far easier task.
Fifth, many advisors have some sort of a hybrid model. Once you dive into the details, you'll find that many advisors charge a fee that is “kind of AUMy”. For example, Daniel Wrenne, one of my recommended advisors, has this fee structure:
- Early Investors (Up to $500,000 of Assets Under Management) – $450/month
- Foundation Builders ( Up to $1,000,000 of Assets Under Management ) – $850/month
- Financially Independent (Over $1,000,000 of Assets Under Management) – $1,250/month
Is that a flat-fee? Or is it an AUM fee? I chose to call it a “tiered AUM-based flat-fee” and many of my “AUM Advisors” charge something similar.
Sixth, flat fees can be higher than AUM fees. For example, consider another of my recommended advisors, Fox & Company Wealth Management:
- Financial Checkup – $3,000
- Basic $1,250/quarter + initial setup fee of $1000
- Premium $2,500/quarter + initial setup fee of $1500
- Concierge $3,750/quarter + initial setup fee of $2000
Well, those are technically flat fees, but they're also pretty much all higher than Daniel's fees (although can easily still be in the range I consider to be fair.) So it's not as simple as “AUM is bad and flat fee is good.” Sometimes you actually have to do some 3rd grade math.
Seventh, at low levels of assets, an AUM Fee is usually cheaper than a flat fee. Given that 1/4 of doctors in their 60s are not yet millionaires (including their house), lots of my readers are far better off paying even standard AUM fees than a typical flat fee.
Eighth, in case it isn't obvious, I'm running a for-profit business here. While I try to do some reasonable vetting of my advertisers (none more so than financial advisors), at the end of the day the entire world is caveat emptor. I can only hold your hand so much. I can show you what good advice looks like. I can show you what a fair price is. But if I want to provide you a selection of good firms to choose from, I cannot insist on perfection from any single firm. You want the cheapest advisor you can find? Do what I do and manage your own money. If you like this financial stuff, managing your own money is the best-paid hobby you could have. If you don't like this stuff, managing your own money is the best-paid chore you have available to you.
What to Do About AUM Fees
So, what should you personally do about AUM fees? Should you avoid hiring an advisor who charges them? I don't think so. As mentioned earlier, if you can get good advice from someone charging you nothing but an AUM fee while you have a sub-$500K Portfolio, you are likely coming out ahead of another investor paying a flat fee. That will take most doctors several years or even a decade before anything must be done.
Eventually, I hope your portfolio will grow to such a size that a typical AUM fee will represent an onerous fee. You should do the calculation each year to make sure you know what you are paying. The math is simple- portfolio size multiplied by the AUM fee. If the fee decreases with higher level of assets, be sure you understand exactly how that happens. For example, if the fee on the first $500K is 1% and the next $500K is 0.75% and the fee after that is 0.5% and you have $1 Million, are you paying $7500/year (the usual case) or $5K/year?
As that AUM fee moves into the 5 figure range, it's time for you to make a decision. Are you going to start doing this yourself, change advisors, or negotiate a lower fee? Your negotiation endpoint can be a lower percentage of new assets, a lower percentage of all assets, or perhaps a cap on total annual fees. Most advisors are likely to give you at least a small discount in order to keep your business, but an advisor with a full practice may feel no need to give you a discount at all (they're running for-profit businesses too and they only need to find 50-100 docs willing to pay their fees to have a very nice little business). In that scenario, you'll have to choose the DIY route or move to a true flat fee advisor, or at least another AUM advisor with a cap on their fees.
As you can see once you understand the nuances of the industry, AUM fees are not necessarily bad. The entire fee package must be looked at, compared to the value provided, and compared to the alternatives. It's fine to use an advisor who charges an AUM fee as long as you are getting good advice at a fair price.
What do you think? Should an AUM-charging advisor be avoided on that basis alone? Should a business accept advertising dollars from AUM-charging advisors? Have you had a good or bad experience working with an advisor under this model? Comment below!
Maybe this should have been run as a pro/con?
I think that from the consumer’s perspective your job is to find three things when it comes to financial advice: (1) Find good advice, (2) at the best price, (3) with the least conflict of interest.
Number (2) is pretty easy. Just do the math. Number (1) is tough because, as you say, by the time you know what good advice looks like, you can probably manage your own money yourself. So, then, the only other variable to manipulate is that third part – conflicts of interest.
In my opinion, a flat-fee model is less conflicted than an AUM model. Hourly advisors’ conflict? Work on the portfolio as much as possible to increase billable hours. Flat quarterly fee? Work on it as little as possible (though you could argue this conflict is not different in an AUM model). There is a shade of increasing assets of the fee is based on assets.
And, when I recommend an “AUMy” flavored model, I prefer for it to be based on net worth, because it encourages good financial habits on both sides of the fence (paying down debt and accumulating savings). Why? Because there is less conflict for someone who does or doesn’t know the difference between good and bad advice. (I hope that they all come to learn that, but it takes time).
Plainly put, an AUM advisor is conflicted on anything that doesn’t put more money into the account (or takes money out of the accounts) that they manage. This includes (but is not limited to) paying down debt early including your student loans, mortgage, or financed car; investing in real estate (this isn’t included in most AUM fees); encouraging a rollover IRA when you change jobs (because IRA’s count towards the AUM whereas 401K/403B do not typically); taking social security early (to avoid taking money out of the AUM managed account); giving large sums of money to charity that could be invested; etc.
I do agree that a fee-only advisor who operates under an AUM model is much better (and less conflicted) than a fee-based advisor. And you give multiple examples of people who have worked historically under an AUM model in the past. Yet, as their thinking evolved (and, I’d argue, improved), many of them switched over to a flat fee model, including Rick Ferri and others.
The bottom line is this: Every model has conflicts of interest. Some just have more than others. You can get good or even great advice from an AUM advisor, but this is not the least conflicted model that exists. The least conflicted financial advisory model, in my opinion, is a flat fee-only advisor working as a fiduciary who has experience working with physicians. That said, like with any financial advisory model, if you use an AUM financial planner or advisor, it is necessary to understand the ins-and-outs of where their conflicts exist.
Also, here is a post written from the perspective of an advisor that includes an awesome chart on all the different conflicts that exist in the financial advisory world (from the perspective of a financial advisor):
https://thephysicianphilosopher.com/how-do-financial-advisors-get-paid/
P.S. I’d love to grab my bag of popcorn to watch the comments explode under this one, but I’ll be working late today. I’ll take a look later after I’ve had lots of rocks thrown at me 🙂
TPP
Okay. I’ll call your bluff. Go ahead and list ALL of the advisors with experience working with physicians who charge under a “pure” flat-fee model and have a need to advertise. I’ll wait. I assure you it’s a very short list and if you’re like me, it’ll take you years to compile it. And most of them have been in business less than 5-10 years.
I do have a list. It can be found here: https://thephysicianphilosopher.com/financial-advisors/
And you are right. It is a short list (5 total right now, but always looking for others who meet the criteria above), but one that I can recommend even to docs who don’t have a ton of financial literacy, and who are at the highest risk for being taken advantage of by the financial industry.
I think we all draw the lines in various places for our recommended lists, and mine is drawn at the four criteria I listed above. If they all run out of room, maybe I’d consider expanding the list to other fee-models for those who still need help.
TPP
What did that list look like in 2011? 🙂
I’ll give you a hint. It would have had one advisor on it and it would have been a hard sell to get him to pay you $100 a year to advertise there. Hardly worth designing your application much less reading it. (Ask me how I know.)
Kudos to you for putting together a list. Of all the things I have done with WCI over the last 8 1/2 years, that was my least favorite AND the one least worth the money I got for it. But I’ve got docs asking for referrals to advisors every single day. I either don’t serve them, put together a list and not get paid for it (which I did for the first 2 or 3 or 4 years), or do what I’ve been doing the last few years. I obviously chose # 3.
Incidentally, one nice side benefit has been convincing some advisors to change not only their fee structure (from AUM to flat fees) but also their investing advice (from active funds to passive funds.) Advisors really don’t like being told I don’t feel like I can recommend them to my readers. Some of them just go away mad, but a few actually change.
The last few AUM charging advisors that have applied have been asked to read my post on “My Two Least Favorite Ways of Paying for Advice” (which includes commissions and AUM fees.) Some still advertise with me, some don’t.
At any rate, I don’t view AUM fees as some sort of purity test as other bloggers (including you) seem to. I think doctors can be responsible enough to do one third grade math equation a year to make sure they’re still paying a fair fee. I don’t think that’s too much to ask.
Conflict of interest is not the only problem with AUM of flat fee. A large issue is the hourly rate one pays. The nice thing about a hourly fee system is that the client knows what they are paying.
Let’s use the estimate of $5,000 per year for a half million dollar portfolio. Hourly fee advisors charge a range of rates. Let’s use $250-500/hour. That $5,000 would pay for 10-20 hours per year of advice. How many people need that? Zero-2 hours per year seems a lot more likely. Someone who uses an hourly fee planner would pay $500-1,000 for two hours of advice one year and perhaps nothing the next year. So $500-1,000 over two years. Someone paying AUM would pay $10,000, even if they had not need for any advice beyond that 2 hours. They are paying $5,000 /hour for advice.
Someone who anticipates a need for 50 hours of advice one year could get a great price paying only $5,000 for it. But who needs that? For what?
The next problem with AUM is that the cost goes up as assets increase, while the need for advice may not change or decrease.
If there is a steep reduction in rates as assets increase, one could imagine $5,000 on the first 500k and another $5,000 for the next $4,500,000. The fees have doubled. Does the client need $10,000, 20-40 hours, of advice? Again, for what?
Parking money in a handful of index funds is all the investment management one needs. For someone who refuses to do that on their own, a balanced , target date or life strategy fund will provide that for a tiny fraction of the cost.
So there is no reason to pay an advisor vastly more to do the same thing.
Most AUM arrangements do not include tax preparation or the legal work of estate planning. So what is the advisor doing for dozens of hours per year? In most cases the answer is “nothing”. In some cases the advisor may actually be doing things but not things that need to be done.
By seeking and paying for legal advice when needed and doing the same for financial advice, the clients pays zero most years and when advice is needed pays only for that requested.
This prevents buying many hours of advice that are not needed and not used.
Part of what they’re paying for is simple portfolio maintenance chores. Obviously you and I don’t put a lot of value on that, but there is some value there and it is a lot of value for some people.
“Part of what they’re paying for is simple portfolio maintenance chores. Obviously you and I don’t put a lot of value on that, but there is some value there and it is a lot of value for some people.”
The issue is not the value of these simple chores, but the price.
Balanced, life strategy and target date funds will maintain a portfolio for a tiny, tiny fraction of what advisors will charge.
If you can get this service for 7 basis points, which is what Vanguard’s Balanced Index fund charges, then why pay 1%?
Vanguard’s balanced index fund isn’t going to do my portfolio chores. To suggest it is naive.
Illusory Superiority Complex – we view ourselves better than average.
The stock market rhythm ROI on the average is 6 to 10 percents long term naturally – currently,
a diverse index fund is the best partner for the natural market dance.
Ninety five percents of financial advisers cannot beat the natural stocks market rhythm.
At the very best and few of you here are ranked in the 95th percentile in net worth – you will
need the minimal of 12 million dollars to break through this barrier and have the opportunity
to invest in something other than index fund.
You still have to work tirelessly to gain knowledge beyond the 95% of the financial advisers to have any inkling understanding of the new and out of general public view opportunities.
What is missing right now in the world of investing is a gap to satisfy the investing need
for top 10 percentile of the population (90% – 0.1%).
WCI thinks he has the strategy!
You don’t need $12M to invest in something besides an index fund. At most you need $1M to become an accredited investor.
The most important part of the AUM fee is that you are not sent a bill, but the money is withdrawn from your account (as you have pointed out). It is not any more work for the adviser to manage $500,000 or $700,000, yet the fee increases. Charlie Munger once asked his audience what product out there can you sell—where you raise the price—and you wind up selling more of that product? The answer was a load mutual fund. That is because you are bribing the purchasing agent, and getting the best sales force. I am glad you did this post. I have a slide in my talk for your conference about what fees you should not pay. I am debating to put in the AUM fee, however there are so many caveats I am just not sure if I should. I have had the experience that clients do not know what they are paying. When I put it like “if you received a bill for $2,500 four times year and had to write a check, what would you think?” The answer is usually that is too expensive. A nice example of this concept is the WCI’s parents. The WCI spends an hour each year re-balancing the portfolio. That could be a $10,000 hour with an AUM fee! To be fair, the professional adviser does have overhead, E&M insurance, compliance costs, etc….Great and balanced article Jim. Enjoyed it very much.
PCM
The not being sent a bill can be remedied by asking for the bill to be sent and paying it directly without it coming out of the assets under management . What I want to know is what is the maximum that is fair to pay when portfolios go over the million mark; as has been said one million 5 million 10 million is the same amount of work to manage.
It’s probably better to pay it out of assets under management if the assets are tax-deferred. You just paid your bill with pre-tax dollars. That’s a good thing. But that can be done with any model I imagine.
AUM is the worst model out there expect for all of the others.
My bone of contention is when AUM is used for Asset Management. Asset Management is a commodity. Charging 1% for a modern portfolio is absurd.
Then, why do you throw financial planning on top of asset management in order to “add value” and think it is a good deal?
An educated consumer can find good value with an AUM advisor. But why are most brokers abandoning their commission model and converting to hybrid to sell AUMs? Do you think brokers are doing it because it is the best deal for their clients, or is chasing assets is hella profitable???
Is it absurd to charge 1% for a $10K portfolio? You think $100/year is “absurd”? Would you manage someone else’s portfolio for $100/year? I wouldn’t.
Okay. I’ll call your bluff. Go ahead and list ALL of the advisors with experience working with physicians who charge under a “pure” flat-fee model and will accept a $10k portfolio? I’ll wait. I assure you its a very short list and if you’re like me, it’ll take you years to compile it. And most of them have been in the buisness less than 5-10 years.
You mean a pure AUM model? I agree it’s a short list. Most have a minimum or at least want to see you saving a ton every year.
Got a new slogan for you Jim:
AUM: THE NEW WHOLE LIFE
Or maybe better for TPP and me to take up that fight!
If you can’t see the difference between a fee-only AUM-charging advisor and a commissioned agent selling whole life inappropriately, I’m not sure I can help.
I doubt anyone has ever accused WCI of having a sense of humor!
Not very often. I’m also told my podcast is not very entertaining. Oh well. If it helps docs save hundreds of thousands (millions?) it’s worth it.
Looking at these numbers and seeing how easy it is to manage my own money (since I have educated myself on how to do it) I’m thinking that maybe medicine was a bad choice and I could make better money with less headache as a financial advisor.
Was it really money that drove you to go to medical school? I doubt it if you’re like most docs. You assumed you would make good money, but that probably wasn’t your primary motivation. Hard to get through residency making $8-15/hour for years “for the money.”
In my opinion, everybody should learn some basics about personal finance, it’s not hard, doesn’t take long time to learn and you don’t need to spend a lot time managing your money.
In my opinion, everybody should learn some basics about personal finance, it’s not hard, doesn’t take long time to learn and you don’t need to spend a lot time managing your money.
To clarify, we (Daniel Wrenne) charge $1k up front and $200 or $250/mo for financial advice and planning (no investment management). We charge more for investment management ($4-10k/yr) – average person pays $5k. We are doing our best to make pricing more fair and aligned.
Your range is $5-10k. What does the client that pays $10,000 look like?
Maybe around $1 Mil of assets. Ha, just kidding.
People on the high end for us have lots of accounts that are growing fast and want to delegate as much as possible to us.
An AUM FA has motivation to make you as much money in the accounts they control. This might not be best aligned with your interests.
A Flat fee FA might be more conservative then they should be. How many clients do they lose when the market takes a dip and people get pissed. Being more conservative will free them up from more hand holding. Loss hurts more then gain helps for most people.
A Commissions based FA should be avoided at all cost. It is surprising that these actually still exist. Some of the fees I have seen are borderline criminal.
When it comes down to it the only person you can really trust with your money is you. (pretty sure I am paraphrasing one of your quotes)
That was my main motivation to learn this stuff.
1250 per month is $15000 per year, $3750 is $15000 per year. What do you consider the maximum sum/AUM dollar sum to pay per year? Is it $15000? The cap number would be good to know so if you are under an AUM model when you reach the terminal fee amount you can either do it yourself or go elsewhere or discuss lowering the percentage to stay below the threshold I’m asking you to state what that threshold amount is. Is it $5k, $10k, $15k? It should be the same number whichever model you are under other than doing it yourself.
My personal threshold? It’s $0. That’s why I do it myself.
Your personal threshold? I have no idea. Ask yourself that.
But if you step back and look at it this from the outside, if someone is willing to manage your assets for a flat annual fee of $5K/year, and does a good job, it seems kind of silly to pay someone even $10K to do it. So you have to ask yourself, “Self, what am I getting for that extra $5K/year and is that worth it to you?”
I’m not sure what reaching a certain dollar “threshold” has to do with immediately switching over to managing your own investments. If you are willing to pay an advisor for financial planning (hopefully not just for your portfolio despite the billing method) and asset management, I’m not sure that you would reach a certain dollar amount, likely when you have the most investable assets that you’ve ever had in your life, and then decide, no, I don’t want to pay for advice, I want to do it myself.
I think that this overall post and comments are combining multiple types of people/investors and equating them as equal i.e. those who want to outsource everything related to financial planning and asset management, do it yourself types, investors who could be do it yourself types with more education and those who possibly could be (maybe not for a variety of reasons) and talks as though with just more education, everyone could be doing it themselves.
.
I feel comfortable managing my portfolio myself. It took probably 4 or 5 financial books and a lot of blog reading on personal finance sites to get to that comfort level but maybe 30 hours and about $200 saves me 5 figures each year.
Now is it possible I am leaving something on the table and not super optimizing my portfolio? Sure. But just like passive vs active investing, the active funds have to not only beat the market but also beat the increased cost for the management, something that has been proven to be difficult to do.
I like how you put it in Jim that this could be the best paid hobby or chore (depending on how you look at it) and over a couple of decades of more can easily save you 6 figures or more.
Another thing readers who still don’t want to DIY their portfolio is you can partition a small component of your portfolio and have that be advised (such as a robo advisor), take the recommendations and then apply it to your entire portfolio. Then you can keep the fees at a lower cost even though the portfolio can be quite large.
I never got the justification that a 7 figure portfolio should be more difficult to manage (and incur higher costs) than a smaller one. It’s not like the advisor is physically carrying each share. A click of the button is just as easy selling 1 million shares as it is 10.
What a timely post! Lots of pros and cons and I think folks often get worked up over the issue because of being burned in the past. For us we see no need for a financial advisor at this time. I’m comfortable managing our portfolio.
On the other hand, a close relative nearing retirement has a financial advisor who has a tiered AUM system like you mention. Pre-retirement, FA only charges for assets in taxable accounts. Post-retirement, FA will make a lot more managing taxable, plus a substantial amount in retirement accounts and cash buyout. I initially had mixed feelings about the set up. But the FA isn’t wrapped up with commissions or insurance sales. The fees seem reasonable. And the family member knows they aren’t DIY kinds of people with finances and believes the FA is a fair price. All this leads me to believe that there are many valid options for people to pursue. Just be aware of what it will cost you (time if you do it yourself, money with FA, stress one way or another, etc.). Good post!
Hang on just a minute:
Another issue with the AUM model is that often there are front load and back load fees hidden within the mutual funds your advisor has invested your hard-earned money in. If you really delve into the expense ratio/fees for each individual fund and read the fine print, you will be able to spot these front and back load fees and my all-time favorite: the 12b-1 fee which is a marketing/promotion fee. What an amazing concept: you, the individual investor gets to pay for the mutual funds marketing expenses!!
We were with a Morgan Stanley advisor for 6 years and we thought we were “only” paying the 1.7% AUM fee. After we found the Bogleheads forum and White Coat Investor, our eyes were opened to all the fees hidden within the mutual funds which were continually churned – our 32 page quarterly statements definitely didn’t highlight these fees!
Hang on just a minute:
Another issue with the AUM model is that often there are front load and back load fees hidden within the mutual funds that your advisor has invested your hard-earned money in. If you really delve into the expense ratio/fees for each individual fund and read the fine print, you will be able to spot these front and back load fees and my all-time favorite: the 12b-1 fee which is a marketing/promotion fee. What an amazing concept: you, the individual investor gets the privilege of paying for the mutual fund’s marketing expenses!!
We were with a Morgan Stanley advisor for 6 years and we thought we were “only” paying the 1.7% AUM fee. After we found the Bogleheads forum and White Coat Investor, our eyes were opened to all the fees hidden within the mutual funds which were continually churned – our 32 page quarterly statements definitely didn’t highlight these fees!
No, a fee-only advisor, even one paid an AUM fee, would not be putting you into funds with front or back loads. Those are FEE-BASED advisors.
1.7% plus loads churned multiple times a year! Sounds like a real POS advisor. If that person had a fiduciary duty to you, you might have a legal case. But I bet he didn’t.
To provide clarification to my previous post: the front and back load fees are commission paid to your financial advisor. Our Morgan Stanley guy was adamant that he was not commission-based whatsoever – only AUM- based. However the front load fees within the fine print on our funds told a different story.
Sounds like he was either a liar or an idiot, neither of which is a good sign in a financial advisor.
AUM makes “some sense” if ACTIVE management makes sense. The more money you have the more work involved in finding advantageous opportunities to deploy that money. The problem is that as ACTIVE management has been exposed and threatened by PASSIVE management, the AUM model has persisted where it makes little sense at all. As many have noted, passively managing $5 million is not twice as much work as passively managing $2.5, but the AUM fees are still close to double. (And I do say run for the hills if any advisor claims their “fees ‘go down’ the larger your portfolio is.” No. The percentage goes down. A smaller percentage of the higher amounts is still MORE money removed from your pocket– fees “go down” would means LESS money out of your pocket, and that never happens.)
I would be willing to give an advisor a percentage of my GAINS if I thought they were adding value above what I could do myself. But the pot of money I bring to the table is mine, and they have no legitimate claim to a penny of it. I am not aware of any advisor willing to offer such an arrangement. Then the incentives would actually be aligned. Almost.
The WCI is at least up front about the criteria to be listed as a trusted advisor– The advisor MUST PAY WCI ad fees.. This may be a site for doctors, but it is a business site., run as a business with the values inherent in business….This is NOT THE VALUES IN MEDICINE.
Imagine if a doctor were to only recommend a specialist if she paid him to do so. It is illegal, I think.
So when asking this site to provide information about the “best” advisors… as WCI very plainly states, CAVEAT EMPTOR.
Very nice post and clearly a heated topic based on the comments above. Having followed you since 2011 and done a lot of reading before and since then, I am confident I could completely take over my own finances. However, I still maintain an AUM financial advisor.
However, I do somewhat of a hybrid model. I actually control a lot of my own stuff (so it stays out of the AUM fee). My financial advisor controls some of it and at least to this point it costs me less than 10K/year. The main reason I stay with him at this point is he is very active in Private Equity/Company investments. Given the size of my portfolio, I like the diversification factor away from the market at this point. I have about 15% of my portfolio diversified outside of the market in a handful of private companies in different sectors. Given my tax bracket, this is an important thing. He (and his group) have more fully vetted these companies which is something I do not have the time for. So I feel there is still a value add to using his services.
All of that being said, once the AUM fee gets over 10K I will either re-negotiate the terms, or leave the FP/FA. As you have mentioned AUM fees are very little when you are fresh out of residency and have essentially no A’s to M. Unfortunately too many physicians get LAZY, stop learning, stop reading and just let their FP keep control and forget to look at how much they are paying for services. When they hit age 55 and realize they have been paying 20-50K for 15 years they kick themselves and get upset with the “system”. If this could be you….then look in the mirror and you will find the problem…stop blaming others…and fix it yourself.
That’s actually not a very common thing among advisors. Most have little knowledge/expertise of any sort about private investments. Certainly possible to make a big value add there.
I agree the “lazy investor” factor is a big issue with AUM fees. It really is fine to use one, but you have to do the math each year and make sure the value is still there. At a certain point for most readers of this site, it won’t be.
Another view of PE: https://thereformedbroker.com/2019/10/31/dan-rasmussen-the-private-equity-boom-is-risk-for-main-street/
short summary: PE’s LBO recipe is to pay premium ( PE) prices, add unrated credit, lockup for 10 years, and add high fees.
anything but a flat fee is silly and 85% of “advisors” are not fiduciaries
A non fiduciary and AUM fees is a recipe for disaster
Wm Bernstein in “IF YOU CAN” says a 7th grader can learn this stuff
I think you missed the nuance in the article. But if you think paying a $50K flat fee is smarter than paying $5K in AUM fees then I’ve got a bridge to sell you. You have to do the math.
And Vanguard will be launching their service at .15%; better than all others Followers of Bogle know never to buy loaded funds
Vanguard has had a “service” for years for 0.3%. Maybe they’re lowering their price. But after talking to lots of people who have used it, I’m certainly not convinced it is “better than all others.” They won’t sell you loaded mutual funds though, like all other fee-only advisors.
1250/month over 1 million is crazy
2 million would be a 30k fee!!!!!!!!!!!!!
Is this the twelve steps program? Good…. ‘I am a lazy investor’… but I’m trying to change. Historically, I’ve felt I ‘didn’t know enough’ to handle my own investments, subsequently figured out I apparently need a FA to hold my hand while he loses my money…. and with my last FA, did not know how much I was spending – until last week. They bury that lil’ ‘AUM’ bill pretty well at Morgan Stanley, and my ‘advisor’ would never tell me the amount, only ‘it’s on your statement’. That’s on me. But recently they switched to a monthly billing, and all became clear. I’m spending nearly $60K/year. It sickens.
I’ve worked hard to get my kids to ‘do it right’, reading this and OI blogs. Much easier to start out right, than to undo the ‘mess’. I’ve got individual stocks (from the early days), mutual funds, bond funds, muni bonds. I’m currently ‘in process’ of transferring my assets, but I need guidance as to ‘how’ to get on track. Looking for a fee-only advisor, preferably in Nebraska.
Frankly, I’m embarrassed at this mess. I’ve been kicking the can down the road – and it’s been costly.
Thanks for this timely post, Jim.
The good news is it’s hecka easy to do better than what you’ve been doing!
Any words of wisdom? I’m looking at going to vanguard or fidelity, setting up some accts. – hopefully discuss this with a fee-only, then get into the process of transfer. Would you suggest doing it differently?
If you’re thinking about hiring an advisor I’d do that first. You really just need to get a written plan in place. If you’re not qualified to write it yourself, then consider my online course. If you still feel unqualified, then hire an advisor to help you write it. The course will help you hire the advisor well if nothing else.
It’d be nice to use the AUM model in medicine.
Patient comes to you with high blood pressure. You charge $300 to prescribe meds, recommend diet and exercise.
Patient comes back in 3 months, 200% better. You congratulate him and reduce meds because he’s healthier. You charge $600.
He comes back in 6 months, 50% better – no change in plan. You charge $900.
He comes back each year and you charge him $900 to talk about his golf game.
This model doesn’t make sense like you said unless the AUM is small. They charge more for doing less year after year. No wonder you get so much heat from these “financial advisors” — I’d be too if my income depends on working less and getting paid more.
It’s easy to see that their responses are not rational thoughts but direct attacks on you to try and invalidate what you said — they did this because there’s no good rational response!
Great post!
Interesting post, Jim.
Can you tell me more about how your recommended financial advisor page works? You’ve structured it in what I’d describe as a “Top 10” format.
Is that representative of how you see these advisors? I’ve followed you for some time and was a little surprised to see the number of AUM advisors based on your previous writing on the topic. This article addresses some of my questions I had while I reviewed your “Best” Financial Advisors page and why you list them.
I think you make some good points in this article. Though the number of flat fee advisors is small, your previous writing on advisor compensation gave me the impression that you would seek their promotion over AUM fee structures.
Are your feelings about advisor compensation models strong enough to do something like that—either now or in the future? Is it purely a fact of there just not being enough flat fee advisors willing to pay the fees for advertising on your site?
I like almost everything you do — the “best” advisor page, however, has been a struggle for me. Obviously I have strong feelings about this given my firm’s structure.
I feel comfortable recommending all the firms on that page to my readers and listeners. They are all paid advertisers. The first ten listings on the page are “premium” listings that cost more. In fact, the higher on the page they are, the more they are paying me. There’s a lot of value in being higher on a web page. Much of the website is structured that way as we are running a for-profit business.
The advisor page has also been a struggle for me, but there is a lot of demand from readers for recommendations so I persist, but I’m certainly not willing to do it for free because it’s a pain. Would I consider dropping anyone who charges an AUM fee from the list if I had 100 advertisers who didn’t charge them? I just might. But as you can see, there’s a ton of gray here. When you start diving into fee structures, you find a lot of “AUMy” type fees and you have to draw the line somewhere. Plus every advisor is offering different services, has different levels of experience, and has a different investment philosophy. Very hard to turn it into a commodity even in the current race to the bottom fee-wise. A more likely outcome is advisors charging AUM fees get less benefit from being on the list and stop advertising with me because they’re not seeing the value there or as some have done, convert to a flat-fee structure. A separate but related problem is that many overly idealistic advisors trying to charge “pure” flat fees aren’t making enough money to stay in business, much less advertise with me. I had a Twitter conversation with an advisor trying to serve teachers yesterday after writing this. She’s having trouble keeping the doors open. It’s pretty easy to see why most Americans don’t have access to real financial advice. They can’t afford or aren’t willing to pay a fee that would keep the advisor in business.
Hope that helps.
The “assets under management” model is a different service than an hourly or flat fee service. Advisors who are providing ongoing advice, investment management, education, and counseling/discipline do so because they want to create a consistently great experience–one where all aspects of the financial picture are integrated and updated seamlessly, the portfolio is managed properly based on modern principles (efficient markets, Fama/French Asset Pricing Model, etc.), and that ongoing education is provided that aims to keep the client well informed, confident, and disciplined.
Full-time, professional advice does cost more in most cases than hourly or flat fees, but the goal is that the benefits outweigh the costs and the investor comes out ahead, not only results but in terms of the amount of time saved not having to do this yourself or oversee someone doing it part-time with you.
There’s plenty of information out there but as the saying goes, “the map is not the territory.” The journey is a lot harder than most admit and most people, especially those who cut corners in terms of the advice they get, find out it’s an unnecessarily difficult and unsuccessful journey.
That argument isn’t very strong. That can all be done for a flat annual retainer just as easily as an AUM fee.
But it’s not done well. And that makes all the difference.
“…who are providing ongoing advice, investment management, education, and counseling/discipline…”
Before we get to whether it is done well or how to pay for it, let’s ask whether it need be done at all. Let’s ask whether it is worth paying anything for it. Once a portfolio is set up and a plan in place, there is nothing left to do. The fee for doing nothing should be zero.
There is nothing in the AUM model that makes it possible to do anything that cannot be done with flat fee or hourly.
But if the service should be “doing nothing” and the cost should be zero, there is not reason to pay anything at all. I don’t pay an attorney on the off chance I might have a legal question. I don’t pay an accountant in case I might have a tax question. When something comes up, I buy the advice I need and pay nothing the rest of the time.
With the hourly model the cost will be zero until the service is needed. It will be billed at the agreed rate, then the cost will go back to zero.
This is a critical feature that AUM and flat fee models lack.
“Once a portfolio is set up and a plan in place, there is nothing left to do. The fee for doing nothing should be zero”
1. Ignores vast differences in plans and associated portfolios. An advisor who will never see you again or one who gets paid the same by everyone so long as you don’t leave will provide very different/inferior plans/portfolios than one who works with you & has skin in the game, a vested interest in seeing you maximize your success. That’s so obvious it barely needs saying.
2. “Nothing left to do” is obviously wrong. Ongoing education & advice is essential to preventing all-to-common emotional mistakes. Overconfidence bias ensures most of us don’t believe we need that & blind spot bias ensures we can’t identify our repeated infractions in ourselves. And it saves you a ton of time not spent tweaking and meddling and blogging
A close ongoing relationship with a full time advisor who charges in relation to the value of their services (% of assets) is where the best investment experiences happen. Or you could just take your chances with the lowest possible fees. Caveat Emptor
1. I don’t need a vastly different plan or portfolio. Would not want an advisor who proposed one. I want a handful of index funds. Once set up, there is nothing left to do.
2. See #1, above. If I “do nothing”, then there are no behavioral mistakes to avoid. There will be no “tweaking and meddling” because there will be nothing done.
To get to the heart of the issue-
If advisors can beat the market on a risk adjusted basis, then why is there no evidence in the academic finance literature to demonstrate that? If they cannot beat the market on a risk adjusted basis, why pay them to try?
Associated question: where is the evidence that advisors succeed in protecting clients from behavioral errors? It is an easy claim to make but I don’t know of any data to support it. Advisors are humans with the same emotions as anyone else. I am aware of no data to suggest that advisors are any less prone to performance chasing than are individual investors. If you know of papers published in the peer-reviewed academic finance literature supporting their superior performance on this measure, I would love to see the citation.
I don’t think I’ve ever met an advisor that was so convinced that AUM fees were so holy. Reminds me of the Upton Sinclair quote:
An excellent and ethical conversation – WCI did his best to tell every single one of you to take your charge of your own finance. Hopefully, you can read between the line that he is making money with the AUM sponsors on his site and it is up to you to do your own research and apply 3rd grade math.
To be fair, you probably need 7th or 8th grade Algebra to solve n-unknowns with n-equations along with the quadratic formula to solve quadratic equations.
Otherwise just read the next article “Bernstein Says Stop When You Win The Game”. Afterward, do some research on recently release Fidelity Zero Fee Index Funds. Hopefully for the remainder of your life, you can be the best doctors in accordance to your inner capability without having money stands in the way!
An ancient general once said “I rather failed myself than let the world failed me!”
I’m not sure that’s “between the lines.” And I quote:
That’s a common mistake — to believe so long as your advisor/fund fees are low to zero that you don’t “pay” anything. But you ignore basic economics of opportunity costs…of not having a better plan, a better portfolio, better implementation, tweaking that every few years, and all the time wasted researching & managing it yourself.
Truth is, when all costs are considered, “low fees” can be one of the most expensive approaches.
That’s a bizarre argument. That’s like saying “That crate of oranges you got for free on Black Friday isn’t worth anything because you could have been off getting an 80% discount on a big screen TV.”
No. Savings are savings. If you’re doing it just as well as an advisor would (which for many advisors is a rather low bar) saving the fees boosts your return by the amount of the fees.