Advisor Fee

[Frenchy1011]

I posed a question to my advisor about how much I was actually paying him. He seemed to waffle a bit, but then got really specific with me. It seemed very reasonable, but also a little above my head. Can someone please let me know if this is reasonable, or if I am getting royally ripped off here? Thanks!

 

So he stated that I do not actually pay him. He stated that there were two possibilities as to how I would be charged. One of the ways was to get charged 1%/yr on my assets. It sounded like an Asset Under Management fee, but it wasn't technically that because I do not have 50K with them yet (and would assume it would once it gets to that level). I had previously opted for the second option before I really knew what I was doing. The second option (the one I am currently under) is that I pay Brokerage Solutions a one time sales charge on all contributions of 5.75%. I own two Roth IRAs with them, and thus I contribute around $1000/month with them. I would then assume that I would get charged 5.75% charge on that $1000 every month.

 

The way he explained it was that if I plan on retiring in less than 6 years, then it would be advisable to take the 1%/yr charge, because essentially that would be less than the 5.75%. But if I don't plan on retiring for 20-30 years (as I currently am) then the easy decision would be for the 5.75% one time charges. Is this a reasonable rate? Or is he trying to confuse me with these numbers. Still quite a novice at all of this, so I appreciate any feedback. Thanks so much.

 

Stephen T.

[conniebird]

Um, sounds like you need to find a new advisor.... flat fee only.

[GXA]

Ouch.  A 5.75% sales charge is pretty steep.  1% AUM also adds up over time.  If I were in your shoes I would consider looking up a vanilla 3-fund portfolio and contribute using dollar cost averaging (invest the same dollar amount monthly).  Between this site and others (such as bogleheads) there is a lot of information for you to learn some personal finance basics in order to do this yourself.

I can help you set up a 3-fund portfolio for half of whatever they are charging you  

[retinadoc]

No, the fee structure is not reasonable.

The great news is that you're so early in the process that mistakes won't hurt you much. You've found a great website -- take your time, read the beginner series of blog posts as well as Dr. Dahle's book. Then, decide if it's too much for you to do on your own and want an advisor. Odds are, you will realize that none of this is worth the exorbitant costs that you are currently paying, and it's all a heck of a lot simpler than learning renal physiology, management of diastolic heart failure, or how to peel an epiretinal membrane off a 20/30 macula. Good luck!

[PhysicianOnFIRE]

Fees like that will decimate your portfolio over time.

I recently helped someone close to me get out of a professionally managed 28-fund to a simple 3-fund portfolio and saved him $20,000 a year.

Fees will cost you millions. Those fees aren't atypical necessarily -- a firm that rhymes with ED Bones gets away with charging them to hundreds of thousands of people -- but they can easily be avoided.

[The White Coat Investor]

You have  mistaken a commissioned salesman for a financial advisor. Don't feel bad, I did the same thing. But it's time to get yourself a financial education. You may find you wish to do your own financial planning and investment management. Or you may wish to hire a fee-only advisor to help. 1% might be industry standard, but I would try to find/negotiate a lower rate as there are certainly good advisors out there doing it for lower rates.

[Frenchy1011]

Thank you so much for this information. I completely agree and was clearly worried about this prior to posting. I have the WCI book and have read it and know that this seemed unreasonable. The concern for me now is how to "break up" with the advisor. What happens to those investments and how would I transfer them elsewhere. I do have a high interest in this and do think that I can do it and learn it by myself with possibly a few few only appointments with an advisor. Right now I have a Roth IRA that will have the $5500 in it by April 1st. My Spousal IRA will only have $3666 in it on April 1st. I also have that $75K life insurance on my child, my own 10 year 2 million increasing premium life insurance policy, a 20% added disability benefit, and a 529 that should have about $3616 in it on April 1st. How do I stop my relationship with the advisor and keep those funds?

[PenguinMD]

You can always self-manage your IRAs yourself. The money is still low that you can use it to "self-teach" and get comfortable with doing things independently as you build wealth over time. A number of brokerages have a standard form to move assets "in-kind" and many will also pay any "termination fee" for moving the money. Just talk to any of the discount brokerages -- this can also help educate yourself. Fidelity and Scottrade have physical offices if you want to talk to live people just to feel things out and get comfortable.

Curious why do you have a $75k life insurance on your child? Is your child pulling in income that needs to be replaced or any debts that need to be covered that you also would own as a co-borrower?

For life insurance there's lots of threads on how to get fix level terms that you can read up on.

Good luck!

[canadianoutlaw]

Sounds like you've got plenty of time ahead of you so this is a good learning moment. Don't let uncertainty paralyze you; just make the necessary moves and figure things out as you go along. You'll get more and more comfortable and confident with transactions as your experience and worth grow in tandem.

If you move a large/complex portfolio, especially if in a taxable account, one can use Vanguard's Personal Advisor Service. VG advisors are not paid w/commissions, will give unbiased professional advice, and handle the transfer. low cost, only 0.30%/year. At the end of a period (i.e. 12 mo) you can cancel the service if you feel comfortable managing things yourself

[Frenchy1011]

After a little further analysis, it looks like the 5.75% that he is talking about is a Front-End Load that slowly decreases to 0% after 1M in account value (https://www.americanfunds.com/individual/investments/share-class-information/reducing-sales-charges.html). Is my assumption that that percentage goes down, but is it charged on the total value of my account instead of the specific money I put into it every month? So, if my portfolio is worth 750K for example I won't be paying the 1.50% fee to the 11K of personal money I put in there yearly (2 Roths, $165 in sales charge), rather I'll be paying 1.50% towards the entire 750K ($11,250)??

 

I also emailed my advisor and he sent me a copy of the FINRA analysis of this, and it looks like it compares the 1% yearly to the Front-End Load style. I have attached it hopefully for some clarification on it. Sounds like either of these options is not a great one, and one that I can avoid by doing it myself?

 

Thanks

[PhysicianOnFIRE]

Frenchy1011 wrote:

After a little further analysis, it looks like the 5.75% that he is talking about is a Front-End Load that slowly decreases to 0% after 1M in account value (https://www.americanfunds.com/individual/investments/share-class-information/reducing-sales-charges.html). Is my assumption that that percentage goes down, but is it charged on the total value of my account instead of the specific money I put into it every month? So, if my portfolio is worth 750K for example I won’t be paying the 1.50% fee to the 11K of personal money I put in there yearly (2 Roths, $165 in sales charge), rather I’ll be paying 1.50% towards the entire 750K ($11,250)??

 

I also emailed my advisor and he sent me a copy of the FINRA analysis of this, and it looks like it compares the 1% yearly to the Front-End Load style. I have attached it hopefully for some clarification on it. Sounds like either of these options is not a great one, and one that I can avoid by doing it myself?

 

Thanks

Click to expand...

The front-end load does appear to drop as your balance increases, which gives you some incentive to stay with them and build up the balances. Of course, it makes much more sense to buy a lower cost Vanguard or Fidelity fund, which has 0 load and lower ongoing fees.

The front-end load is only levied on new money. The expense ratio will be charged on the entire balance.

 

[jfoxcpacfp]

A front-end load is a cleverly-designed sales charge to disincentivize you from ever leaving your broker (i chose that work purposefully). The accounts are yours and will go with you if you decide to move to another agent, whether a real fee-only advisor or another broker. But you are not paying for advice at this point, just products. If that is all you want, you haven't paid very much, practically speaking. You will over the long term, though. If you want real advice (i.e. financial planning), you'll have to pay for the value.

[Frenchy1011]

So in that sense if I want to transfer the funds that I've already given into those accounts and transfer them to another Roth IRA account through Fidelity/Vanguard with none of those Front-End Load fees and manage them myself is that possible?

[VagabondMD]

Frenchy1011 wrote:

So in that sense if I want to transfer the funds that I’ve already given into those accounts and transfer them to another Roth IRA account through Fidelity/Vanguard with none of those Front-End Load fees and manage them myself is that possible?

Click to expand...

"Breaking up is hard to do..."

Not really. Just transfer the assets to another account, either self-managed (Vanguard, Fidelity, Schwab, (VFS) etc.) or hire a real advisor (fee only). If you are unsure how things would transfer, call VFS and confirm it with them.

You may not need to have a conversation with the salesperson, other than to turn off any automatic investing that you have in place. It's easier than breaking up with your previous significant other; in a sense, you are just moving out while he/she is at work.

[Frenchy1011]

Vagabond MD wrote:

“Breaking up is hard to do…” Not really. Just transfer the assets to another account, either self-managed (Vanguard, Fidelity, Schwab, (VFS) etc.) or hire a real advisor (fee only). If you are unsure how things would transfer, call VFS and confirm it with them. You may not need to have a conversation with the salesperson, other than to turn off any automatic investing that you have in place. It’s easier than breaking up with your previous significant other; in a sense, you are just moving out while he/she is at work.

Click to expand...

OK that definitely makes sense. I was always better at just slowly not answering my significant others than to have a face to face breakup haha. So I transfer the two Roths I have to another account.

 

I will also be cancelling the BS Whole Life Insurance policy I have on my two year old.

 

I also have a 10 year increasing premium life insurance policy on myself, a 20% disability addition, and a 529 account through him. I am thinking of also cancelling this life insurance policy, but is it a good idea to get the disability insurance and 529 and move it to somewhere else? Is he getting commission/fees from those? Or did he just help set them up and I can keep them without worrying that he is skimming off the top?

 

Sorry for all these questions. I feel so stupid asking them...