Financial Advisor Fees

[devilfish]

Looking into hiring a new investment advisor...

We have decided on someone we trust who has been working with a family member with great results for the last 10 years.

 

I know that WCI prefers flat-fee advisors, but these are our fee options:

1) 1-1.15 % (to be negotiated) annual fee.

2) transaction-based (1% per transaction, minimum 175$ per transaction)

 

Thanks for any input

 

[Hank]

Unless you have a very small amount to invest, those seem like quite high fees.

Why can't you do it yourself?  Barring that, why not see an hourly rate financial advisor for a 2-5 hours per year for a tune-up?  The National Association of Personal Financial Advisors has a pretty good list of potential candidates.  See www.napfa.org

[Dicast]

I would avoid both of those options.  The phrase "someone we trust" gives me chills.  Of course you need to trust them...but at what cost?  Any advisor that hasn't made positive gains for their clients in the last 10 years probably shouldn't have a job anyway.  I have referenced an old blog post from Vanguard in the past and I hope you take a look.  The cost of those fees will eat at your returns and limit your overall growth by a large amount.  1% may be standard, but you can do better.  A 1% per transaction fee is a crazy load with a minimum of $175.  You'll have to invest over $17,500 at a time to make it just 1%.

[devilfish]

Hank wrote:

Unless you have a very small amount to invest, those seem like quite high fees.

Why can’t you do it yourself?  Barring that, why not see an hourly rate financial advisor for a 2-5 hours per year for a tune-up?  The National Association of Personal Financial Advisors has a pretty good list of potential candidates.  See http://www.napfa.org

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I don't have time or interest to do it myself.

Also, this advisor has been getting consistently much higher rates of return than the portfolio of ETF's we currently have... So to me, the fees justify the expertise and the increased rate of return.

[devilfish]

Dicast wrote:

I would avoid both of those options.  The phrase “someone we trust” gives me chills.  Of course you need to trust them…but at what cost?  Any advisor that hasn’t made positive gains for their clients in the last 10 years probably shouldn’t have a job anyway.  I have referenced an old blog post from Vanguard in the past and I hope you take a look.  The cost of those fees will eat at your returns and limit your overall growth by a large amount.  1% may be standard, but you can do better.  A 1% per transaction fee is a crazy load with a minimum of $175.  You’ll have to invest over $17,500 at a time to make it just 1%.

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Thanks for the reply.

Perhaps "someone we trust" was a poor choice of words... Let's say someone who is extremely knowledgeable and has a long proven track record of strong returns over the last 10 years.

 

Also, I may not be in the majority with this opinion but if the rate of return is averaging ~3-4% better than our current returns, then a 1% fee is not "eating into my returns". it's all relative.

People who like to DIY will always harp on the "fees" but if you choose wisely, you will not be "throwing money away"

[Lithium]

To answer your question, it's hard, but not mathematically impossible to see how option 1 beats option 2.  With Option 1, you are paying the same percentage on all your AUM, and with option 2, you're only paying on assets going in.

Even if your advisor is in the 5% who is getting higher returns out of skill rather than luck (the other 95% inevitably come back to earth), he has to do so well enough to overcome the drag of his fees, the higher fees of the investments themselves, AND the higher tax drag of active management for it to be worth it.  You can probably knock off 2% a year of his average annual return from all of these combined effects.

[Hatton]

Who has custody of your money? Sounds like Bernie madoff.

[Dicast]

devilfish wrote:

Dicast wrote:

I would avoid both of those options.  The phrase “someone we trust” gives me chills.  Of course you need to trust them…but at what cost?  Any advisor that hasn’t made positive gains for their clients in the last 10 years probably shouldn’t have a job anyway.  I have referenced an old blog post from Vanguard in the past and I hope you take a look.  The cost of those fees will eat at your returns and limit your overall growth by a large amount.  1% may be standard, but you can do better.  A 1% per transaction fee is a crazy load with a minimum of $175.  You’ll have to invest over $17,500 at a time to make it just 1%.

Click to expand…

Thanks for the reply.

Perhaps “someone we trust” was a poor choice of words… Let’s say someone who is extremely knowledgeable and has a long proven track record of strong returns over the last 10 years.

Also, I may not be in the majority with this opinion but if the rate of return is averaging ~3-4% better than our current returns, then a 1% fee is not “eating into my returns”. it’s all relative.People who like to DIY will always harp on the “fees” but if you choose wisely, you will not be “throwing money away”

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My issue with this logic is that you are using past returns to predict the future.  Advisors that outperform the market are very similar to mutual funds that outperform.  Very few carry the same level of performance on an ongoing basis.  If you have no interest in managing your own investments then getting an advisor with a 1% aum fee may not be the worst thing you could do.  I would wager that the extra 3-4% returns aren't developing without any additional risk taken.

[Hatton]

1% of a small portfolio is well small. As you get a larger portfolio 1% becomes a big number.  Don't think in terms of it is only 1% figure out exactly what you are paying.  Personal Capital can do this with fund fees.  You may be shocked

[RogueDadMD]

devilfish wrote:

Thanks for the reply. Perhaps “someone we trust” was a poor choice of words… Let’s say someone who is extremely knowledgeable and has a long proven track record of strong returns over the last 10 years.   Also, I may not be in the majority with this opinion but if the rate of return is averaging ~3-4% better than our current returns, then a 1% fee is not “eating into my returns”. it’s all relative. People who like to DIY will always harp on the “fees” but if you choose wisely, you will not be “throwing money away”

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There is so much to unpack here that I can't even address it all.  I'll let others reference you to the many articles that address some of these fallacies.

However in brief:

1) It sounds like you already decided to hire this person, and you are being somewhat snide towards those who correctly point out significant potential problems.

2) You can't be bothered to learn to do it yourself, which means it's highly likely you won't/don't understand what this advisor is doing.  Saying you don't have the time is a copout, because unless you've been using some odd scheme, investing in a few broad index funds takes about 2 minutes.  On this forum and many other places people could give you free advice for a decent portfolio that will match the market.  Advisors can definitely add value, but for 95% of people it's not by picking investments that beat the market

3) Is this advisor a fiduciary?  If you don't understand the question or have the answer you should not be blindly signing up with them

4) It's been proven over time, when investing in the broad market, every the active managed funds are always outperformed by the market.  If you're doing some non traditional investments, then you better take the time to learn what exactly this person is doing and how they are going to beat the market

5) Learning the basics of index fund investing is really really easy.  If your equities have been outperformed over the recent bull market, then you certainly need some advice, but a 1% advisor guaranteeing returns 3-4% above the market requires skepticism.

This forum is mostly doctors -- we generally don't go off a sample size of 1 to make life altering decisions unless there is a complete absence of other information.  I suggest you obtain more information about how this advisor will invest your money and "prove" how they manage to consistently beat the market and then apply the appropriate skepticism to that information.

 

[q-school]

Once again I'm in the minority's but i agree with original poster.  There are many people who would do well to have someone else help manage their money.   Maybe not many on this board but many physicians for sure.

Is it more expensive that diy?    Possibly.  Let's even concede for most on this board it is.  There's nothing wrong with spending money if you get something you value from it.

In contrast to above poster, I don't see snideness. Just difference of opinion.  Ymmv.

[devilfish]

Rogue Dad, M.D. wrote:

 

This forum is mostly doctors — we generally don’t go off a sample size of 1 to make life altering decisions unless there is a complete absence of other information.  I suggest you obtain more information about how this advisor will invest your money and “prove” how they manage to consistently beat the market and then apply the appropriate skepticism to that information.

 

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Past performance does not indicate future performance--- The same can be said for ETF's or any other self-directed investment.

 

This advisor is not "promising" anything. The 3-4% I mentioned is based on his actual performance in recent years versus my own ROI. I have sat down with him 3 times now without signing anything and have discussed in detail my investment mix, goals and their investment strategy.

I may not have the interest in managing my own portfolio, but I am interested in being informed and an active participant.

 

If you are calling me "snide" then you should probably take a look in the mirror. It's easy for people on this forum who generally manage their own investments to denigrate those of us willing to pay for a service. If you would have read the initial post, I was not asking whether I should hire this advisor or not. I was asking for opinions regarding the two options for fee structure. Others have turned it into a debate of DIY vs financial advisors.

 

[Hank]

I don't think it's completely unreasonable to have an advisor help with asset allocation and prioritizing debts to pay, accounts to grow in the accumulation phase, and assets to draw from in the expenditure phase.  An honest advisor can be especially helpful in those cliched situations where one spouse let the other take care of most or all financial matters.

All that said, have you crunched the numbers on paying for 2-5 hours with a flat hourly rate advisor versus incurring 1% asset under management fees plus the likely drag of frequent trading, tax inefficiency, and the myriad other harms of active management?

How much are you looking at paying in your first year with this new advisor?  How many hours of flat rate CFP or CFA time could you buy for that 1% AUM fee?

[Dr.V. Investor]

Probably b is cheaper but I just don't know the strategy of your investment advisor. If he/she is a frequent trader, the transaction based may be more expensive. Typical fee based investor is the yearly 1-1.15% fee. I usually ask the manager how do they manage their own money. If they put their own money on the same investments, it exudes confidence in their system. Some active managers recommend different funds- which is a double the fee for you. If they create a portfolio for you, I think it is worth it.

[RogueDadMD]

devilfish wrote:

If you are calling me “snide” then you should probably take a look in the mirror. It’s easy for people on this forum who generally manage their own investments to denigrate those of us willing to pay for a service. If you would have read the initial post, I was not asking whether I should hire this advisor or not. I was asking for opinions regarding the two options for fee structure. Others have turned it into a debate of DIY vs financial advisors.

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They didn't turn it into a debate, they brought up points that specifically relate to whether the advisory fee is high.  You replied

if the rate of return is averaging ~3-4% better than our current returns, then a 1% fee is not “eating into my returns”. it’s all relative.

People who like to DIY will always harp on the “fees” but if you choose wisely, you will not be “throwing money away”

That's a snarky comment in response to completely legitimate and relevant feedback.  That was your first mention of these magical 3-4% returns.  Whether or not they are achievable, that type of information -- alternative investments and types of services provided -- are  relevant to your original question.  You follow that up by saying people are harping on the fees, but your original question was asking what people thought about the fees!  What information have you provided to let us know that you are choosing "wisely"? How your money is going to be managed is germane to what you are paying.

So how can you not consider that a snide response?

I don't care whether you manage your own money or not -- for some people paying others to manage their money can be the right decision.  I'm not denigrating you for paying for the service.  I pay for plenty of things that other people do on their own.  I'm telling you that your comments raise red flags to me that someone could be taking advantage of you and your comments show you may not be aware of it.

However if you are going to ask for advice on how much you should pay for other people to manage your money, and also state you don't want to learn about managing investments, and then later drop in that that you are somehow going to earn 3% above the market, it's fair for me to assume you don't know what you are getting yourself into given lack of other details.  And ALL of that is relevant to deciding whether the fee structure is fair or not.

Paying someone else to manage your money doesn't mean you don't need to know what they are doing with it.

But to answer your original question -- just pay whatever is the smaller amount based on the amount of money being invested.  I don't think that requires a debate.