Financial Advisor Fees

[Lithium]

Why not just use a Roboadvisor like Betterment, Vanguard, Wealthfront, etc?

 

I guess you could say because that guy knows how to beat the market.  But seriously, what are you basing that on?  If you've never actually let him manage your money, how do you know he's that good?  Anyone can give you a folder with fancy charts showing you what they invested in and how they got awesome returns retrospectively.  How do you know whether it's the real story?

Are you looking at the statements of your family member?  What securities is this guy actually buying?  What's his "secret sauce" that makes him so good?

[The White Coat Investor]

devilfish wrote:

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

 

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Why would you trust someone who is so obviously overcharging you? I mean, if you can find someone to do it for 0.5-0.8% (and you can), why pay 1.15%?

And if you can find someone to do it on a fee-only basis (and you can), why would you do it on a commission basis?

[PhysicianOnFIRE]

Between the two options, a 1% front-load (option 2) sounds better than a 1% AUM fee annually, but you may want to do the math based on your portfolio size to be sure. With a $175 minimum fee, I'd make sure you're investing at least $17,500 at a time.

A 1% AUM fee can easily add up to a 7-figure loss over a lifetime, and it's very unlikely the advisor has outperformed a simple index fund portfolio with equivalent risk. If it's true that his performance is that good over the last 10 years, it's extraordinarily unlikely to continue over the next 10. Study after study after study has shown this to be true. Also,

• Investment Fees Will Cost You Millions

[The White Coat Investor]

devilfish wrote:

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.

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It's your money, so your decision. But I would track very carefully a hypothetical boring old index fund portfolio against your advisor's portfolio (including fees) over the years. If he stays ahead, then you made the decision. If he doesn't, it won't take you too long to figure it out.

By the way, if you were paid $1000+ an hour to manage your money, could you find the time to do it? It could come to that as the years go by.

[DMFA]

You're not going to find much useful input in a forum dedicated mostly to managing one's own portfolio...but the second option seems to be the less bad of the two bad options, assuming they're not making tons of transactions.

[FIREshrink]

It's reasonable to hire out a service you don't have the inclination to do for yourself. The going rate is 1% AUM OR LESS. Paying more than that is unnecessary.

Your "3-4% above my ROI" is meaningless. You haven't compared risk characteristics or factor loading. You might be 50% bonds and he might be 100% stocks. You should compare his performance to a proper benchmark. You probably don't know how to do that, and I bet this advisor is counting on that.

Understand that 1% annually eats up 25% of your terminal value. Instead of $4 million in retirement, you end up with $3 million. Make sure the service you're paying for is worth $1 million.

Whatever advisor you use make sure he is a fiduciary and acting in that capacity, and that he puts it in writing. Make sure he understands the inherent advantages of passive investing and broad diversification. Make sure he doesn't churn you, or try to market time, or think he can predict the future of interest rates.

[Miss Bonnie MD]

Is this person only managing your portfolio or a true full service FA? I wrote a 4 part series on FAs, I'd have a look before signing on. I actually have an FA.

[Hatton]

The other consideration is the total amount.  If the advisor is charging an AUM fee and buying individual stocks he may be beating the market by 3-4% in a bull market. If he is buying funds then you have to consider AUM+ER fees.  The OP should figure total costs and see what the guys track record was in 2008.  If the guy was not "running money" in 2008 I would pass. You have no idea what he/she would do in a crash.

[ajm184]

In looking at this, the OP in a reply stated 3 - 4% above their current ETF returns; the FA is not getting 3 - 4% above market.  All ETF's are not built/perform the same, therefore the natural question is; What do ETF's do you own?  It appears IMO the original post is seeking a form of confirmation bias.  It is asking for a selection of two options without a set of facts to make an appropriate comparison.

Though alot of folks including me are the DIY types with respect to investing, it would be wise to heed the advice of many to thoroughly understand to cost of advice dynamically versus the 'value' obtained.  Also, an FA relationship is usually much more about other 'value' that can be brought to the table (estate planning, taxes, debt reduction, home purchase, etc) in addition to investing/asset allocation.  Does this FA person have any credentials to support his FA expertise; CFP, CFA, etc?  Also, as other have stated, is he/she a fiduciary in working with you?

More and better information is needed.

[Chase_WrenneFinancial]

devilfish wrote:

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.

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"Consistently higher rates of return" -- in a market like the past 10 years, it's very easy for advisors to play with Beta, and claim Alpha.  Risk Adjusted returns, net of fees are the only numbers you should be looking at.  Plus, he's directly incentivized to churn your account with his transactional fees, which is a huge conflict of interest -- and I'm sure not included in his return measures.  And, as has been mentioned, 1+% AUM is HIGH.  I wouldn't ever recommend someone working under these fee schedules.