Financial Advisor Fees

[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.

[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.

[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.

[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.

[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.

[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.

[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.

[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:

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?

[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?

[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.

[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.

[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?

[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.

 

[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.