True story. We just got off the phone with a local CPA. He likes our flat-fee business model and isn’t quite sure how the practice of financial advisors charging a percent of assets under management (AUM) began. The CPA said, “Just the other day I was going through a client’s tax information for 2016 and saw that he paid a little over $20,000 in fees to his financial advisor on assets of around $1.3 million. The investments were all exchange traded funds or mutual funds, which of course carry their own fees.” The next time the advisor talked to the client he suggested that the advisor fees seemed high. The client said, “No that’s not right, the fees are only 1.5%.” The CPA replied, “That’s right, but it adds up to more than $20,000.” There was a long, awkward pause, then “Really?”
Our financial planning clients typically fall into two categories, young professionals and the nearly or recently retired. The young professionals, often doctors, are at the beginning of their careers and have modest or negative net worth due to student loan debt. Most financial advisors that charge AUM fees will not accept these types of clients. The nearly or recently retired are highly motivated to get an independent set of eyes to review their savings, including social security and pensions, to understand how much they can spend in retirement. They know that we can give an unbiased, clear-eyed view into their financial situation. Our business can and does thrive on these client constituencies.
We have been somewhat surprised, though, that high net worth mid- or late-career professionals are not yet gravitating toward our flat-fee business model—at least not in the numbers we’d have predicted. If you have more than $500,000 in asset in an advisor managed account charging 1% of AUM or more, you should talk to us. You are paying at least $5,000 per year to your advisor. More than likely you are also paying fund fees of close to 1% on top of that advisor fee. If we expect your nest egg to appreciate by 5% per year, you are giving up 40% of your return to fees. Nearly half of your annual gains are going into someone else’s pocket. These fees, which are simply deducted from your account, are often easy to overlook in a bull stock market. Hey, your account’s still going up, right? You never had to write a check for $5,000…or $10,000…or more than $20,000. The money just disappeared.
Look, we get it. You trust your advisor. You have peace of mind. You don’t want to manage your own money. But $20,000?!? We can work with you on a plan to transition your assets to very low-fee mutual funds that can be extremely easy to self-manage. For a one-time charge of $4,000, we can help you break up with your financial advisor. It will be an educational process and ultimately liberating. You can do it yourself, but you don’t have to do it alone.