Many people who give financial advice have business models that make it hard for them to work solely for you and in your best interests. We believe you’re better off—and will have a greater sense of financial control—if you do it yourself with the guidance of a flat-fee or hourly rate financial planner.
There are many people out there who call themselves financial advisors or financial planners but are wolves in sheep’s clothing. They’re brokers. Ask this simple question of a current or potential advisor: Do you sell any products like insurance, mutual funds or stocks for which you earn a commission? If the answer is yes, your conversation should be over, and you should move on. It’s going to be difficult for them to give impartial advice when one option puts zero dollars into their pocket and the other option helps feed their family.
A better alternative is a fee-only financial adviser who is paid a percentage of assets under management (AUM), often around 1%. AUM fees create their own set of potential conflicts, though, as advisers might prefer that clients deposit funds into managed accounts rather than pay down debts or contribute to employee-sponsored retirement plans.
Those AUM fees add up, too, especially as assets accumulate. An individual with $500,000 in stocks and bonds in an account managed by a financial advisor is likely to be paying $5,000 per year—or more—in advisor fees, which many investors overlook because they are automatically deducted from their account. If the advisor is spending 6 hours a year on your account—and frankly we wouldn’t want most advisors spending more time than that and overthinking the investment strategy—then the fee equates to more than $800 per hour.
Over time, the fees become startling. Over 25 years, an individual that starts with $500,000 in an advisor-managed account, saves $10,000 per year into the account and earns a 5% return on investment, would end up paying $250,000 in fees! Using the same assumption of 6 hours per year spent on your account, the advisor’s rate equals $1,700 per hour. To be honest, some advisors might be worth that much. Most aren’t.
If you’re thinking to yourself 1% still seems like a small tax on my nest egg. It’s nothing really. It’s just a teeny, tiny sliver of my portfolio. Consider this: If you earn a 5% annual investment return, the advisor is taking 20% of your returns each year! That’s a lot of your money going toward the advisor’s vacations and new cars. Is your advisor really your favorite charity (as discussed in this great post by Physician on Fire)?
If you can take a long-term view and stick to a plan, you are better off managing your money yourself. You can develop a basic financial plan with the guidance of a flat-fee or an hourly-rate financial planner, a new breed of adviser with no conflicts and reasonable fees. Focus on spending less than you make. Set aside cash for predictable budget-busters like home repairs. Save 10%-50% of your gross pay for retirement. Work with your flat-fee planner to develop an appropriate investment strategy for your age, income, net worth, goals and risk tolerance. If you don’t want to make investment decisions yourself, invest in low-fee, target-date index funds, which buy an age-appropriate mix of stocks and bonds, rebalance continuously and automatically adjust over time. Finally, just be consistent. Save and invest through all the ups and downs of the stock and bond markets.