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 financial planner.
There are still a lot of 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 cash value life insurance or mutual funds 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 debt or contribute to employee-sponsored retirement plans.
Those AUM fees add up, too, especially as assets accumulate. An individual or couple with $500,000 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 12 hours per year on your financial planning and investment management—and frankly we doubt it—then the fee equates to $417 per hour. High, but not terribly unreasonable.
Over time, the fees become startling though. Over 25 years, an individual or couple that starts with $500,000 in an advisor-managed account, saves $20,000 per year into the account and earns a 5% return on investment, would end up paying $291,459 in fees! Using the same assumption of 12 hours per year spent on your account, the advisor’s rate equals $972 per hour. Some advisors might be worth that much. Most aren’t. As a point of comparison, an Aptus client using its most comprehensive and expensive services, and assuming annual inflation adjustments, would pay ~$111,000 over 25 years, or $180,000 less than they would pay an AUM advisor. An Aptus client would also have the option to reduce support or completely DIY down the road.
If you’re still 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.
Regardless, for someone who truly doesn't want to have the steering wheel in their hand, an AUM advisor can be money well spent. If you know you would be prone to sell everything when the stock market is down 40% and miss a big upturn, then an AUM advisor may be worth the money. It also gives you someone to yell at when your account's down in a bad year, ha!
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 financial plan with the guidance of a flat-fee financial planner. Focus on "paying yourself" first by saving appropriately for retirement and eliminating debt. Set aside money for future expenses by transferring money to savings each month for travel, healthcare, home, cars, education and other big tickets expenses. Spend money in ways that bring you happiness, provide peace of mind or express your values. Cut spending that doesn't. Address risks and uncertainties through appropriate insurance. Work with your flat-fee planner to develop an appropriate investment strategy for your age, income, net worth, goals and risk tolerance. Finally, just be consistent. Save and invest through all the ups and downs of the stock and bond markets. Stay the course over the long run and you'll do great.