Not a question for financial advisors but rather about them…

My investment strategy has thus far been pretty simple, I have a Schwab account and I have most of my money in a total market index fund, a little bit in an S&P index fund and a little bit in a dividend 100 index fund.

My wife is trying to convince me to use a financial planner, Creative planning. Their fee structure is 1.2-% on the first $500,000 and then 1% on on every thing up from there.

Help me with my math…

As I understand it, if I, hypothetically, put $1M with them, their fees would be;

($500,000 x 1.2%=$6,000.00 )+(500,000x1%=$5,000.00)= $11,000

That's against my total portfolio, not gains.

Then say at some point in the future, I have accumulated enough to retire comfortably. Say $5,000,000. I decide to follow the standard advice of living off 4% of my assets annually.

$5,000,000 x 4%=$200,000.00 a year. But my advisor is earning $51,000 a year off my portfolio.

($500,000 x 1.2%=$6,000.00) +($4,500,000 x 1%= $45,000)= $51,000

So at retirement, with $5,000,000, not considering growth to keep the math simple, my financial advisor is earning over 20% of what my portfolio provides for annual output?

Please tell me I'm missing something. That seems crazy.

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Their fee structure is 1.2-% on the first $500,000 and then 1% on on every thing up from there.

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That's expensive especially not giving on 1% above $500k. I would shop around more.

Find a fixed fee advisor. Do not pay based on percentage against assets.

I could take either side of this argument., but financial advisors are not a scam. They also make perfect sense for some people. I personally don't use one, as I feel I have enough knowledge to self-advise. However:

The OP sounds like he DOES need some help and advice. If he has the time or inclination, he can easily self-educate, and at least invest to a basic asset allocation and risk profile that makes sense to him. I'd suggest since he's with Schwab, he should look into their inexpensive Robo-Advisor program right now, and change when he develops enough confidence to make his own investing decisions. Right now, with his stated allocation, he definitely needs help, which is nothing to be ashamed of - most people don't have the experience to do it themselves.

I don't see how people can think advisors overall are a scam. A good deal? Maybe not. But do you expect them to work for free? The price is what the market will bear (it's quite a competitive space), and 1% for smaller accounts is pretty normal (still way too much for me to consider).

Got a FA a couple years ago when family had some changes in our finances that required help navigating taxes and advising on how to invest as we were novice to most investing strategies. 1% annual fee of assets under management. After spending a couple years learning from our FA and also mostly our own research and observation, we decided the value was no longer worth it and are managing things on our own and using an accountant to ensure no tax missteps.

So, a FA was definitely worth it for us early on, but 1% was too much to stay with it permanently. If we run across anything complex going forward, we will go with a one time / fee for service arrangement to help us plan and probably avoid the X% AUM fee because most of them are way too high. Plus we like steering our own ship now.

The money you lose on 1% AUM compounded over years is significant. Especially if the market is crappy for an extended period.

Ag00Ag said:

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Please tell me I'm missing something. That seems crazy.

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What you are missing is there are a lot of people who can't manage their own investing and using a financial advisor is the only chance they have getting it right.

It doesn't sound like this would be a good fit for you because it sounds like you are already doing fine with your own investments. If you aren't interested in taking a hands off approach, you will be miserable handing things over to an advisor.

YouBet said:

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And some people have complicated situations that require/need a third party.

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This. I got a ChFC and CLU early in my career (like 30 years ago), so definitely know my stuff. All was good until about 3 years ago.

I never anticipated the level of complexity I now face and having an FA *team* is incredibly helpful. And by team, I mean investment management, tax and estate planning. Maybe most important is long term tax strategy, tax planning and overall cash management. I don't like paying for it, but the service is very valuable to me now.

Two things:
1. 1% should be the starting fee and it should drop dramatically as your portfolio rises. 0.5% is the max I'd pay for $5mm.
2. Your wife asked you to do it. If you were gone tomorrow would you rather she work with an advisor you worked with for years or go find one on her own? IMO an FA is more for those who depend on me than for myself. An FA is the absolute best way to ensure your kids get an inheritance if your spouse is a financial dodo.

For perspective, we pay 0.1% which started out around 0.2%. It has fallen over time because we pay a flat fee. So, if you are paying 1% you are getting robbed.

I would do some research to find advisors who are flat fee based. They absolutely exist; talk to family and friends. Ask around. Look up the official Financial Advisor database online (I forget the name of it) and start your research there.

Also, don't assume there is a minimum asset requirement. My firm did not have one.

And ask what services they provide - I use my guy and his team for investment advice, insurance advice, tax planning, estate planning, anything at all that touches money that I want a second opinion on I ask him. They will run any analysis I ask of them from Monte Carlo to simply double checking my own Excel based cost planning and projections that I run through Tiller.

Actual tax prep for 1040s and/or estate docs is extra which they outsource on my behalf, but what we pay through them is pretty reasonable.

Based on my personal experience, I would urge you not to utilize Schwab Wealth Management. We signed up in 2022 on the recommendation of my wife. I was nearing retirement and she thought it would be best to have our nest egg professionally managed. We had quite a few dollars invested in Midstream Master Limited Partnerships for the dividends, but our advisor felt we were overweighted. He sold about 80% of our holdings in December 2022. In July 2023, I received a letter from Schwab stating I owed the IRS mid-five figures due to UBIT (Unrelated business income tax). When I contacted my advisor, he deferred my call to his assistant, who had no clue what was going on. When we finally met face to face, he lied, and said the sales were not related to the tax. As I dug into it, the Schwab tax group (which is based in Austin), said the UBIT was triggered by the actions of the advisor. I fired the advisor, and asked that we should be made whole for the actions and the deception. The branch manager agreed, the Schwab consumer advocate group in Westlake, TX agreed, but Schwab legal, also in Westlake, and their Risk Management Group in Phoenix, told me to pound sand. I filed FINRA complaints, but they claimed no harm was done to the client.

I moved 75% of our holdings to Fidelity, which has been great. Ironically, my Fidelity account manager was shocked the Schwab advisor didn't know it was an MLP unit and not a stock. Lesson learned for me as well. I knew nothing about MLP's, UBIT, and the dividends weren't Qualified. My biggest issue, the advisor never admitted the lie. Yes, a mistake was made, and the securities would have triggered the UBIT at some point, either prior to my death or after. But don't lie, especially when you have control of my money.

I now manage our portfolios, as I have for years. I think professional management is worthwhile for some, but I would definitely suggest a thorough due diligence (which I did not do either).

Are you willing to share the firm you are working with? Thanks

neutics said:

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Are you willing to share the firm you are working with? Thanks

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Well, they no longer exist. Got absorbed by Goldman Sachs a few years ago. I have no idea if costs/asset requirements have changed (if anything) now that they are in the GS family. I was grandfathered assuming any rules have changed.

YouBet said:

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neutics said:

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Are you willing to share the firm you are working with? Thanks

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Well, they no longer exist. Got absorbed by Goldman Sachs a few years ago. I have no idea if costs/asset requirements have changed (if anything) now that they are in the GS family. I was grandfathered assuming any rules have changed.

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Thanks, and that was part of my point in that fee structure simply doesn't exist nor would it be sustainable for a firm. The closest I've seen to that is in the 0.25% range where you typically get automated portfolios and robo advice, and possibly access to a call center advisor at best.

Flat fee is fine for those who want to DIY and have the time, discipline, and knowledge to do their own implementation. My experience as an advisor for a decade+ is that those who I've tried to help in this way, even friends and family, usually fail to execute the majority of the 5-10 step checklist that I have provided to make it as easy as possible. There is an incredible cost to the missed opportunity in this case.

Full disclosure I'm a CFP at an RIA and yes we charge a % based on AUM. No other commissions/loads or fees that are unseen. It is expensive, but whether it is worth it depends on your situation. Most of our clients are older and have significant complexity in their plans. We offer an all in one solution to include estate planning and preparation, tax preparation, and customized investment options to include access to private funds.

Again, you can debate the efficacy of fees based on AUM, but the value add from our perspective is incredible and hard to argue against even just the numbers based purely on performance. Many hire us for peace of mind for their spouse, or have reached a point in their lives where they likely have better uses of their time.

I don't think many can argue against the value add, it absolutely exists - the issue is more that the AUM% structure exists not because it's prudent but because firms can still get away with it.

If the investable assets in question aren't beating the market long-term, then why is the fee tied to that?

"Because that's just the way it is."

I bleed maroon said:

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Proposition Joe said:

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I don't think many can argue against the value add, it absolutely exists - the issue is more that the AUM% structure exists not because it's prudent but because firms can still get away with it.

If the investable assets in question aren't beating the market long-term, then why is the fee tied to that?

"Because that's just the way it is."

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While I generally agree with this for myself, I think you (and B-E-S above, especially) are missing the point of a financial advisor. If all you want is investment portfolio management and judge success as beating the S&P500 index, DON'T hire an advisor, and simply invest in an index fund (beating it long-term is mostly a pipe dream). Dabble in riskier stuff to gain an edge if you dare. Figure out your retirement and risk tolerances yourselves, later, when you need it (that's my approach).

You are discounting the real value of an advisor: things like risk management expertise, tax planning expertise, estate planning expertise, and having ready access to a sounding board going forward. They usually will also provide a written plan and instructions for sequencing draw-down in retirement (with tax, risk, and other factors fully considered). I think we all can objectively say there's a value in this - it comes down to price. I'm no fan of the % of AUM method, but it does link the advisor's interests to yours, at least directionally. Fee-only advisors are probably the direction I would go, in most situations.

I don't have a dog in this hunt, but simplistic takes like "it's a scam", or "it's never worth it" are just as bad as the typical defenses by a self-interested %AUM advisor. At a certain price, everything is a decent deal - you have to determine (based on your own qualifications) what that "fair price" is.

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That's kind of the point I was making though -- I agree that CFP's provide a valuable service.

But I disagree that an AUM% links the advisor's interest to yours. It instead provides a safety net for them in that if they do well in their investments they make more money, but if they do poorly they are still getting theirs.

All fixed rate does is remove the upside they have.

There's a relatively small number of actual tax strategies that exist. There's few firms out there doing things that other's aren't. Hell, even tax loss harvesting has been automated at the bigger brokerages. CFP's are incredibly valuable in pointing these strategies out and helping you execute them, but those strategies don't differ much between $2mm, $3mm and $4mm. Now that doesn't mean that each case is exactly the same as another, but it certainly doesn't differ enough to justify a % of the entire amount of assets.

Proposition Joe said:

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I bleed maroon said:

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Proposition Joe said:

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I don't think many can argue against the value add, it absolutely exists - the issue is more that the AUM% structure exists not because it's prudent but because firms can still get away with it.

If the investable assets in question aren't beating the market long-term, then why is the fee tied to that?

"Because that's just the way it is."

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While I generally agree with this for myself, I think you (and B-E-S above, especially) are missing the point of a financial advisor. If all you want is investment portfolio management and judge success as beating the S&P500 index, DON'T hire an advisor, and simply invest in an index fund (beating it long-term is mostly a pipe dream). Dabble in riskier stuff to gain an edge if you dare. Figure out your retirement and risk tolerances yourselves, later, when you need it (that's my approach).

You are discounting the real value of an advisor: things like risk management expertise, tax planning expertise, estate planning expertise, and having ready access to a sounding board going forward. They usually will also provide a written plan and instructions for sequencing draw-down in retirement (with tax, risk, and other factors fully considered). I think we all can objectively say there's a value in this - it comes down to price. I'm no fan of the % of AUM method, but it does link the advisor's interests to yours, at least directionally. Fee-only advisors are probably the direction I would go, in most situations.

I don't have a dog in this hunt, but simplistic takes like "it's a scam", or "it's never worth it" are just as bad as the typical defenses by a self-interested %AUM advisor. At a certain price, everything is a decent deal - you have to determine (based on your own qualifications) what that "fair price" is.

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That's kind of the point I was making though -- I agree that CFP's provide a valuable service.

But I disagree that an AUM% links the advisor's interest to yours. It instead provides a safety net for them in that if they do well in their investments they make more money, but if they do poorly they are still getting theirs.

All fixed rate does is remove the upside they have.

There's a relatively small number of actual tax strategies that exist. There's few firms out there doing things that other's aren't. Hell, even tax loss harvesting has been automated at the bigger brokerages. CFP's are incredibly valuable in pointing these strategies out and helping you execute them, but those strategies don't differ much between $2mm, $3mm and $4mm. Now that doesn't mean that each case is exactly the same as another, but it certainly doesn't differ enough to justify a % of the entire amount of assets.

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Sounds like we both agree on fee only advisors, if we do decide we need them.

If I chose an advisor, I'd offer to pay them an upfront fee for the plan, a nominal amount per year for plan updates and refreshes, and if they were providing portfolio management, maybe a small asset kicker when they out-perform our up-front agreed target return benchmark (a blended index rate, most likely). I'd also want a side account to manage myself, mainly to keep my mind sharp and in-the-game). They would also be on a short leash - I'd discontinue their services (they're mostly a commodity, I agree) in a heartbeat if I wasn't perceiving value.

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Thanks, and that was part of my point in that fee structure simply doesn't exist nor would it be sustainable for a firm.

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I would say I disagree with this because I have it and I know of others who also have this arrangement, but I haven't personally researched the options in several years to actually know who is out there doing it. Maybe it has become less common over time. I don't know.

I'll also add that the fee I'm charged is negotiable.

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You are discounting the real value of an advisor: things like risk management expertise, tax planning expertise, estate planning expertise, and having ready access to a sounding board going forward.

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Not to muddy the water as this is a serious question. When I log on to the various 1 hour live seminars offered by Fidelity, they begin each one by stating they do not offer tax advice. If that is the case would one need the involvement of an attorney the specializes in tax?

ToddyHill said:

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You are discounting the real value of an advisor: things like risk management expertise, tax planning expertise, estate planning expertise, and having ready access to a sounding board going forward.

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Not to muddy the water as this is a serious question. When I log on to the various 1 hour live seminars offered by Fidelity, they begin each one by stating they do not offer tax advice. If that is the case would one need the involvement of an attorney the specializes in tax?

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Correct - Fidelity and broker dealer's can't legally offer tax advice, nor can they do tax preparation etc. RIA's can.

YouBet said:

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Thanks, and that was part of my point in that fee structure simply doesn't exist nor would it be sustainable for a firm.

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I would say I disagree with this because I have it and I know of others who also have this arrangement, but I haven't personally researched the options in several years to actually know who is out there doing it. Maybe it has become less common over time. I don't know.

I'll also add that the fee I'm charged is negotiable.

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Fees are always negotiable, but the only way that arrangement works is if there are other hidden fees for products or funds, which is very likely at Goldman Sachs though their AUM fees are actually quite high

Tell your wife if she agrees to bring in addl $17k after-tax in year one to cover the advisor cost, then you'll consider it.

Just posting to say that I really appreciate the replies. I've read everyone.

Thanks.

That MLP trade was an absolute F Up by the advisor and should have been covered by Schwab. MLP's are not the type of security sought out by novice investors, meaning they're usually rec'ed by FA's.

JSKolache said:

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Tell your wife if she agrees to bring in addl $17k after-tax in year one to cover the advisor cost, then you'll consider it.

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This is hilarious! But yes most likely the financial advisor is for her benefit should something happen to you.

On a related note a firm called Origin just launched an AI-based advisory service that is significantly cheaper. AI is already part of our practice, but in theory I think most wealthy clients still want to talk with a real advisor/person.

Anyways, their launch ad was pretty funny actually:

There's a lot more that goes into your total return over your lifetime than how the market performs. If you think all of the advice and expertise of a great advisor will equal a total return of at least 1% more than what you could do on your own, then it makes sense for you to hire somebody.

Don't discount your time either. That's worth something and should be factored into the equation.

In the typical household the male dies first. And the male is in charge of the investing. That means for most of you here your spouse will end up with her name on your money at some point. If she has never been involved and is going to look for someone to manage "her" money it might make sense to set her up with someone in advance. My advice is once you're ready to retire pick someone, negotiate a fee and park some of your assets with that someone. And tell her if something happens to you to move the rest over there. From experience (I was a Merrill FA for 28 years) I can tell you 2nd spouses are a major threat to your kid's inheritances. For example, this wasn't my client but a girl I dated in HS, her dad was a USAF Colonel, he died, mom married another USAF Colonel. They joined their accounts and changed beneficiaries, telling their kids not to worry. She died, all the joint accounts reverted to his name and the beneficiary accounts swept into his accounts. He died 2 months later and his kids refused to even talk to her kids. About $1mm never got to where mom wanted it to go.

Yeah, I can't state enough how important it is to get estate stuff figured out in advance if it's going to be a decent windfall for someone. Regardless of blood family or second wives, many/most get stupid and greedy when a windfall is on the horizon.

Have personally dealt with both scenarios. People lose their damn minds and their ethics when it comes to money. I don't care how close you think you are to a family member they may turn on you at the drop of a hat.

Get your estates in order if you are going to leave money behind to someone. Get crystal clear on it and communicate it.