When you’re doing well financially, paying advisor fees might seem unnecessary. So, do you need an advisor if you’re already in a good place?
Having a successful retirement isn’t just about not running out of money; it’s about what more you can do.
Through a real-life client story, I explain how having an advisor’s perspective to implement the right strategy can be more valuable than the cost of their fee.
Advisors can help you avoid biases in the way you invest and plan. They can ensure you have the right withdrawal strategy and don’t overpay on taxes. When handling finances for yourself, you may worry about what you could be missing. A good financial advisor will give you peace of mind, knowing you have all the right information.
It’s important to reframe your thinking: Is the cost of your advisor justified by the value provided?
Questions Answered:
What’s the opportunity cost of not having an advisor?
What value does an advisor provide when you are stable financially?
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⏱Timestamps:⏱
0:00 Financial advisor vs DIY
3:37 Does an advisor add value?
8:30 Story of lost opportunity
12:27 Understand the bigger picture
13:41 Being ok vs optimizing
17:44 Risk of wrong withdrawal strategy
21:13 Risk of overpaying taxes
22:20 Continuity costs
23:27 The real goal
27:31 Appropriately compare
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Am I Crazy For Paying My Financial Advisor $25k/year?
When it comes to managing your finances, it’s important to have the right guidance and expertise to make sound investment decisions. Many individuals turn to a financial advisor to help them navigate the complexities of the financial world and plan for their future. However, the cost of hiring a financial advisor can be a significant investment in itself.
Paying a financial advisor $25,000 a year may seem like a hefty expense, but it could be worth it for the personalized attention and expertise they provide. It’s important to consider the value you receive from your financial advisor and whether the cost is justified.
One of the key benefits of working with a financial advisor is the personalized financial planning and investment strategy they can offer. They can help you set realistic financial goals, create a comprehensive investment portfolio, and provide ongoing advice and support. This level of personalized service can be invaluable, especially for high-net-worth individuals or those with complex financial situations.
In addition to personalized service, a financial advisor can provide expertise and knowledge that the average individual may not possess. They can offer insights into market trends, investment opportunities, and financial strategies that can help you optimize your investments and minimize risk. This level of expertise can potentially lead to higher returns on your investments and ultimately offset the cost of hiring a financial advisor.
Furthermore, a financial advisor can provide peace of mind and confidence in your financial decisions. By having a professional guiding your investment strategy, you can feel more secure in your financial future and have a sense of assurance that your investments are being managed properly.
However, it’s important to weigh the value of the services you receive from your financial advisor against the cost. If you feel that you are not receiving the level of service or expertise that justifies the $25,000 annual fee, it may be worth considering other options.
Before deciding on whether or not you are “crazy” for paying your financial advisor $25k a year, it’s important to evaluate the value you receive from their services. Consider the personalized attention, expertise, and peace of mind that they offer, and determine whether it is worth the cost. Ultimately, the decision on whether to continue with your current financial advisor or seek a more cost-effective alternative is a personal one that should be based on your individual financial needs and goals.
Problem with high annual cost you pay when markets go up and markets go down. Also the 25000 / yr is lost forever and cannot benefit anymore from any future gains.
In similar situations simply do the math for the following scenarios over a longer period. Preferable 10+ years:
– Calculate current gains for investments done as advised by the FA
– Calculate if you would have invested in S&P 500 ETF including dividends that can be reinvested + adding extra 25000 / yr saved because you do not need to pay FA. Note SPY has a 0.15% fee
After this exercise is complete, go for the scenario that gained the most.
Just my 2 cents. I am not a financial advisor.
I like this guy but he is combining the activities of a financial advisor and a retirement planner. That's OK if you want someone to take care of all that for you. However you can find firms that will regularly give retirement planning advice only such as withdrawal, roth conversion, tax, social security, Healthcare and Medicare, etc. strategies each quarter for a flat annual fee for a tenth of the $25k he mentions. You can then be your own financial advisor and invest in an index mutual fund or etf and with a mix of bonds, cash, CDs, and treasury bills to rely upon when the market is down.
Research study after research study has proven imperically that the vast majority of financial advisors can not even match the S&P 500! Period. That is not up for debate. The ONLY real value an advisor has is stopping you from doing stupid, emotional mistakes with your portfolio. There is NO WAY A N Y advisor should be paid 1% for simply managing a portfolio. After the first year, when the financial plan is created, what does the advisor do to E A RN 1%….regardless of performance? The only real services the vast majority advisors offer is tax loss harvesting or rebalancing. The real services you actually need are tax planning and retirement income planning. ..and most advisors do not offer these services. Even if they did, they would only offer them in conjunction with a "managing your money" scenario…even if you didn't need or want those services. A visit to your website indicates that your firm is in that category. While your information is actuate and spot on, in all the videos of yours that I have watched, since I only wan't tax planning advice, I am not a prospect for your firm. FYI…I hold almost every financial services designation associated with financial advising, and I have been teaching the CFP program and associated designation courses for 15 years, after spending 40 years in the industry, including 12 as a producing manager.
I find value in the use of an advisor that understands my personal situation. However, there are some funds that don't need managing, especially index funds, which can be quite good without the expense ration problem. So, one option is to split the portfolio into managed stocks and managed funds. Pay the fee for the managed stocks, but not for the managed funds, which already have built in management fees. And if you look at some fund families, you will find the top 10 stocks repeated across multiple funds. The average annual return is within a percent or two of each other regardless of which fund you pick.
TLDR: “Yes, you’re crazy.”
Financial advisors who take a percentage of your portfolio instead of a flat fee are a rip off. If you need an advisor find a fiduciary pay them a flat fee and keep Thousand of dollars in your own pocket.
The current market looks so much like the 70's which everyone is dismissing. Buy the dips with SPY for the last 40 years may be history. Market may look like Japan's market with the debt loads now in the US looking more like Japan's debt load. In an inflationary market commodities did well to buy the on the dips. QE is the only solution the FED has pursued for the last years since 2008 and now they cannot stop that response without tanking the market and economy. Only have to look at Japan to see the future for the US economy because of the FED's response to economic downturns by continuing to pursue QE. How many advisors have never lived through the 70's that are ignoring the fact history repeats itself.
25K fee on a 4million portfolio is outrageous. Using 4% rule the retiree is giving up 16% of their retirement portfolio income to their advisor. It’s now a 3.3% rule.
So who does an advisor's investments..?? What bench mark to use against .?? No advisor will answer these questions ..that we all do know
I wish I'd consulted an advisor before I sold my all S&P 500 mutual funds on March 30, 2020.
Imagine you come to a store and all prices are expressed in percentages of your net worth. That's what AUM is. It doesn't make any sense, its sole purpose is to extract more money from those who can pay, and somehow it is supposed to be ok. An AUM advisor can easily be worth whatever percentage of your net worth they charge, but there is no way in hell it will be worth it every and each year. Yes, the plan needs to change occasionally, but paying $25k every year for decades is completely nuts.
You are repeating the same statement over and over. Yes, an adviser may offer services worth their cost, be it asset allocation or withdrawal strategy. But that's a one time job. Unless your financial situation changes significantly every year, no way you can justifying paying every year, especially since vast majority of advisers cannot outperform the market (say SP500) net of fees long term.
One more danger with financial advisers: They may trap you by creating a super complicated portfolio which would grow over time (albeit slower than the market). Then what? If you fire your adviser at that point YOU are left with the mess. You either sell those investments in order to simplify the portfolio and get hit with a huge tax bill, or drag it on with suboptimal performance and waste your time trying to understand what you own and how to optimize it. Pick your poison.
Or rather don't. Learn to manage your money yourself, or hire a fee based adviser once to do a specific job.
My response for the poor returns of the S&P during 1999 to 2009, use a bucket strategy and have more stock diversification than just S&P ETF. During a down market, use CDs, bonds and stable value fund for withdrawals to minimize sequence of returns risks. Replenish when stock values recover.
A reasonable billing rate would, in my opinion, be around $150 per hour. Is your advisor spending 150-160 hours per year on your account?
I hear of advisers taking a half percent fee off of a CD invested in a bank with the security of FDIC insurance. CDs are something I can do on my own as a pool of secure funds.
I agree with previous comment regarding fees. As a doctor, I don't charge my patient a percentage of their assets for medical advice, although I could argue that giving them the proper medical advice might make them more productive financially. In addition why should I pay more for the same financial advice if the advice is the same for a 1 million dollar portfolio or a 2 million dollar portfolio?
I have done essentially what Don has done, with great success. I have used a Total Stock Market Index for 20 years+, with a bond fund & bank accounts to cover 2+ years when market is down. But you need to invest time. You might consider buying a few hours of advice, but paying 22k/year or more is unnecessary if you are not trading. Withdrawal strategy is important. Watch James’ videos. Write down what you are doing, to inform your successors.
It would be great to compare the annual returns under his FA for the last 20 years agains the S&P returns. Compare year by year the FA returns (after subtracting the FA fee) V the S&P returns. History is no guarantee of future performance. But it is an excellent start.
Great video. Like and subscribed.
And that guy could have just executed that portfolio himself. Financial advisors rarely add value to a person who is moderately educated in investment.. it is called modern portfolio theory. Learn it and follow it
While I do really like the channel, I think that the example of when a client should have bought into the market at the low point was not a good example, since if his advice would have been to get into the market at the peak and then sell it at the bottom we would never have heard him talk about how good that advice was.
I'm sure some people publish two blogs, one saying now is a great time to buy across supporting different articles and the second blog to say now is a great time to sell, with many supporting articles.
Depending on what actually happens they will point to one blog and remove the other blog from the other one from public viewing.
Smoke and mirrors.
Ask a financial adviser if you should pay a financial adviser? Hmmmm..
I like your last point best.
I would like to know what type of advisor can be hired for distribution decisions regarding investment portfolios, annuities and social security in the current tax environment? I would rather hiring someone for annual advice at a one time fee.
Very nuanced conversation James. Well done!
You are really amazing!
You are brave to take this on as a financial advisor. Your reply was very eloquent and totally sound. I enjoy your channel, well done!
FAs can add value, no doubt, but the AUM fee structure is ridiculous. Especially over multiple years as most of the work is performed up front, then tweaked in later years. Fees should be relative to the work performed. The amount of financial work has no relation to the total amounts of assets. We do not compensate other professionals based on some arbitrary number, typically hourly or by the task. Fees based on market losses/gains don't make sense either as returns are not predictable. An outstanding FA could have a bad return year through no fault on his own.
I am in the exact same situation and paying ridiculous AUM fees as my portfolio has grown. If the firm sent out a bill for $25,000 in the mail every year, how many would continue to pay? I am not in retirement and I can really now see that my advisor is withdrawing almost to same amount as I am. The 4 percent rule now becomes 1 percent for my advisor, 3 percent for me. They are skimming off the cream. I plan to find a less expensive or a fee only advisor. I do not have to pay any other professional based on my assets. Why should the most expensive item in my budget be a financial advisor? It is like I am paying for a kid to go the college for the rest of my life.