I was honored to be quoted in an article by Top Dollar, Money Advice for Your 50s.
Here’s what I said on the topic: “For many of us, our work is our life. Once people don’t have that, it can feel like you’ve lost your sense of identity and don’t have as much purpose. As funny as it might sound, you should plan what you’ll do when you’re not working.”
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Most people estimate the price of a financial advisor to cost 1% per year. To investigate this assumption, Bob Veres surveyed nearly 1,000 advisors about their fees.
The main takeaway is that financial advisors’ fees are made up of two components.
Number one is the advisor’s fee, which is typically charged as a percent of the money that is managed, known as “assets under management” or AUM. This is the 1% fee most people have in mind.
AUM fees typically decline as more assets are managed. For instance, the fee on might be 1.0% on the first $1M and 0.75% on the next $1M. This leads to an overall “blended fee schedule,” shown below in orange:
Source: Financial Advisor Fees Comparison, Michael Kitces, Nerd’s Eye View
As you can see in the chart above, until you have $1.5M you will likely pay above 1%.
It’s also noteworthy these fees do not decrease dramatically. Even for clients with $5M the fee is approximately 0.80%, or $40,000 per year.
The second notable cost is the expense ratio. This often overlooked fee is the price of the mutual funds, exchange-traded funds, or other investment products used. Across all firms, the median cost was 0.50% per year. Importantly, these fees do not decrease as more money is invested, making them that much more impactful.
Total Costs
Adding the advisor fee and the expense ratio, the all-in cost of a financial advisor varies by asset level, but remains well above 1.0%:
Conclusion
Keeping fees low is an important component to successful long-term investing.
Those evaluating financial planning professionals should question the value of asset-based fees, and make sure to understand the total overall fee. Then, ask the prospective advisor, “How much time do you expect to spend working with me on an annual basis.” From there, calculate the fees as an average hourly rate.
As a flat-fee financial planner I believe charging an annual retainer is a fairer, more transparent compensation method. It does not cost more to manage a $5,000,000 portfolio versus a $500,000 portfolio. Why should a client pay tens of thousands more to receive the same service and investment portfolio?
This is also not how other established service professionals charge. Would an accountant charge based on your income? Would an estate planner charge based on the size of their estate? No. But this, unfortunately, is the norm in financial planning and investment management.
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I hope you’ve had a great week.
Please see this week’s personal finance articles, chart, and quote below, along with a bonus blog post written by me.
3 Articles
How to Buy Happiness (Responsibly)
Ron Lieber, The New York Times
The great reopening offers ample opportunity to lift your spirits if you have some money to spare. Here’s how to do it right.
Why You Should Wait Out the Wild Housing Market
Derek Thompson, The Atlantic
Pick a housing statistic at random, and it’s probably setting an all-time record. Home prices: record high. Inventory: record low. Percentage of homes selling above asking price: record high. Average time on market: record low.
Is $1 Million Still Worth $1 Million
Nick Maggiulli, Of Dollars and Data
There are around 32 million millionaires living in the United States. Based on data from the Survey of Consumer Finances, having $1 million in 2019 would have put you in the top 12% of U.S. households. However, having $1 million in 2001 would have put you in the top 7% of households.
1 Chart
26% of board seats there are now held by women — twice as many as before the law passed.
Source: California’s “Boardroom Quota” Impact, Axios
1 Quote
“The trouble with retirement is you never get a day off.”
– Abe Lemons
Bonus Content | Written by Will This Week
Investing Where it’s Comfortable
US investors are more comfortable holding US-based stocks. The same is true with Canadian, British, and Australian investors. This article describes this “home country bias,” including where it stems from and why it’s to be avoided.
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People invest in things they feel comfortable with. That’s why:
The same pattern emerges at the domestic level. US investors are more comfortable holding US-based stocks. This is called “home country bias,” and it means investors have a tendency to favor companies from their own country as compared to those from other countries.
This is not just a US-based bias. Investors across the world do the same thing:
The average American is ~80% exposed to the US, despite the American stock market being around half the global weight.
The average Canadian is ~60% exposed to the Canadian stock market, despite it being only 3% of the global weight.
If you are a US-based investor who is overly concentrated in US stocks, this approach has turned out very well over the past decade:
But if you look back over the previous decades, it’s clear that the performance of each country ebbs and flows. Knowing that it’s impossible to predict which sector or stock market will perform the best, we diversify.
While it might feel more comfortable to invest locally, buying international companies provides exposure to great international businesses: Toyota, Nestle, Roche, and many more. In fact, there are about twice as many stocks listed internationally as there are in the US (source #1, source #2)
When setting up your portfolio, be mindful of home country bias, don’t concentrate too much of your investments in your domestic market, and diversify internationally.
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Happy Friday!
Please see this week’s personal finance articles, chart, and quote below, along with a bonus blog post written by me.
I hope you have a great Memorial Day weekend!
3 Articles
Play Your Own Game
Morgan Housel, Collaborative Fund
We’re all playing different “games” when it comes to investing. Twenty-year-olds trying to learn about markets have different desires than 48 year-olds saving for their kids’ college. Figure out what game you’re playing, then play it.
Grab An Umbrella
Adam Grossman, Humble Dollar
On the importance of umbrella insurance.
What Can You Do About High Stock Market Valuations?
Charlie Bilello, Compound Advisors
1 Chart
Note the rise in home sales occurring in less than a week!
1 Quote
“The real measure of your wealth is how much you’d be worth if you lost all your money.”
– Anonymous
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