The disastrous effect of a 1% management fee

[Oz investor]

hopefully Warren is obeying Rule 1. ( DON'T lose money )

if not losing capital the returns MIGHT improve later

 

[cranberryjoe]

Another twist on a 1% AUM fee is when you've retired and are withdrawing according to the 4% rule. That's 3% to you, 1% to the adviser. In other words, the adviser is getting 25% of your retirement income. If your WR is less than 4% the adviser is getting relatively an even larger chunk.

 

[scrabbler1]

Also consider how much that 1% AUM is when compared to the other expenses in your budget. I remember when a FA at Fido tried to poach me from another advisor whose advisory services were free (I'm in their Private Client Group), he wanted to take control of my portfolio for a 1% fee. I wasted 2 mostly miserable hours with the guy, and by the time I had walked back to my car I had already mentally written a letter of complaint to the office manager. Anyway, 1% of my portfolio would have been about $10k per year, an expense which was larger than my housing expense, larger than my HI costs. It would have increased my annual spending by about 40%! No thanks, pal!


The office manager quickly called me to switch me to another advisor in Fido's PCG., one I have had since than. Mr. Pushy left the company a few years later, I learned.

 

[Dtail]

As mentioned in other threads, if one has Private Client Status at Fidelity, one can effectively receive some form of investing advice for ZERO advisory fees.

 

[OldShooter]

As mentioned in other threads, if one has Private Client Status at Fidelity, one can effectively receive some form of investing advice for ZERO advisory fees.

Yes. Schwab has something similar.

I have talked to my rep about this; he is not legally a fiduciary and he will not recommend specific investments, just refer me to Schwab's "preferred" lists. He will happily discuss strategy and he is also a good resource for accessing Schwab's information banks. A few weeks ago I asked him what Schwab's take on leveraged loans was, as these have been getting a lot of criticism lately. Within a few hours he had forwarded a fairly detailed paper that their research people had recently written. He's also very responsive at expediting things and solving problems. I am happy with the relatiionship.

 

[Texas Proud]

I do not remember anybody pointing this out... but it is not only the 1% AUM... they also put you in funds that have expense ratios that are between .5 and 1.5 BP....


Now, the expense ratios are harder to get out of unless you direct your own money and buy ETFs or use a low cost provider...

 

[DogGone]

A tip and a question...

So I plan to announce my FIRE decision next week and am looking at this expense.

First the tip.
Once our assets with him approached $2M, I explained how rational and low maintenance we are and how I was tempted to do this myself if not for the time. I negotiated the fee from 1 to 0.85%. I didn’t see anyone mention that, like anything, things are negotiable.

My wife is not finance savvy so an advisor is an advice plan if I pass first.

The question.
If I did this myself, how much do I really save? This pays for expense fees, any other fees, correct? Would I save the 0.85% or still end up paying 0.4% or so on my own?

 

[samclem]

This pays for expense fees, any other fees, correct?

Oh, no. Very unlikely. Check the fine print, but in most cases the advisory fee is just that. All the fees within the products themselves (expense ratios for funds/ETFs, etc) will be extra. So, in total you could easily be paying 1.2% per year, which likely amounts to about 30% of the total amount you'd want to withdraw from a portfolio every year. That's the best way to think of it at this point: You are about to give this advisor and his products 30% of the annual amount that your portfolio is paying out to you every year--money you could be spending. It is outrageous (IMO).

And, FWIW, 0.85% is no bargain at all, even if you need handholding (and you probably don't).

Would I save the 0.85% or still end up paying 0.4% or so on my own?

Yes and yes. You'd save 0.85% but you still need to pay the expenses on the individual products. If you choose low-cost investment vehicles, they will be >much< less than 0.4% per year.

 

[DogGone]

Interesting... about half our investment is with him, so minimally I will withdrawal from there and pay college from there these next few years.

Can I just exit the relationship and keep my cash with the same brokerage firm?

 

[samclem]

Can I just exit the relationship and keep my cash with the same brokerage firm?

Normally, yes (and there's no reason to stay with the same brokerage, either). There can be a sticking point (causing a taxable event) if any of the investments are of a type that can't be transferred in kind, but that is unusual.
This is a big subject and definitely worth reading about before doing anything. There are many threads here about managing your own money. Main points:
- It is not hard (though advisors will often explain things in such a way that it seems hard)
- You can, and probably will, get investment results just as good as if you had an "advisor." If he >really< knew what was going to happen next in the stock market--even 20% better than random chance--he could get wealthy on his own in short order using leverage and options. He can't.
- You will definitely save a lot of expenses.
- Nobody cares more about your money than you do.

Spend some time looking through the threads on this forum and asking questions here. Read one or two of the recommended books, read some of the threads here about folks who sprang free of the clutches of their advisors (so you'll know what to expect: your advisor will likely not let you go without doing a lot to keep you). Once you are ready, cut the rope and do not feel any remorse at all.

 

[target2019]

Interesting... about half our investment is with him, so minimally I will withdrawal from there and pay college from there these next few years.

Can I just exit the relationship and keep my cash with the same brokerage firm?

Now that you negotiated to .85% fee, possible next steps:
1) Withdraw from management, leave everything in place, and pocket .85%
2) Withdraw money from funds to pay college, effectively reducing account fees each year, since you are reducing the total.
3) Make agreement with another institution (Vanguard, Fidelity, Schwab), and let them figure out how to transfer everything, and reduce your fees by 1-2%. This happens when you are in low cost index investments.

 

[mrfeh]

So I plan to announce my FIRE decision next week and am looking at this expense.

First the tip.
Once our assets with him approached $2M, I explained how rational and low maintenance we are and how I was tempted to do this myself if not for the time. I negotiated the fee from 1 to 0.85%. I didn’t see anyone mention that, like anything, things are negotiable.

My wife is not finance savvy so an advisor is an advice plan if I pass first.

The question.
If I did this myself, how much do I really save? This pays for expense fees, any other fees, correct? Would I save the 0.85% or still end up paying 0.4% or so on my own?

https://www.bogleheads.org/wiki/Bogleheads®_investing_start-up_kit

With a portfolio of $2M, you'll save $17K per year. And it takes virtually no time or effort on your part outside of a little reading.

 

[free2020]

I find Buffets experiences ages 6 yr old - 19 yr old much more interesting. What kid thinks that way? And that's why finance should be taught from 1st grade. I've always thought that.

Yes that’s the story here. I would submit that Buffett learned about investing on his own; Through his many early childhood businesses he ran: newspaper routes, pinball machines, selling Coke in the neighborhood and buying stock from age 11! He did his own taxes at 14!

I highly doubt that traditional teaching of finance would give the knowledge because the teachers learn from books. Forget grade school, even MBA courses teach it wrong. If you don’t teach according to the norm, you don’t get tenure. The mediocrity is institutionalized.

 

[samclem]

https://www.bogleheads.org/wiki/Bogleheads%C2%AE_investing_start-up_kit

With a portfolio of $2M, you'll save $17K per year. And it takes virtually no time or effort on your part outside of a little reading.

It is some of the easiest money you'll ever "earn" (save).
It should burn people up that someone who has claimed to be "on their side" is willing to take 25%- 30% of their annual retirement income for what amounts to about an hour of effort per year to do something that they know that client can easily do for themselves.

IMO, the best part of doing it yourself is that you'll know that no one is taking advantage of you.

 

[OldShooter]

... I explained how rational and low maintenance we are and how I was tempted to do this myself if not for the time. I negotiated the fee from 1 to 0.85%. I didn’t see anyone mention that, like anything, things are negotiable. ...

They are negotiable, especially with the smaller shops. Big banks and insurance companies are likely to be less flexible, but for them you are a trivial account so you don't want to be there anyway.

I wanted to try some DFA funds with a $100K, 2 year, experiment. These are available only through FAs. I haggled one down to 50 basis points because he was interested in the experiment and he could tell that I was gong to be low-maintenance.

... My wife is not finance savvy so an advisor is an advice plan if I pass first. ...

Establish a relationship with a good FA on a dollars-per-hour rate. Involve your wife in the meetings and communications. Then, if she feels she needs ongoing help she can consider an AUM relationship when you are paws-up.

... If I did this myself, how much do I really save? This pays for expense fees, any other fees, correct? Would I save the 0.85% or still end up paying 0.4% or so on my own?

If you take the passive investment approach that is popular here (and which we use) your mutual funds will have internal fees ranging from zero to maybe 50bps, the latter for international funds. Assuming your FA is buying mutual funds for your portfolio, their fees are on top of his/her fees, so you are already paying them. Odds are, too, that the FA is using funds with higher fees that you will pay with passive funds. So, yes you will really save the 85bps plus probably a little more.

 

[Starsky]

I think it would be very interesting for managers to just charge a monthly fee for their services. I wonder how investors would respond. At 1% per year, that would work out to $83.33 per month for a $100K portfolio (or $416.65/mo. for a $500K account). This is whether the market is going up or down, every month; for, pretty much, the rest of your adult life.

For a lot of people who don't know or care about personal finances (and there are a lot of those people), paid financial advice may be the only way to become a saver. In that case, anything is better than nothing; and the advice enables people to participate, just at a much higher cost.

For anyone inclined to be an active investor, spending between $100 and $400 per month to get someone else's advice is a steep price - like paying an extra mortgage. My experience with institutional advisers has been dismal; and most will begrudgingly admit that their services are probably not right for an educated, engaged long-term investor like myself. Their management is not as active as you are led to believe, is highly generic, and you are just an annuity for them. I get a lot more [and better] advice from my free account rep than I ever got from my paid Fidelity Advisor. (and I'd much rather get my tax advice from my tax accountant) It's a function of asking the right questions.

It explains why there are so many people who have very little savings. Investing requires knowledge and expertise - there's no question. But it doesn't require a degree to become a perfectly capable investor at a very basic level. If you can master that basic level, then the math of an advisor becomes hard to swallow when you see the long-term impact on the portfolio.

 

[samclem]

I think it would be very interesting for managers to just charge a monthly fee for their services. I wonder how investors would respond. At 1% per year, that would work out to $83.33 per month for a $100K portfolio (or $416.65/mo. for a $500K account). This is whether the market is going up or down, every month; for, pretty much, the rest of your adult life.

I think an hourly fee is much more appropriate. The real work is in the initial setup of the portfolio (what--maybe 3-5 hours total for an average situation, incuidng time for the sit-down with the client to understand their risk tolerance, etc?), with another hour every year.
It's roughly the same amount of work for a $100K portfolio as for a $2M portfolio.

 

[Starsky]

I think an hourly fee is much more appropriate. The real work is in the initial setup of the portfolio (what--maybe 3-5 hours total for an average situation, incuidng time for the sit-down with the client to understand their risk tolerance, etc?), with another hour every year.
It's roughly the same amount of work for a $100K portfolio as for a $2M portfolio.

That makes sense. Like with attorneys, the hourly rate could be much higher for the more experienced high-dollar advisers with a proven track record. This is more about the quality, not quantity, of their work. Let the market set the price.

And I forgot to mention, these paid advisors are not fiduciaries. Paying someone a huge percentage of your annual profit who doesn't have your best interests at heart to manage your money seems dangerous.

 

[Dtail]

It explains why there are so many people who have very little savings. Investing requires knowledge and expertise - there's no question. But it doesn't require a degree to become a perfectly capable investor at a very basic level. If you can master that basic level, then the math of an advisor becomes hard to swallow when you see the long-term impact on the portfolio.

Bolded by me - and that's the big point. One could study all they want on the internet, but can't perform heart surgery as an example.
However most folks can't imagine that one can accomplish the same results (or better) as a layman vs. a "professional" when it comes to investing.

 

[kgtest]

Or stated another way, ‘by the time you know enough to pick a great/value added advisor, you don’t need one.’


Many/some pros may outperform short term (some just at random), but do you have some evidence to support that “many pro’s” can over the long term - more than 2-3 years? Everything I’ve read is about 80% don’t, and it’s not obvious who the good 20% are in advance (see adage above). If it was, the underperformers would have washed out long ago.

Two acquaintances of mine are EJ advisors, neither of them had any background in finance and all they really do is whatever the back office tells them. When I ask questions, it’s all basically scripted. Both of them had about 7-8 weeks training before being turned loose on clients...and last I heard EJ takes about 1.25% of AUM annually.

I am not pro, but I think I have done it. I am up like 165% over past 6 years...which is around ~ +27.5% And I knew nothing about investing, hell I still don't. Now sure, I am not hitting a double...back to back doubling my money like Buffet, but pretty damn close and I didn't need to convince all my buddies to come along for the ride.

 

[OldShooter]

... these paid advisors are not fiduciaries. Paying someone a huge percentage of your annual profit who doesn't have your best interests at heart to manage your money seems dangerous.

I believe that in most cases paid advisors are fiduciaries. Registered investment advisors (RIAs) and their representatives are bound to a fiduciary standard as part of the Investment Advisors Act of 1940.

It's a bit of a swamp to verify fiduciary status, though. One way is to request a copy of the firm's form "ADV," a document required by the SEC. (https://www.investopedia.com/terms/f/form_adv.asp) Kitces also provides a big gulp: https://www.kitces.com/blog/the-4-different-types-of-financial-advisor-fiduciaries/

Although there is a lot of bad information out there, Certified Financial Planners are NOT, by virtue of having the certification, fiduciaries. In particular their code of conduct omits the fiduciary duty of "loyalty." This allows the CFP Board to sell certificates to Series 7 licensed registered reps, whose loyalty runs to their employer and not to their customer.

I have read that the CFP code of conduct will be revised this fall to become more fiduciary-like. That's good, but in the end the CFP is simply a piece of paper sold by a private corporation and the CFP code has no legal teeth. Also, though the corporation is legally a nonprofit, the top guy makes over $1M a year. So there is a moral hazard; more CFPs mean more money for the seller of the certificates and to the extent it is tough to get a CFP, fewer will exist and be paying dues.

 

[free2020]

Excellent points made on this thread. The world is going to miss Jack Bogle and someday, Buffett chirping about the impact of fees. The financial media is very savvy when it comes to burying this message. They keep seeding doubt in the minds of the average Joe that passive(low cost index) investing “may not” work in the future. No matter if the math has held true for the past 100 years.

 

[OldShooter]

... I am up like 165% over past 6 years...which is around ~ +27.5% ...

Hmm... my calculator makes that about 17.5%. (2.65^0.16)

An S&P calculator I found says over 6 years (Feb 2013 to Feb 2019) the S&P total return is 106%, or 12.8% annualized. Your result isn't bad at all. I would love to have it, but the question becomes whether you are winning on a risk-adjusted basis or not. Are you investing in only US large cap stocks? Or?

 

[OldShooter]

... No matter if the math has held true for the past 100 years.

Actually, the math is true for all time. No expiration date.

Here is Dr. William Sharpe's (https://www.nobelprize.org/prizes/economic-sciences/1990/sharpe/biographical/) 1991 paper that explains "The Arithmetic of Active Management" : https://web.stanford.edu/~wfsharpe/art/active/active.htm One of life's little mysteries for me is that active managers are not nearly as successful as Sharpe predicts.

(Don't be intimidated. It's only three pages and a very easy read.)

 

[JP.mpls]

Another twist on a 1% AUM fee is when you've retired and are withdrawing according to the 4% rule. That's 3% to you, 1% to the adviser. In other words, the adviser is getting 25% of your retirement income. If your WR is less than 4% the adviser is getting relatively an even larger chunk.

Cranberry Joe,
I've used this example with several friends who pay FA for guidance.

I'm supposed to live on a 4% withdrawal of my retirement accounts.

It took a career to save that money. I don't want to give a FA 25% of my yearly earnings from my retirement savings simply to set my AA, and to tell me what mutual funds to buy from their "preferred" high cost family of funds.

Low cost Vanguard Index funds with my preferred AA will work just fine, and I will spend the whole 4%.

Take care, JP