Hiring a Financial Advisor

[Ready]

I'm not going to defend FA's or AUM fees, but the above is not typical at all. I suppose anything is possible, but anyone I've ever talked to gets a much reduced rate after the first million. There's no way someone with a $10M portfolio is paying 1% unless they've totally given up on trying to limit their expenses or just don't care. The funds I have with my FA are just under $1M and I pay about 3/4 of a percent (.0075). Not saying I don't feel pain from that, but it's not 1% and I'm sure it would be a significantly lower if I had a few more million.

That’s better than paying a full percent. But even at .75% you are giving away 18.75% of your income each year.

Under a simple example of a $1M nest egg and a 4% withdrawal rate, a self managed portfolio provides $40,000 per year in living expenses. An AUM portfolio would yield $32,500 in living expenses. That’s still pretty substantial.

 

[Jerry1]

That’s better than paying a full percent. But even at .75% you are giving away 18.75% of your income each year.

Under a simple example of a $1M nest egg and a 4% withdrawal rate, a self managed portfolio provides $40,000 per year in living expenses. An AUM portfolio would yield $32,500 in living expenses. That’s still pretty substantial.

I've conceded that the FA is expensive, but my math does not work that way. I have significant investments in another account and I have a pension. I don't even draw from the money I have with the FA. I'm grateful that my initial cash at the beginning of retirement has not yet run out. I think I still have a few years before I have to think about a distribution from any of my retirement (pre-tax) accounts.

 

[Ready]

I've conceded that the FA is expensive, but my math does not work that way. I have significant investments in another account and I have a pension. I don't even draw from the money I have with the FA. I'm grateful that my initial cash at the beginning of retirement has not yet run out. I think I still have a few years before I have to think about a distribution from any of my retirement (pre-tax) accounts.

I understand. My comment was more of a general observation for someone who is thinking about hiring an advisor to manage their entire nest egg.

 

[levindb]

I know everybody's situation is different, but I did a comparison to a colleague who retired from the same Megacorp as me. While he has been retired longer than me, I have compared his ROR for the 8 years we have in common. We are the same age. We both have 65/35 AA.

He manages his own 7 index funds at Vanguard and rebalances yearly; does 1 annual w/d. He pays a CPA for occasional financial advice.

He has averaged 9.4% ROR for the past 8 years.

I have a financial advisor (for 13 years now) who charges .85% AUM. Minor rebalancing happens with each monthly w/d. I get financial advice for free when needed, and just this tax season my advisor told me to consider using COVID Relief Distribution to pay back funds into my IRA that I borrowed for a few months to put down on a new home while waiting for our rental property to sell. That saved me $30K in taxes and kept me from paying IRMMA fees. There have been other tax savings suggestions over the years as well.

I have averaged 9.3% ROR after fees for the last 8 years.

Advisors can be good for some people, but good ones are not easy to find.

 

[Ready]

I know everybody's situation is different, but I did a comparison to a colleague who retired from the same Megacorp as me. While he has been retired longer than me, I have compared his ROR for the 8 years we have in common. We are the same age. We both have 65/35 AA.

He manages his own 7 index funds at Vanguard and rebalances yearly; does 1 annual w/d. He pays a CPA for occasional financial advice.

He has averaged 9.4% ROR for the past 8 years.

I have a financial advisor (for 13 years now) who charges .85% AUM. Minor rebalancing happens with each monthly w/d. I get financial advice for free when needed, and just this tax season my advisor told me to consider using COVID Relief Distribution to pay back funds into my IRA that I borrowed for a few months to put down on a new home while waiting for our rental property to sell. That saved me $30K in taxes and kept me from paying IRMMA fees. There have been other tax savings suggestions over the years as well.

I have averaged 9.3% ROR after fees for the last 8 years.

Advisors can be good for some people, but good ones are not easy to find.

It looks like you have found a good advisor that you are happy with, and it has been a good fit for you. There are legitimate advisors out there who add a lot of value, particularly in answering questions that are unique to an individual’s circumstances.

As far as comparing your ROR to your friends, I don’t know how meaningful of an exercise this is. It would be better to simply analyze what investments your advisor has you in compared to your friends index fund portfolio. Your advisor could have told you to put 100% of your money in Tesla stock 13 years ago, in which case you would be a very wealthy individual today. But you would have taken a much greater risk to get there, and it simply would have worked out in that scenario.

If you look at the beta of your portfolio, which measure the amount of risk you took to get those returns, and compare it to the beta of your friends portfolio, that will give you a greater insight into what’s going on with both of those RORs.

When the stock market is going up for long periods of time (as it has been over most of the past 13 years), riskier portfolios tend to do better. But during down periods they get clobbered.

 

[garyt]

Agreed! Giving away 27.5% of your income to an advisor is absolutely ridiculous. I don’t understand how people don’t see that.

Well, if the advisor is beating the indexes handily it may be worth it. No advisor here,though.

 

[OldShooter]

... There appear to be very few true "fee-only" FAs. I've seen many that claim to be fee-only, but then also charge AUM on top of (!) their fee. To me, that's not "fee only"..it's AUM PLUS a fee. ...

Your words, you get to say what they mean. But in the industry, "fee only" means that the advisor is not paid commissions on products they recommend. Most AUM-paid advisors will tell you that they are fee-only, according to standard industry definitions.

... I get financial advice for free when needed, and just this tax season my advisor told me to consider using COVID Relief Distribution to pay back funds into my IRA that I borrowed for a few months to put down on a new home while waiting for our rental property to sell. That saved me $30K in taxes and kept me from paying IRMMA fees. There have been other tax savings suggestions over the years as well. ...

This is what a Financial Advisor does, in contrast to an Investment Advisor. If he is doing the full FA job he has also made sure that you have a will, an estate plan, health care powers, durable POAs, etc. If you have kids with college in the future, he has probably discussed strategy with you too. I'd suggest, though, that you not view this as "free." You are paying handsomely for it and should be as demanding as necessary to get advice on the non-investment aspects of your financial life. An FA is not a substitute for an estate attorney or a CPA, but rather a member of the team.

 

[Ready]

Well, if the advisor is beating the indexes handily it may be worth it. No advisor here,though.

If the advisor is beating the indexes without adding more risk and volatility to the portfolio they may be worth it.

 

[OldShooter]

If the advisor is beating the indexes without adding more risk and volatility to the portfolio they may be worth it.

If the advisor has the skill to pick winners, they would not be out hustling AUM customers. They would be as rich as they cared to be from trading for their own account, working from a yacht or a private island.

 

[travelover]

Financial advisors discussions remind me of extended warranty discussions. There is always someone who came out handsomely by taking the extended warranty. Of course, the difference is the FA is in a can't lose situation with an AUM compensation.

 

[ProGolferWannabe]

Financial advisors discussions remind me of extended warranty discussions. There is always someone who came out handsomely by taking the extended warranty. Of course, the difference is the FA is in a can't lose situation with an AUM compensation.

Generally, I tend to think of purchasing an extended warranty as a zero value add on that is for the retailer’s benefit. I think it is perfectly possible that there are FA’s who are acting in their clients’ interests but they effectively charge a lot of money. The guy I met with was very upfront about his fees....in today’s parlance, he was completely “transparent”. I’ve come the conclusion, he is not for me, but I can see why someone would hire him. I’m not sure I could ever say the same about buying an extended warranty.

 

[levindb]

When I connected with my FA, I asked them to give me a ROR of 3% over inflation, and that is what I am using for my financial planning. I am not in search of high risk high gain opportunities at this point in our lives. With inflation in the 0% to 3% range, we have done well and have much more in our accounts than when we retired 8 years ago. We have done some pretty hefty spending also (world cruise, 7 week safari, 4 week Alaska adventure...), and even purchased our FOREVER home last year.
I did a comparison with someone who was doing it on his own with index funds. That is a pretty small sample...we both seem to be getting the same annualized ROR, but I have had much more volatility...we still sleep well at night.
If my colleague was getting much better returns and spending less, I would make a change...but right now, I feel we are OK. When I am pushing up daisies, my wife will already have a relationship that she can trust.

 

[travelover]

Generally, I tend to think of purchasing an extended warranty as a zero value add on that is for the retailer’s benefit............

Others would argue that like having an FA, it gives them piece of mind and some do in fact recover a lot more in warranty services than they paid in premiums.

 

[Markola]

Others would argue that like having an FA, it gives them piece of mind and some do in fact recover a lot more in warranty services than they paid in premiums.

Me, for one. We have a Vanguard CFP and we are fully invested in index funds, so I expect and embrace that we will earn the market rates on each of them. Trying to beat the market is not even a consideration of why we have a CFP. We get a highly comprehensive financial plan to achieve our goals and regular check ins to keep it on track; peace of mind that my non-financial DW knows exactly whom to call if I croak before her; a neutral, third party expert to help DW and me stay comfortably on the same page and in sync despite our different spending styles; investment mistake prevention insurance since any counter-productive emotion-based trading decisions are no longer possible with AUM. And more guardrails, planning tools and “warranty services.” I kind of like that metaphor.

Oh, and I retired last year with great confidence rather than having to work several more years had I followed the 4% Rule common to DIYers. I don’t even know how to calculate the value of getting my life back. So, “THANK YOU, Vanguard advisor. The 30 basis points we pay you for AUM is the best money we spend, period.”

 

[SecondCor521]

Oh, and I retired last year with great confidence rather than having to work several more years had I followed the 4% Rule common to DIYers.

I'm curious what kinds of things led you to retire earlier than the 4% rule would have suggested. Is it your investment profile? Something about your future income? Tax cleverness? Something(s) else?

 

[Markola]

I'm curious what kinds of things led you to retire earlier than the 4% rule would have suggested. Is it your investment profile? Something about your future income? Tax cleverness? Something(s) else?

Sure. Vanguard Personal Advisor Services (VPAS) has its own proprietary software, in which they have invested millions to leverage their vast experience. It is Monte Carlo based. It ignores the 4% Rule. Clients go through a planning process to envision all the major pieces of their retirement plan, including Social Security and other expected income sources, debts and mortgages, life expectancies, legacy goals or lack thereof, a healthcare projection tool for each individual based on their specific useage of medical services to date, plans for specific expenses, such as home repairs and travel desires, everyday spending needs per year, etc., etc. You name the topic and Vanguard has an instrument to help you get a handle on it. All of that vast data is factored in.

That said, though the long term goals are protected and kept in sight, VPAS focuses on controlling only five years out, because so many things change short-term. They project what one can spend each year through a program called Dynamic Spending, which leverages Monte Carlo analysis, our known goals and expectations above, our progressively more conservative asset allocation, etc., etc. As market conditions occur, recommended spending year over year might go up a max of 5% or down a max of 2.5%. So, despite the complexity under the hood, the directive to us each year is very doable and simple to understand.

Given all of that, FOR US, our SWR for 2021 is about 7.5%. Hence, RE was possible for me in 2020 rather than 2025 or something. I emphasize FOR US, because we have no heirs and we inputted 95 as our life expectancy. YMMV. VPAS does not consider home equity, so should the SHTF in the out years and our AUM assets fall to zero (which they never will, because we would see it coming years ahead and would adapt) we still have that to rely on, plus maximum SS taken at age 70.

I hope that gives a sense of the program and why, to me, the 4% Rule is a far-too-blunt instrument that, had I followed it, would have kept me yoked to the cart for several more years than necessary rather than FIREing with high (90%+) confidence at age 54.

 

[SecondCor521]

^ Thanks, Markola. That does give a sense of the program, and I appreciate the detail.

7.5% seems like a really high WR at your age. Especially if it's based on a Monte Carlo analysis, which generally speaking is more conservative than the 4% rule, not less. But since we can't see under the hood and obviously are not privvy to all of your inputs and assumptions, it's hard to say one way or the other. It would make me nervous, but I do hope it works for you.

 

[nwsteve]

Sure. Vanguard Personal Advisor Services (VPAS) has its own proprietary software, in which they have invested millions to leverage their vast experience. It is Monte Carlo based. It ignores the 4% Rule. Clients go through a planning process to envision all the major pieces of their retirement plan, including Social Security and other expected income sources, debts and mortgages, life expectancies, legacy goals or lack thereof, a healthcare projection tool for each individual based on their specific useage of medical services to date, plans for specific expenses, such as home repairs and travel desires, everyday spending needs per year, etc., etc. You name the topic and Vanguard has an instrument to help you get a handle on it. All of that vast data is factored in.

Strikes me as having many of the attributes of Fidelity's Retirement Planner except Fidelity does not require you to sign up or pay for advisory services.

 

[urn2bfree]

The funds I have with my FA are just under $1M and I pay about 3/4 of a percent (.0075). Not saying I don't feel pain from that, but it's not 1% and I'm sure it would be a significantly lower if I had a few more million.

This is more of their nonsense- if you had a few more million the “RATE” charged would be lower but YOUR EXPENSES would be higher. The more you have the more they take for doing nothing more. The service they provide would be identical. So they continue to rip you off. 0.75% for ongoing portfolio management is over 10x higher than what I pay. Because I have a big portfolio and my expenses are flat. And as my portfolio grows my percent rate shrinks and my expense stays flat...
And for any non-ongoing questions there should not be ongoing fees, that should be answered at a flat rate based on complexity and will certainly be in the range of $250-$1000 one time charge.

 

[Exchme]

I'm not going to defend FA's or AUM fees, but the above is not typical at all. I suppose anything is possible, but anyone I've ever talked to gets a much reduced rate after the first million. There's no way someone with a $10M portfolio is paying 1% unless they've totally given up on trying to limit their expenses or just don't care. The funds I have with my FA are just under $1M and I pay about 3/4 of a percent (.0075). Not saying I don't feel pain from that, but it's not 1% and I'm sure it would be a significantly lower if I had a few more million.

The advisor fees may not be the whole story. We had an advisor for a few years and his fees went down some after the first $1M, but the funds he put us in also had high fees and (and they were repackaging funds from 3rd parties and they had high fees too). The fund fees stayed constant regardless of the amount. So the sum of everything totaled ~1.8%. We finally wised up and fired the leech, but it's very possible to pay a ton of money.

 

[Markola]

^ Thanks, Markola. That does give a sense of the program, and I appreciate the detail.

7.5% seems like a really high WR at your age. Especially if it's based on a Monte Carlo analysis, which generally speaking is more conservative than the 4% rule, not less. But since we can't see under the hood and obviously are not privvy to all of your inputs and assumptions, it's hard to say one way or the other. It would make me nervous, but I do hope it works for you.

Thanks and, from what I read, there is no escaping that retirees are inherently nervous. Yes, it’s a high withdrawal rate at first to buy our freedom but my more rational and analytical mind has high confidence in the very “surgical” VG plan’s numbers. When I plug the same numbers into Personal Capital I get the same high probability successful result.

The trade off is that I have to watch the portfolio that we earned painstakingly for years decline for about 15 years until Medicare at 65, SS at 70, the end of mortgage payments, and natural spending decline all provide relief to the portfolio SWR so that it starts growing again in our 70s and beyond. (Kitches and others refer to this common phenomenon as the “Retiree Portfolio Smile Shape,” so at least we’re not alone.). The portfolio will then likely be at its low ebb, while those on the 4% Rule will likely enjoy growing portfolios throughout. That would be intolerable to many here but it’s normal in the rest of the retired population and is the price we are willing to pay to FIRE now in good health. Even with the high WR up front, we’re not facing dramatic declines, given that our portfolio construct has earned 7-8% per year, on average.

If the decline becomes intolerable because markets have landed in their 10% worst performance bands in recorded history, we will see it coming a long way off and we will adapt. There are so many ways to adapt! It’s using the tools and trusting the numbers. At least we’ll have lower RMDs. And I have to remind myself that there is a 50% likelihood that our upcoming returns will be BETTER than that projected median returns that I plan around. Further, if we downsize the house in our 70s, as we intend, to get away from icy sidewalks and stairs, it pours on investment fuel and a huge safety margin when our health is most vulnerable.

Though we’re facing 15 projected years of gently declining portfolio totals, our net worth itself is not declining given our growing home equity, based on the trend over many decades in this popular neighborhood. The odds still are very strong that we’ll die relatively wealthy, in which case charities will benefit.

Not yet, though, we hope. We have living to do!

 

[Rocky mtn high]

I hate paying a fee to a FA. But I have done it for 20 yrs and used the same one. My return has averaged 8.5% for those twenty years after his fee. I think his has done a good job with investments and tax advice. I have wanted to change but after looking at the return and that my wife will need help I have decided to stay. If he ever retires I think I will not hire another one.

 

[RetireeRobert]

Have never used an advisor, as I am a retired CPA, a longtime investor, and consider myself sufficiently adept at financial matters. I did worry over the years about what DW would do after I passed and always assumed I would be the first to go. So I did consider getting in with someone whom DW could turn to in that case. I thought bout the Vanguard or Schwab personal advisor setups but it never went farther than thinking about it. As it turns out DW went first. So, I likely will never use an advisor.

 

[target2019]

What I don't like about a FA that charges a % is the more money you have the more you pay for the same info. His investment advice isn't going to change much if at all from a guy who has $1 million to invest and a guy who has $1.5 million yet the fee is $5K more a year, assuming 1% fee.

My in-laws were invested with a smaller FA, and then a larger company. One thing has always stuck in mind. My father-in-law could never be happy with the smaller company, as they bought and sold according to the plan, but the fee was the same, even when the client lost money. The AUM fee was something like 1.5%.

Fast forward, and he was happy to go along with the larger firm's plan, which had them in 12 high expense house funds. The AUM fee was just .7%, but adding in the mutual fund fees it was more than 1.5%.

Anyone who invests in this way should eventually come to the conclusion that the expenses they paid were dubious. The problem with many is that things go on, and 10 years down the road you may not be able to discern much about past performance, and what benefit you received from the agreement.

You have to get in the car and sometimes read the manual, or pay a mechanic to explain every sound and alert.

 

[levindb]

Financial Advisors get paid a number of ways, and there are a number of ways that you are being charged, there is a difference but looking at just how you are being charged, the biggies are:

1. Hourly rate - you pay for the time they spend with you
2. Flat rate - certain services cost $xx
3. Assets under management (AUM) - and the rate can vary with smaller portfolios paying a higher percentage
3. Mutual Fund Charges - these can be when buying into, selling out of, or continuously (monthly/quarterly/annual) or a combination of these
4. Activity Charges - you pay a transaction fee for buying or selling an asset.

As a client, you need to understand how you are being charged, and decide if you are OK with that. Unfortunately, many people who use financial advisors do not understand finances...and therefore do not understand the charges.

Getting a fiduciary financial advisor would help a lot of folks, if those folks only knew what that word meant. Finances can be tough for some folks.