Ok, before you read this post, go read this one first.
So here’s the thing.
The idea of a financial advisor isn’t an inherently bad one.
This person has some knowledge and expertise that you presumably don’t have. So you meet this person and they advise you on your finances… basically a consultant. Any consultant desires a fee, and rightly so, as they have provided a service, hopefully a value one.
You receive a service and pay a fee. However… that is where it should end. You shouldn’t need to continually pay A PERCENTAGE of your net worth every year to continue to receive the same service. Therefore, at its very basic I am against the idea of a continuing AUM fee.
Let me give an example:
Your tooth hurts. You don’t know anything about teeth. So you go to see your dentist, an expert in teeth. He looks at your teeth and tells you that you have a cavity, some tartar buildup and some gingivitis. He recommends you get your cavity filled and that you floss more regularly. So you get the cavity filled and promise to floss more regularly (you won’t, but you promise anyways). You pay the dentist for his service, or your dental insurance and you pay together. Service rendered. Fee paid.
Now imagine that after the initial cavity getting filled, you have to continue to pay the dentist every year… and rather than going down every year, the cost goes up every year.
Also… all this happens without you ever seeing your dentist again.
Does this sound like a good idea to you?
If it did, then I have a bridge to sell you. Hopefully your answer to that question is… ummm… what?!?!?!
But Sensei… don’t we pay to go see the dentist every year… isn’t that kind of the same?
Yes… and no. But mostly no.
Remember, the dentist is providing a service for you every year by checking your teeth in an attempt to prevent any future cavities, and checkups cost significantly less than getting a cavity filled or a root canal or something.
Service rendered. Fee paid.
That is normal. Is the dentist’s job “easier” if you see him more often…? Possibly. He knows who you are and how your teeth looked the last year and so follow-ups are “easier” in that sense.
But my financial advisor meets with me every year, so isn’t that kind of the same?
Yes… and no. But mostly no.
Even if your financial advisor meets with you every year for free, it doesn’t matter, the majority of his fee comes from your AUM fee anyways. If you have $10000 being managed by him then he gets $100 or $200 (1-2%) whether he meets you or not. Obviously, as the first number increases, so does the second. As a physician you will have 100k in your retirement accounts pretty quickly which means he gets $1000 or $2000 regardless of whether you made or lost money that year.
Wait, so if I had 100k in my account and the market was down, and I lost 10%, dropping my net worth to 90k… he still gets $900 or $1800?
Yes. You losing 10k makes him lose $100.
Now of course, he would much rather that the market went up 10%, so then he would $1100 or $2200. He is banking on the concept of compound interest just as much as you are.
I dunno Sensei, I don’t like all this money stuff, can I just have a financial advisor take care of it for me to start, and then I’ll move it over later?
Of course you can. However, once you have your money somewhere, people become afraid to move it around…
Let’s say you start with a traditional financial advisor and start putting your money away. You put your head down and grind away at work stashing money away every year. You are planning to “figure this stuff out” later, in like 2-3 years. But then you have kids and you decide, it’s ok, I’ll just wait another few years. Then the kids make it to high school… and you say. Oh, how is my money doing?
So you check your account, wow you have a $900,000 in there. I mean, it’s been 15 years… your kids are in high school now, remember? You’ve been putting money away every year like clockwork, $36000 a year (assuming 7% interest). So how much have you been paying that financial advisor… what was his name, Bob? Dave? John? I don’t remember, haven’t talked to him in years… or maybe not even since you started the retirement account…
This year he received a nice $9000 or 18000 from you and the previous year probably about $8500 or $17000. And every year before that for the prior 13 years he received some money from you.
You were being bled dry and you didn’t even know it.
Ugh. Ok. Well what should I do then?
Learn how to do some of it yourself. That’s what this blog is for.
If you still decide to use a financial advisor (and you probably should!), then get a fee-only advisor. Basically, these people are independent and not affiliated with any particular fund, so they have no inherent conflict of interest to peddle “their fund”. You can imagine that affiliated advisors get some kind of bonus or commission to sell their own funds. And surprise!, these “funds” which they are supposed to peddle are usually the higher expense ratio, loaded funds, actively managed funds.
Basically, a fee-only advisor is someone you meet with and they advise you on what to do with your money. Usually they meet with you for a few hours, decide your gameplan and then set up the paperwork for you. You then pay them a fee, usually on the order of a few hundred dollars or maybe even $1000 (for their time and expertise). This is where new physicians become wary… why am I paying this guy the equivalent of $100-200 an hour for this information.
Here’s the simple answer:
Because you don’t have it.
You were ready to sit down with a financial advisor and have them “take care of it” for you while they took a percentage of your money every year likely with a higher expense ratio, loaded fund… and maybe even a first-time consulting fee.
You were ready to lose hundreds, thousands, tens of thousands, or maybe even hundreds of thousand of dollars over your lifetime…
… but when a person with more experience than you wants to charge you an hourly fee or flat fee for financial advice… you suddenly become Ebneezer Scrooge?
Get over it.
Ignorance is Bliss.
When you didn’t know you were losing money every year you were completely ok with it. However… NOW YOU KNOW.
Don’t pay for something… and get nothing.
Service Rendered. Fee Paid.
Use a Fee-Only Financial Advisor (hourly rate or flat rate)
However, just because an advisor is “fee-only”… that doesn’t mean they’re GOOD.
Stay tuned next week for “How Do I Find a Good Fee-Only Financial Advisor”
Fee-Based is NOT THE SAME as Fee-Only
Agree? Disagree? Questions, Comments and Suggestions are welcome.
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