Author Topic: Standard Financial Advisor Rate is 25%  (Read 1034 times)

Much Fishing to Do

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Standard Financial Advisor Rate is 25%
« on: March 11, 2017, 06:49:57 AM »
There are a lot of billing methods out there in many industries that use some slight of hand to convey affordability.  But I think one of the worst is the 1% financial advisor fee, though maybe I'm looking at this wrong.  The 1% is charged on the same dollars over and over.  If the federal government was to tax us based on our net worth every year instead of our income think of how different an end that would be.

If one believes the 4% withdraw rate is a good guideline, then just realize how much tiny numbers can matter.  If you pay 0.4% for an S&p500 fund versus 0.1%, you should not think you are losing 0.3%, but that you are losing 7.5% (of your annual income).  The 1% standard advisor fee (which is laid on top of these expense fees), therefore means you are paying 25% of your annual income for this service.  I can't imagine near as many people would choose this if they looked at it in that way. Something about just it being a tiny number (1%) makes it seem not a big deal.

On a related point it would be interesting to know if there are any advisors that base their fees on how much they actually beat a simple target fund/benchmark/etc or the like (we get half, you get half, of how much we beat it by). Though I can't figure out a way to make it work in practice, because its hard to imagine them paying you when falling behind the benchmark, and if they don't then they are basically incentives to be extremely risky given the potential upsides and no down.

I've really been thinking a lot about the 1% advisor fee and just can't wrap my head around how it could be justified for anyone in this day of easy access to cheap/diversified/automatic options out there.

kayvent

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Re: Standard Financial Advisor Rate is 25%
« Reply #1 on: March 11, 2017, 07:10:14 AM »
On a related point it would be interesting to know if there are any advisors that base their fees on how much they actually beat a simple target fund/benchmark/etc or the like (we get half, you get half, of how much we beat it by). Though I can't figure out a way to make it work in practice, because its hard to imagine them paying you when falling behind the benchmark, and

There are such funds. Their population has dwindled though. The most recent one I've personally heard about (one of friend's wife's) has no fee if they fail to make a pre-defined return and a sliding fee up to a cap.

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if they don't then they are basically incentives to be extremely risky given the potential upsides and no down.

One of the reasons they aren't as popular anymore, I've heard, is because of how active people are in reading the news. If one has a financial adviser that they trust and they don't check their year-to-year returns (because of the aforementioned trust and not watching the news), the adviser can make good long-term choices without being risky. But in the climate of the last thirty (forty) years, people have a habit of harping their financial advisers if they see any dip. Even if the adviser is beating the market.

Indexer

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Re: Standard Financial Advisor Rate is 25%
« Reply #2 on: March 11, 2017, 07:51:57 AM »
Why does the 1% fee exist? For a long time it was a lack of alternatives. The MMM crowd includes a lot of math oriented people, computer programmers, engineers, people who work in finance, etc. Most people don't enjoy playing with numbers and %s. Most people don't enjoy reading about tax laws of Roth VS Trad, SEP VS SIMPLE, tax efficient investing, tax efficient spend down, etc. Most people without real help will buy XYZ stock because their uncle said it was good on facebook, they will ask their banker for ideas on how to pay down debt(banker says... consolidate!), or their insurance agent for investment advice(agent says... annuity with hidden 2-3% annual fees).  Those representatives have a hammer they get paid to hammer with so they believe their hammer is the solution to every problem.

For those people an advisor held to a fiduciary standard, even at 1%, will probably help them avoid mistakes that would cost them significantly more than 1%.

NOW we have alternatives, but it is still a really short list. Some fee only advisors charge for a plan, some charge a smaller % like 0.5% and use low cost ETFs so all in costs stay under .7%, and Vanguard has that new offering that is only 0.3%. If you are just looking at an IRA or 401(k)[no tax considerations] then you could use a lifecycle fund, many of which cost less than 0.2%.

Note, I''m not advocating using an expensive advisor, just why they exist. I hope the model significantly changes.