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Conflicted Advice

In general, there are two types of licenses that an advisor may have- as a Broker or an Investment Advisor.

Brokers get paid a commission to sell products/investments, and their obligation is to their broker-dealer.

Investment Advisors get paid to give advice, and their obligation is to you, the client.

The term “advisor” can be used loosely as it’s not an actual designation or certification of any basic level of knowledge. To make things even more confusing, your advisor could hold both licenses as a Broker AND Investment Advisor, meaning you may be getting charged under both compensation models.  Of course, this also means they may give you advice as a fiduciary, and other times as a salesperson.

Which hat is your advisor wearing when giving recommendations?  You’ll learn how to search an advisor’s license status and mitigate this challenge in THE SOLUTION.

Let’s say you find a fiduciary advisor that you trust, and they’re licensed solely as an Investment Advisor.  You’re off to a good start, but how much will you pay in fees?

The overwhelming majority of Investment Advisors determine their fees based on what’s referred to as AUM, or assets under management.  If your portfolio is $1 million and your advisor has a 1.25% AUM fee, you’ll be charged $12,500 for that year (the exact amount will fluctuate with your account size).

The problem with your account size being the measuring stick used to determine your fee is that it doesn’t correlate with the service you are paying for (imagine getting a quote to paint your house, but the painter first wants to know how much money you have, then you can have your quote).

This may surprise some people, but it takes almost no additional effort to manage $10 million of assets than it does $1 million (and certainly not 10x the effort, even though this is roughly how much more you’d be charged under an AUM model).  If fact, some would argue that it’s more challenging to manage smaller accounts as there is less margin for error, and every available opportunity needs to be taken advantage of to make retirement work!

As you can imagine, it’s an uphill battle exposing this, as the industry is slow to change and certainly does not want to disrupt profits.  Even though the AUM model looks absurd to many from the outside looking in (charging based on asset-size is illegal in many industries), retirees looking for something different find what we call a “sea of sameness” because almost everyone is swimming in the same waters.  A person could interview 10 different Investment Advisors, and very likely find all 10 using small variations of the same AUM model.

When we ask retirees how much they’re paying in fees, the most common response is some form of, “I’m not exactly sure.”  In the rare cases that people do have an answer, they typically don’t have the full picture, quoting only part of their all-in fee.  As mentioned before, you may have an AUM fee, but you may also see ‘sales loads’ on the front end, back end, or along the way if you work with a Broker.

While sales loads can be avoided, ‘expense ratios’ are typically part of any well-diversified investment plan.  They can run as high as 2% or greater, but more often are found hovering in the 0.5-1% range.  Other fees to be aware of include trading expenses, tax costs, and cash drag, which isn’t directly a fee but still negatively impacts long-term returns.  Some advisors also charge a separate fee for financial planning (on top of investment management).

Many of these fees can be difficult to find, or flat-out omitted from your statement, which makes figuring out your all-in fees challenging!

What does this look like in action?

Below is a hypothetical fee breakdown of a common scenario we encounter:

$2 million portfolio example:

• 1.15% AUM fee ($23,000)
• 0.45% expense ratio ($9,000)

To keep this example simple, we’re only looking at two potential expenses, and the client is already up to $32,000 in annual fees.  Sometimes these numbers are lower and sometimes they are higher, and while we’re certainly not against charging a fair rate in exchange for value, fees are often overlooked when they are expressed as a percentage or simply not disclosed in the first place.

What impact does this have over a 20 or 30 year retirement?

Net of our fees, the client in our above example would keep an additional $400,000 in their account (this is a simplified example with a level balance and without interest, income, nor other variables considered).

Using a conservative 5% return on saved fees, this figure jumps to just over $1 million in additional funds this client can use in retirement or pass to future generations.

With our RETIREMENT RISKS Analysis, you’ll receive a more detailed breakdown specific to your circumstances.

*Calculation based on saving the difference between a $32,000 fee and  our flat-fee over a 20-year retirement.

In general, there are two types of licenses that an advisor may have- as a Broker or an Investment Advisor.

We believe the solution for minimizing conflicts is simple- always act in a fiduciary relationship (see FIDUCIARY).  It’s for this reason that we are licensed as Investment Advisors, but do not work with a broker-dealer, as our clients always come first.

Advisor License Check provides a database of all past and present advisors in the United States, listing whether they are licensed as a Broker, Investment Advisor, or both and also if the advisor in question has ever had any disciplinary action.

The following is an example of what you would see (advisor name and firm removed).  This particular advisor has one disclosure of a client complaint, of which you could see more details by clicking on the yellow tab.  The concerning part is being dual-licensed as both an Investment Advisor AND as a Broker.  The good news is that with the above search option, it’s easy to discern how advisors are licensed.

We believe that an ongoing flat-fee (also referred to as a retainer fee) makes the most sense for retirees.  This model is priced in a simple, straightforward way- based on the amount of time and education required to provide our clients with top-notch financial planning and investment management.  We have “trimmed the fat” of unnecessary expenses, middlemen, and anything that doesn’t provide our clients with value in return.

Additionally, a continuous relationship is important since retirees will have financial decisions on an ongoing basis, year after year.  Life is fluid and always changing.  Gone are the days that you walk out of an advisor’s office with a binder stuffed 2 inches with a financial plan, never to be looked at again.  Planning needs to integrate with Social Security, Medicare, taxes and new laws, changes to your life, RMDs, income location and much more!

As the saying goes, knowledge is power!  We believe that understanding fees and their impact starts with having the conversation rather than hiding from it.  Transparency of licenses, fees, and working with a fiduciary who is a Certified Financial Planner™ is a great start.

In our Retirement Risks Analysis, we offer a report breaking down the different fees of your current plan, and estimate their impact over your desired retirement horizon.  When we get rid of percentages and speak in terms of real dollars, it hits home with most of the retirees we talk with.  The next step is simply figuring out what you’re passionate about and putting any saved dollars toward your goals!

Additionally, a continuous relationship is important since retirees will have financial decisions on an ongoing basis, year after year.  Life is fluid and always changing.  Gone are the days that you walk out of an advisor’s office with a binder stuffed 2 inches with a financial plan, never to be looked at again.  Planning needs to integrate with Social Security, Medicare, taxes and new laws, changes to your life, RMDs, income location and much more!

Our fee is $12,000 per year. This includes investment management, tax planning, estate planning, and comprehensive financial planning. Our portfolios tend to have a cumulative expense ratio of 0.07% or less, versus industry averages that frequently run 0.5-1% (this expense goes directly to the fund managers for administrative and operating costs, NOT to your advisor).  We also work to minimize tax costs, trading expenses, cash drag and other fees so that you have the best chance at a successful retirement.

We do not charge simply to review a person’s financial plan, rather we mutually decide after Step 3 of our Retirement Readiness process if a relationship makes sense.

We begin the new fee structure once your new plan is established.

We do not. Rather than requiring a minimum amount of investable assets in order to work together, we’re more concerned if we’re a good fit and where we can add value!