Quote:
Originally Posted by retiredguy123
Duh. Obviously, if you pay AUM fees, you will have less money unless the advisor can make up the difference with more successful investments than you could make on your own. I have never paid any AUM fees, but every investor needs to assess the value of paying an advisor. Apparently, the OP's calculations assume that the advisor has zero value.
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Right.
Many investors benefit from an ‘assets under management’ (AUM) advisor relationship. Some investors cannot make good financial decisions (investment, retirement, taxes, risk assessment, etc.) by themselves because they lack knowledge, experience, confidence, and so on. Also, it is often challenging for an ordinary investor to find a competent fee-only investment advisor. (Try to find one around The Villages. Granted, competence is subjective but you get the idea.)
Let’s assume an average investor cannot make good financial decisions on their own for a moment. Average investor benefits of using an AUM investment advisor over a fee-only (hourly) advisor include:
* Alignment of interests between the investor and advisor. Not so with a fee-only advisor.
* Predictable costs. With a fee-only hourly advisor, fees each year depend on number of hours working for you and an hourly rate that can change over time. With an AUM relationship, the main advisor cost variable is your portfolio value since the advisor fee percentage is set by agreement.
* No clock-watching. Fee-only clients may have less frequent communications with their advisor as they watch the clock so they don’t pay as much.
* Comprehensive services. The AUM model more likely results in more comprehensive services from an advisor such as financial planning, retirement planning, tax planning, estate planning, education funding for grandchildren, cash flow analysis, risk management, and so on. AUM advisors want to keep your business and larger AUM advisors such as a larger financial institution are set up to provide comprehensive services with relatively little prompting from clients.
* Proactive management. AUM advisors tend to be more proactive for a client than fee-only advisors.
Investment decisions have costs and benefits. Each person’s trade offs of costs and benefits are unique and differ from person to person. The OP partly outline costs (OP did not outline costs of a fee-only advisor over 25 years from what I see) but, crucially, OP implicitly made multiple assumptions: (1) average investor benefits from an AUM advisor are identical to a fee-only advisor, (2) average investor risk characteristics are identical (ability to take risks and risk tolerance), and (3) identical portfolio returns.
One size does not fit all. Benefits differ from person to person.
Also, if I were to use an AUM advisor (I don’t), I would go to a larger financial institution rather than a smaller local firm that has potential clients come to group lunches or dinners.