In recent weeks I have been in the process of contacting and interviewing potential financial advisors as I am hoping to reduce the amount of time and energy I use to manage my financial affairs as I continue to age. I also want one on hand to take over if I become incapacitated or when I pass on.
In general most FAs want a fee based on assets under management (AUM). On average it starts at about 1% on the first $1M and steps down to maybe 0.5% over the next several million if one has a larger securities portfolio. Some will agree to bill by the hour or otherwise but their fees are still substantial.
As their fees cannot be expensed and are not in any way tax deductible I started playing around with numbers to see how much I would need to earn to pay for their guidance, i.e., their true cost.
The following formula provides a good approximation.
Gross Income = Net Income / (1 - Marginal Tax Rate).
So I plugged in my personal numbers, a 35% marginal US tax bracket plus NIIT which is 3.8% imposed on top of both income and capital gain taxes. I rounded my top bracket out at 39%.
Using this formula I was astounded as a 1% AUM on $1M would run $10,000 but I would have to earn about $16,400+ to pay it!
Say I gross 5% in interest, ordinary dividends and realized short term capital gains (qualified dividends and long term capital gains enjoy lower tax rates). I need $16,400 of income to pay out of pocket the FA's 1% fee and $19,500 to pay the 39% tax on the $50,000 as it is all in my top bracket, so I am out of pocket $35,900 and get to keep and spend a whopping $14,100. That is a mere 1.4% cash return on my $1M. The FA receives more than I do after costs, almost as much as Uncle Sam!
Of course the portfolio could rise in value, decrease in value and provide little cash income return. In any event I am still out $16,400 which must come out of my other income.
Not considered: long term capital gain and qualified dividend tax rates.
Net Investment Income Tax (NIIT):
The NIIT is an additional 3.8% tax on certain investment income, including long-term capital gains, for individuals, estates, and trusts with modified adjusted gross income (MAGI) exceeding specific thresholds. This tax was enacted as part of the Affordable Care Act to help fund healthcare reforms.
For the 2025 tax year, the standard long-term capital gains tax rates are 0%, 15%, or 20%, depending on your taxable income and filing status.
Qualified Dividends and the NIIT: If your modified adjusted gross income (MAGI) exceeds the applicable NIIT threshold, your qualified dividends will be included in your net investment income for the purpose of calculating this additional tax. The NIIT is in addition to any other income tax already due on the qualified dividends.
"Dividends are taxed differently based on whether they're classified as qualified or ordinary.
Qualified dividends, which come from domestic or qualified foreign corporations and are subject to specific holding-period requirements, are taxed at the lower long-term capital gains rate. This rate is generally more favorable than the ordinary income tax rate and can range from 0% to 20%, depending on your income bracket.
Ordinary dividends are taxed at the higher ordinary income tax rate, which is the same rate applied to your regular salary or wages. This can be significantly higher, especially for those in higher income tax brackets. Understanding these tax implications is crucial for optimizing your investment strategy and minimizing your tax liability."
From:
How are dividends taxed? | Vanguard