Talk of The Villages Florida - Rentals, Entertainment & More
Talk of The Villages Florida - Rentals, Entertainment & More
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Long-Term Cost Of Paying AUM Fees
There have been many posts on TOTV concerning the AUM (assets under management) fee schedule that many financial advisors are charging. Personally, I have never paid such a fee. During my 30 years as a business owner, I paid my accountant and lawyer by the hour. When I sought financial advice , I hired a fee-only planner and also paid by the hour.
The following example shows just how much money the advisor is pocketing over a 25 year period. We need to make several assumptions. 1. $100,000 invested for 25 years. 2. 6% annual return. 3. NO AUM fees or other costs. OR 4. 1.25% AUM fee plus 0.75% other fees such as expense ratios and trades for a total annual cost to the consumer of 2%. Now comes the math geek in me. Here is the formula to calculate your individual numbers: n 1 - (1 - f) where “f” is total fees expressed as a percent and “n” is number of years. 25 In my example: 1 - (1 - 2%) Now, get ready to gasp. Here are the results: 1. With zero fees: Account balance after 25 years - $460,000 2. With 2% total fees: Account balance after 25 years - $266,000 You have lost a whopping 40% of your account balance. Obviously, your individual numbers will produce varying results. Try running the numbers with a $1,000,000 portfolio. Granted, there are people that should seek the help of an advisor but at least you now know how much it is costing you. Also, now you know how they can offer “free” dinners and polo tickets. This is the rationale why so many people are suggesting very low-cost firms such as Vanguard, Fidelity, Schwab, etc. While not for everybody, it is a great way to build a substantial retirement portfolio. Fees matter! |
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#2
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Sorry, the “n” and “25” should be above the parentheses in the formulas.
It is an exponential number. Post didn’t come through as written. |
#3
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Vanguard has everything you need. It’s shareholder owned. Listen to Buffett. Very few beat market returns in the long run without taking additional risk. Don’t make investing complicated.
Ask your advisor if they refund fees when underperforming. That’s your bottom line answer. |
#4
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Just a moment... The article shows how advisory fees can have a large negative effect on meeting retirement goals. |
#5
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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.
Last edited by retiredguy123; 10-29-2023 at 09:25 AM. |
#6
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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. |
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#8
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#9
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This post is a perfect example of why we have few helpful threads and more "Who died this week" threads.
The OP was clearly showing how disastrous AUM fees are. The first post doesn't like how he expressed his algebraic formula several are 'Duh, I knew that' posts. Do you really want to spend your time in retirement critiquing forum posts or appreciating a stranger who is trying to help people? Last edited by Toymeister; 10-29-2023 at 05:21 PM. |
#10
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If you really must, Vanguard does it for 30 basis funds. Tell the others to match
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#11
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If that is what the article implies, fine. But it’s an opinion, not a fact. More importantly, that opinion is certainly not universal because some investors actually need an AUM advisor model because the alternative could be far worse.
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#12
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Come on. It’s not that simple.
There is about $40 trillion in the USA and about $100 trillion globally in assets under management. A lot of these amounts is smart money. The AUM investor model certainly benefits a lot of people — just not everyone. If it was a bad model, the market would not be this big especially with smart money investors. Asset & Wealth Management Revolution: Embracing Exponential Change -PwC Channel Islands The Tide Has Turned: Global Asset Management 2023 | BCG Last edited by spinner1001; 10-29-2023 at 07:45 PM. Reason: Spelling |
#13
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#14
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Right. Vanguard’s 0.3% annual fee of AUM, for instance, is very different from a fee of 1.25%. (Although you won’t get a free lunch out of Vanguard!)
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Closed Thread |
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