[Plinker]

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!

[Plinker]

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.

[Babubhat]

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.

[Caymus]

Originally Posted by Plinker

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.

One of the podcasts I listen to included a link to the following article.

Just a moment...

The article shows how advisory fees can have a large negative effect on meeting retirement goals.

[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.

[spinner1001]

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.

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.

[Caymus]

Originally Posted by spinner1001

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.

The article implies that the AUM Advisor does not come close to justifying their fees.

[Plinker]

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.

The point of my post was not to show you will have less money when paying AUM fees. That is obvious, unless your advisor is consistently beating their benchmark by more than 2%, in my example. Numerous studies have shown that very few advisors can, after fees, consistently beat their benchmark. Rather, I was showing just how large the amount paid, over time, can end up being. It is a significant percentage of what you may have achieved by choosing index funds with a low cost provider. I also stated that there are individuals who would benefit from an advisor. Preferably, a fee-only, non-AUM advisor that charges by the hour. The right advisor can add value and should be compensated. However, it appears that in TV many advisors are nothing more than insurance salesman and are actually providing negative (less than zero) value.

[Toymeister]

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?

[Babubhat]

If you really must, Vanguard does it for 30 basis funds. Tell the others to match

[spinner1001]

Originally Posted by Caymus

The article implies that the AUM Advisor does not come close to justifying their fees.

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.

[spinner1001]

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

[retiredguy123]

Originally Posted by Plinker

The point of my post was not to show you will have less money when paying AUM fees. That is obvious, unless your advisor is consistently beating their benchmark by more than 2%, in my example. Numerous studies have shown that very few advisors can, after fees, consistently beat their benchmark. Rather, I was showing just how large the amount paid, over time, can end up being. It is a significant percentage of what you may have achieved by choosing index funds with a low cost provider. I also stated that there are individuals who would benefit from an advisor. Preferably, a fee-only, non-AUM advisor that charges by the hour. The right advisor can add value and should be compensated. However, it appears that in TV many advisors are nothing more than insurance salesman and are actually providing negative (less than zero) value.

I appreciate your explanation. But your original post says that with zero fees, the account balance after 25 years would be $466,000 as compared with $266,000 with a 2 percent advisor fee. So, in this calculatipn, you have not applied any value whatsoever to the advisor's efforts or investment decisions and the 2 percent fee for 25 years was money down the drain. It seems as though you should at least apply some estimated value to the advisor's investment decisions or state that financial advisors are totally worthless.

[spinner1001]

Originally Posted by Babubhat

If you really must, Vanguard does it for 30 basis funds. Tell the others to match

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!)