How much is your financial advisor costing you?
 

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

Another way to look at it.

A current rule of thumb is that a safe withdrawal rate from retirement accounts should be in the 4% range. Based on $1M, you will get $40,000 and the advisor will get $10,000 or 25%.

another way to look at it:

People who have more money than they can spend and don't want to manage their assets themselves, can afford the fees.
That's why most titles are called "Wealth Management"

In most villagers scenarios, managing assets yourself finding the right advisory service (paying a flat fee) to move money between asset categories is the most economical.

With the proliferation of AI and market data history, including funnymentals, one can back test lots of strategies, including bond ETFs, SP500 sectors, etc. The new retail trader is turning into an educated personal edge trader, using software to find the profitable edges to trade. The problem will be the results will be very similar wherever you may go as everyone is using the same software tools and the same data sets.. . .

So in retirement, its more about not making large asset allocation mistakes, than it is aggressively growing your wealth, assuming that you currently have enough assets to live comfortably.

To me, paying an advisor a percentage of your total assets annually has never made any sense. I would never do that.

I think it will be hard to find one that will take over if you can not pay your bills etc.
To manage the money think about ETF and invest in the large indexes and forget it.
One problem is that if you sell an investment to adjust your asset mix you will have a capital gain tax so an advisor that wants to rework your investments could cost you a lot in taxes.

I have an accountant who will surely be able to recommend a bookkeeper to handle my household expenses. I shudder to think it may come to that but one never knows.

I agree about the possibility an advisor could cost me a lot in taxes by selling appreciated stocks and ETFs. Some have enormous gains as I have held them since the 1970s and 1980s. That is why I am talking to several to determine their approaches. Frankly, for now, I like things just as I have set them up. I am retaining enough in cash and treasuries to last me through the end of life given my life expectancy and a few extra years.

I do my own investing mix.

My obligatory post to anyone seeking investment advice.

Take time to read Paul Merriman’s 3 FREE ebooks.
1. First-Time Investor
2. 101 Investment Decisions
3. Get Smart or Get Screwed (read this first!)

Found at paulmerriman.com

Also on his site are recommended portfolios for using Vanguard, Fidelity, T.Rowe Price or Schwab for DYI'ers. Much good info, ignore the puffery and sales pitches, remember, the info is free.

I use the Vanguard breakdown (403 Forbidden) and it has treated me kindly for 20 years.

If you do want to know too much about annuities, listen to Stan The Annuity Man® | Brutally Honest Facts About Annuities podcasts.

Podcast - Have Fun With Annuities(R)

Last recommendation is FIRECalc: A different kind of retirement calculator , a Monte Carlo simulation of your future.

FWIW

I get that. Based on my own research I first invested in stock when I was 16 years old and have been DIY for 67 years as I am now 83 years of age. What I am facing is who do I turn to when I cannot or do not wish to continue handling it all myself?

manaboutown,

I am not as well off or as sophisticated an investor as you are, and I am not yet in my 80s, but I understand how you are feeling.

With the help of an accountant and with estate planning in place, it is not like I feel like I need some kind of financial plan which is what retail advisors are supposed to do in addition to the investing part. They put the investing part on autopilot probably anyway, and for those of us who have planned the other stuff, those AUMs are especially annoying.

Also, the first thing they often want to do is sell all the beloved long held individual stock holdings that have been around so long that when looking at the dividend yield based on the cost basis, the yield is far more impressive that what is stated based on the current price of the stock. AND, no expenses connected.

All that being said, I do wonder how people can say never, never, never when it comes to relinquishing portfolio control. That's because while we think we might always be able to make good decisions, how do we know that for sure? I have seen people reach a point where the part of their brain that does executive decision making fails them. That is why scammers target us as we age. What if we start investing in Beanie Babies and Franklin Mint plates and those hideous staring dolls that look like the spawn of Chucky.

Also, even though our heirs might be perfectly responsible, it is not always easy to have a numbers discussion as a family. Some can do that. Some cannot. I am from the neck of the woods where people do not talk about how much money they have. ymmv

It is not a bad problem to have -- to have been successful with investing -- but for those who have been wise enough to try to think ahead, a certain age is reached when thinking ahead gets a lot harder because aging enters the picture, faster every day it seems.

I get it, but I do not know how to adjust my attitude. My plan in place for now is to leave the names of a couple of advisors that I could tolerate if I had to so that the heirs could talk to them. But I know that is a half-assed plan. (sigh)

Boomer

Thank you, Boomer. Thank you for both the compliments and for again providing thoughtful considerations to a discussion.

In my case my children for various reasons are incapable of managing a securities portfolio and my grandchildren are too young to do so. For those and other reasons over thirty years ago I established a revocable living trust which I occasionally review and amend as necessary. The trust company which I have chosen, as they can deal with managing my real estate portfolio, does not manage securities portfolios in-house, but works with an advisor chosen by the trustor. The conundrum I am facing is finding a suitable, capable and trustworthy individual or company. I have a few possibilities I am in the process of checking out. What I had not given much thought to is that their fees come out of aftertax income. Shudder...

Furthermore, fees based on AUM do not seem justified to me. How much more time, knowledge and experience does it take to manage a $2M, $5 or even a $10M portfolio over a $1M one? All one does is buy/sell 200. 500 or 1,000 shares instead of 100.

When you take a distribution the financial advisor does not get a pct of the distribution. What is this about?

Seems like these advisors are not worth their fees based on your draft here.

$10,000 is 1% of 1M. If the annual fee is 1% of AUM, you take your 40k and they take 10k as a fee. It's not part of your withdrawal.

Indeed, but it costs me $16,400 out of my income to pay them $10,000.

Where does the fee come from? Of course, they take their cut with or without distributions.

Zero. I use Vanguard and manage my money myself. Financial advisors very rarely have your best known mind long term.

A good wealth manager will be using tax lost harvesting throughout the year to offset taxes. depending on your situation that might justify fees and always ask if they are a fiduciary.

Don't just ask. They should give you a signed letter stating that they are a fiduciary and which assets it covers.

Which is what the OP is doing now.
His question was, who to use when he cannot manage assets because of age or infirmity.
It's a big problem for many as we age.

I agree that AUM is not a good way to charge and so does my advisor who is flat fee and a true fiduciary. He also specializes in retirement withdrawal strategies and taxes. I very well could do it myself but my wife wants no part of it and since statistically I will pass first we have our advisor for her when that day comes.

Right. You are confirming my post.

I never heard of an investor look at the tax part of the AUM fee. For example, if you have $1 million and the fee is 1%. Your fee is $10,000. However one would expect your return on your account to exceed 1%. 5 to 7 % would be a reasonable return. At 5%, your gains would be $50,000. 50,000-10,000 = 40,000. Your net gain after fees is $40,000.

The problem is that research has shown that most financial advisors cannot outperform the total return of the S&P 500 index. You can buy an S&P 500 index mutual fund or ETF for almost nothing and avoid the 1 percent AUM fee altogether.

You can get 5 to 7% by tossing a dart at a list of broad based ETFs taped to a wall.

About 55 years ago took a little over 100 grand out of Dean Witter because of their expense charges, put it in Vanguard Mutual funds, where now some of their Admiral expense charge are under .2 %. Never used an adviser, been living on around 70K withdrawals for the last 10 years and still have a little over 3 mill. Vanguard is the best.

I hate when people make broad based assumptions that pick any etf and you will do well. There are just as many ETFs that make little money as there are that make very good returns. When getting into any ETF or index fund (my 2 preferences), do your homework/research before picking anything.

I will never let somebody tell me how to handle finances/investments. My wife knows who to call that is a vp of a brokerage firm when I can’t do it for any reason.

I’ve helped many friends over the past 15 years that had advisors/brokerage houses manage their portfolios and they all did a terrible job. Just like a poster here mentioned maybe you will make 6 or 7% on your investments with an advisor. If I only made 7%, I’d move everything to a money market where there are no fees and no risk.

Some of my friends were making 3-5% in loaded managed funds that their advisor/broker got them into and managed funds have higher expenses and much more turnover which you have to pay at tax time.
I was an etf/index fund guy but since the 1st week in April when everything took a dive and people were talking about recession coming up, I got into a dozen stocks and they all shot up, 1 over 100%, a couple 50% gains, and others in the 20-30% gains, all in less than 3 months. I sold all the big hitters and got into very well known stocks that had big dips in the last 6 weeks, which have done very very well, some with 5-7% gains a day.
No advisor except hedge fund guys will do this kind of investing for you.
When you’re retired, take some time to learn this stuff. What else are you doing? I spend 1 hour a day reading investment type books and have for decades. Read the John Bogle Boglehead books to become an indexed fund investor, and yes, not all index funds are alike nor do they make the same amount of money.

Do yourself a favor. Contact Travis Bender at Blackston Financial for an interview. He is a Fiduciary as well as an advisor. Blackston Financial is on Rt. 466 in Sumter County. You will do well. I promise.

I think it might be more of a challenge to find a bookkeeper to handle / pay your expenses than you realize. Hopefully I'm wrong, as I share your concerns.

But I'm confused as to why you feel you now need to retain the services of a wealth management firm--you sound like a fairly educated / experienced investor, and you wrote above that "I like things just as I have set them up" and "I am retaining enough in cash & treasuries" to last you the rest of your life.

If you like the way things are set up & don't need to sell any stock / mutual fund / ETF investments to pay your bills, why the need to pay for an advisor?

One of my favorite money-related quotes:

"Truly poor people necessarily have to think about money all the time, and very rich people are almost always obsessed with acquiring more money. The perfect amount of money is when you don't have to think about it at all"

Is the Vanguard breakdown still working for you in 2025, given market conditions & uncertainty this year?

Being single & childless & "quantity sufficient" in terms of net worth, I share OP's concerns about who will take care of my investments, bill paying, and (most importantly!) who will be my health care advocate if / when I become physically &/or mentally incapacitated. I think about and have researched these issues a lot, & my overall takeaway is that there are no easy or perfect solutions.

In terms of paying a person or company to manage your investment portfolio for a 1% fee, maybe back in the 1980's & 90's that was a good solution, but that's no longer true. We all know that statistically speaking, investing in low cost diversified index funds or ETF's thru Fidelity/Vanguard/Schwab will beat actively managed portfolios with high fees.

OP states that he has enough money in cash & treasuries to pay his living expenses for the rest of his life, and that he's happy with his current investment mix, so again I'm confused as to why he thinks it's necessary to hire someone to help manage his portfolio. Presumably he doesn't actually need help NOW, but is rather trying to plan for the future. Vanguard has a low-cost investment advisory services called Vanguard Personal Advisor Services (PAS) so I'd def recommend contacting them before contacting any locally owned "wealth management" companies.

If OP is concerned about succumbing to investment scams as he gets older, a SPIA (Single Premium Individual Annuity) might be a good solution. I would NOT suggest buying any other type annuity, and I'd be VERY wary of even discussing annuities with local wealth management company.

While OP has received lots of good suggestions on this forum, imo the best place to ask finance / investment related questions is here:

Attention Required! | Cloudflare

Lastly, below are some low cost investment advisory companies often recommended by bogleheads:

Home - PlanVision

Financial Ducks In A Row • Independent financial advice: IRA, Social Security, income tax, and all things financial

https://www.evansonasset.com

Excellent Financial Advice for Everyone - Blankenship Financial Planning

Same here… I have a handful of mutual funds that average over 10-12% a year over the life of the funds, and no funds are younger than 20 years.

Why pay anything
 

as several people have already said, if you have that much money I won't worry about another five or $10,000 coming out if you're going to earn $40,000 a year minimum on a million.

However I don't know why you need someone to manage your money. As you get older you're supposed to simplify your life and personally if I were you I'd end up with half a dozen ETFs and a few bond funds and not worry about anything anymore. ETFs are extremely inexpensive much less than mutual funds and they trade It whatever the market is at that minute.

Hope I've saved you 10 to $20,000. As most people will say if you've earned the money I think you're pretty smart enough to do it on your own and it really does not take that much time.

More info
 

Another suggestion is to talk to your local bank and see what they suggest as far as managing your assets and your end of life stage. If you don't have children to help out you should definitely contact a few lawyers and see what they would charge you if you get in capacitated

I actually have a relative who is a billionaire and he has a full-time lawyer and at least six people that live with him in his house 24 hours a day
Pretty sure you're not in that range but I think you get the idea that you have to have backup plans now rather than later

I would never allow a bank to manage my assets, or to do any estate work.

If your assets are with Vanguard, their index mutual funds have a very low cost and they are comparable to their ETFs.

You may mean 50 years ago as Vanguard did not exist until 1975. The Vanguard Group - Wikipedia

..nor any investment manager, money manager, attorney or best friend.:boxing2:

It is, I might not be getting the big ups of the market but I'm also not getting the big downs either. I have used a variation of Paul Merriman's recommendation since 2005 and recently try (not very well) to limit my draw to 5%, some years were MUCH more. And finally, we're ahead of where we started in 2005.
YMMV

A friend of mine for 10 years handles my investments with Morgan Stanley. He gets1%.
All I know is I spend 60 or 70 K a year and my investment only drops 3 or $4000. I'm happy.