[manaboutown]

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

[Caymus]

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%.

[CoachKandSportsguy]

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.

[retiredguy123]

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

[rjm1cc]

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.

[manaboutown]

Originally Posted by rjm1cc

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.

[petsetc]

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

[manaboutown]

Originally Posted by petsetc

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?

[Boomer]

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

[manaboutown]

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.

[kingofbeer]

Originally Posted by Caymus

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%.

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

[kingofbeer]

Originally Posted by manaboutown

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

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

[Pugchief]

Originally Posted by kingofbeer

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

$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.

[manaboutown]

Originally Posted by Pugchief

$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.

[Caymus]

Originally Posted by kingofbeer

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

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