Getting Into the Weeds

I’ve had a few requests to clarify my position on financial planning and the use of financial advisors.  I want to state, first and foremost, that I have absolutely nothing against professional financial advisors and the service that they offer.  Just like with lawyers, accountants, and consultants – there are times when paying for the time and advice of a professional financial advisor makes enormous sense.  In fact, I do think that there are advisors who create more value than cost to the client.  That being said, my major goal is for clients to get unbiased advice and understand the motivations of the advisors hired to serve them.  My other significant concern is with the current model for charging clients in advisory relationships.

In the United States, the primary model for offering financial advisory services is the “assets under management” (or AUM) model.  For those unfamiliar with this model, the advisor charges a percentage fee for the assets on which he or she advises.  The typical fee is 1% on all assets that are being “managed”.  So, as the client grows her wealth, the advisor rakes in a higher and higher fee without having to do any more work.  In the AUM model, a client with a $1,000,000 portfolio pays $10,000 in annual fees, while a client with $200,000 pays $2,000 annually for the exact same service.  Is that fair?  This model further creates a conflict of interest where most advisors are incentivized to go after bigger accounts, often requiring account minimums of $500,000 or $1mn in order to increase their firm’s overall revenue per account (and their own take-home pay).

Why does the current system bother me so much?  Besides the fact that this model makes financial advising inaccessible to anyone from the recent college grad to the typical middle class family (the very people who need it most), the AUM fee is charged every year no matter what happens to the investments!  Personal Capital recently did a great study on what this fee costs a typical investor over the course of his investing life time.  The summary of the study points out that even using the lowest cost advisors (in their study USAA and, of course, their own roboadvisor) the traditional AUM model would cost an investor with a $500,000 starting portfolio more than $503,000 in fees during a 30-year investing time frame. (See the full report here: Personal Capital Study.)  It is noteworthy that the Vanguard Group ( was omitted from their study, as this would change their data so the ultimate result would not point back to their own firm as the least expensive advising option.  More on Vanguard (and my love for their nonprofit, unbiased product line) to come in future posts…

So back to the $503,000 charged in fees over 30 years under the AUM model – I’m sorry, but there is no advisor out there adding $500,000 worth of value to a portfolio.  Keep in mind that the $503k figure is just for a lower-cost firm’s advisory charges and leaves out the underlying transaction costs and mutual fund fees.  If we take the average mutual fund cost of 1% and stack that on top of the 1% advisor fee, we are looking at double the annual fees quoted above (i.e. $4,000 on $200k, $10,000 on $500k, and a mind-numbing $20,000 annually on a $1mn portfolio).  In a world of 4-5% real returns (i.e. adjusted for inflation) on a fully diversified portfolio of stocks and bonds, an investor simply CANNOT AFFORD to give up 2% of her investment returns on an annual basis.

So what am I proposing?  I’m much more comfortable with the hourly consulting model, the monthly/annual retainer plan, or an alternative suggestion of a “split the savings plan”.  My ideal business model would be the latter, where an investor engages an advisor who can expose the client’s current excess fees and help transition her assets back under her control.  With this accomplished, the investor pays a one-time charge that is a percentage of the fee savings from the first year.  For example, if I save a client $10,000 in fees, I bill 25% or $2,500 once.  In this model, there are no additional charges, no hidden fees, and no suboptimal products to push for the benefit of the advisor.  This model aligns interests because if the advisor cannot generate measurable savings for the client, he does not get paid.  It also creates a nearly risk-free engagement model for the investor as she only pays on proven and measurable results.

At this point you may be thinking, “well, Mr. MoneyHappens, that sounds great, but I don’t know anyone who works under that model and I’m looking for help now”.  So, how can you judge if an advisor you might engage is truly looking out for your bottom line?  Ask him about his personal investments to see if he is buying what he sells.  If he is not using A-share mutual funds, private REITs, and whole life insurance (all high upfront-fee products) for his own portfolio, why does he think these are the appropriate investments for you?  For full disclosure, 100% of my family’s assets are invested with Vanguard with an average annual expense ratio (i.e. total annual fee) of 0.10% per year (Yes, that is 1/10th of 1% per year).  Why put all our eggs in the Vanguard basket?  In my 10 years of money management research, their nonprofit firm is absolutely the best solution that I have discovered.  Let’s go back to the previous example of the average investor with a $500k portfolio.  She could keep paying $10,000 per year to her dubious financial advisor, or she could move her entire portfolio to Vanguard index funds (paying 0% in AUM fees and an average mutual fund expense ratio of 0.10%) and pay only $500 per year in fees!  I suspect the average American could find a great use for that annual savings of $9,500–I’m thinking big Caribbean vacation.  Our hypothetical investor also gets to pocket the $503,000 she would otherwise be paying over the next 30 years in the AUM model.

I’ve brought up a lot of points in this post.  I will work to unpack the various ideas and support them with more figures and details in future posts, but feel free to question any of the assumptions or views by leaving a comment below.

How did we get here?

I’m concerned that the current state of financial advising and investment management is broken.  I’m married to a doctor (considered “easy money” or “dumb money” in my industry) and have seen first-hand how poorly various financial planning clients are treated.  Doctors are always among the first targets for unscrupulous advisors because they have a high income and very limited time to evaluate their various investment options.  Advisors are attracted to this type of client because they can make quick money pushing mutual funds with high front-end sales loads, non-traded REITs (real estate investment trusts) with 10% upfront commissions, variable annuities, or structured notes. All of these are products that have no greater purpose than to make a profit for the advisor.  They offer very little benefit to the end client but offer huge financial rewards to the individuals selling the product.  This whole conflict of interest is best embodied by my favorite rhetorical industry quote, “But…where are the clients’ yachts?”

This broken system is by no means isolated to doctors. Anyone outside of the financial industry gets the same treatment.  If you are an architect, a computer programmer, nurse, engineer, HR rep, etc. – you are most likely the target of financial advisors simply looking to profit off of you.  As my wife says, “there is no Hippocratic Oath in the financial advising industry”.  Brokers and investment advisors aren’t looking out for your best interests; they are looking out for their pocketbooks first. If that happens to help you in the process, that’s a great secondary benefit.  So, the purpose of this blog is to help the financial layperson not only fend for himself and understand ways to manage finances, but also to offer a more transparent alternative to the current system.

The additional issue that most young professionals have working against them is that we have “minimal” assets to manage, so the traditional model of charging for assets under management (e.g. being charged 1% on all money an advisor touches) doesn’t work.  Advisors often don’t want to work with younger professionals because they can’t make enough money on a $200 or $300k portfolio.  This is especially true if most of a client’s investable wealth is tied up in a 401k or an IRA, as the advisor can’t charge on those assets and thus won’t accept the client.  This whole model is broken, but that’s a topic for a separate post entirely.  This blog will propose a cleaner and more transparent process based on retainer fees and limiting client charges to when their savings can actually be measured in real dollar amounts.

So, what qualifies me to opine on the topic? I work in finance and investments. Specifically, I conduct research and analysis for high net-worth investors.  The top 1% have it good.  They get customized advice to help them grow their wealth, but they pay dearly for that advice.  Often these clients are paying $25,000 – $40,000 per year in fees for the guidance provided by researchers like myself.  The goal of this blog is to help democratize that advice and share these insights with anyone willing to invest 15 minutes of time reading.  The benefit to the reader is that I have nothing to sell and no products to push, nor am I taking advertising money from any investment firms.  I aim to make this process as transparent as possible, and, if I ever have a conflict of interest, I’ll be the first to disclose it.

So, what’s coming next?

In the next few weeks, I plan to…

  • Fully detail the business plan for this site. (Yes, I ultimately want to create an advising business for young professionals and will detail the process here.)
  • Demonstrate how to automate everything in your financial and investment life.
  • Explain why investing your assets with Vanguard is the best course of action for 95% of the readers of this blog.
  • Convince you that you don’t need a 529 plan (or its equivalent) to save for your kids’ college education.
  • Explain what a taxable retirement account is and why you need one.
  • And discuss many more topics that will be of interest to my readers–if you have specific ideas, please leave them in the comments below.

    You know who eventually won the race...
    You know who eventually won the race…