1.25% for a financial manager -- good fee?

[BuckyBadger]

We met with a very nice financial planner/manager. He spoke with us for over an hour and a half and will be presenting a sample portfolio to us at a second meeting. He/his company charges a flat 1.25% of money that he actively manages. It's only what they actively manage, so all the money in our 401k and 403b and IRAs that is just sitting there is target date funds does not count toward that fee. That is an all inclusive fee and there are no addition transaction/brokerage/etc fees.

We would start with about $50k invested through him and add $26k a year, as well as another $30k lump sum sometimes in the future.

I liked him and the fee sounded reasonable. Does it sound reasonable to you guys?

[disneysteve]

Not at all. What exactly will he be doing that you can't do yourself? Vanguard's Target funds have an expense ratio of 0.18% and almost all of their other funds charge less than 0.50%. I'm glad you liked the guy but you really need to ask yourself why you should pay him about 1% of your assets every year. That's $500 on your initial $50,000 and another $260 for each 26K you add to the account so in 5 years, you'll be paying him at least $1,800/year (or $2,100 if you put in that other 30K). That's $1,800 you wouldn't be spending if you invested on your own.

[jpg7n16]

Financial advisors can help you keep from making the wrong decisions at the wrong time. Plus the convenience of having a financial team to handle all the financial investment/tax/insurance/estate decisions for you could be a bonus. (well not bonus cause it's included in the price) And you have to compensate them somehow.

Industry standard fee is 1% for assets under management. So he's a little over the average, but not too much. Is there a structure that once you get over $X, the rate lowers?


I don't think that DS needs a financial advisor. In fact, he could probably be one. I personally don't need one either. But for others it could be worthwhile.

Seeing as I'd like to be a financial advisor/planner one day, I see more benefit in the services they offer (services DS doesn't need).

[photo]

We had a financial advisor for awhile years ago, and the charge was 1.0% for anything they managed (like you, the 401k and other things weren't affected). However, we just began reading on our own and soon managed everything ourselves. Guess what? We, who are mere consumers who have made many mistakes, made decisions that outperformed anything the manager advised.

1.25% is higher than average. What is crucial, however, is that any money you have managed be placed with a custodian (who keeps the money). Bernie Madoff had no custodian hold his clients' money.

[Petunia 100]

I wouldn't pay it myself. There are plenty of excellent all-in-one-fund type choices costing far less than 1.25% for year, so I don't see the need.

However, if you are the sort of investor to chase returns (selling what is not currently hot to buy what is currently hot, or moving to cash after inevitable corrections), then you may indeed be better off with an advisor. (Assuming the advisor will discourage you from chasing returns.)

So the question you should ask yourself is: which sort of investor are you? Do you tend to react to current market conditions rather than to continue following your own plan? Investors who react lose a whole lot more than 1.25% per year.

[photo]

Originally Posted by Petunia 100

Investors who react lose a whole lot more than 1.25% per year.

You've probably heard of the new book entitled "Warren Buffet Invests Like a Girl," which says that women tend to trade much less often than men, which usually results in much higher returns. (I haven't read the book, but a title like that is rather eye-catching.)

[Petunia 100]

Originally Posted by photo

You've probably heard of the new book entitled "Warren Buffet Invests Like a Girl," which says that women tend to trade much less often than men, which usually results in much higher returns. (I haven't read the book, but a title like that is rather eye-catching.)

Yes, I have heard of it and read a synopsis, but not yet read the book. I'm looking forward to it.

[disneysteve]

Originally Posted by jpg7n16

Financial advisors can help you keep from making the wrong decisions at the wrong time.

Assuming your advisor doesn't make the wrong decisions at the wrong time.

If the standard fee is 1.00%, 1.25% isn't a little over the average - it is 25% over the average. I think that's a lot considering that there are hundreds of mutual funds that charge less than 0.25% to professionally manage your money for you.

I think that sometimes gets overlooked. Putting your money into a mutual fund isn't really "doing it yourself", especially if it is an actively managed fund. You are hiring a professional or even a team of professionals to manage that investment. If you hire an advisor on top of that, you now have that advisor second-guessing the judgement and decisions of the pros already managing the funds.

Another question in my mind is what types of investment this advisor will be recommending and if he has any financial interest in any of those recommendations. I would absolutely not do business with any advisor who had a stake in what he got you to buy.

[BuckyBadger]

Steve -- He is fee based. His fee is 1.25%. He is not commission based, so he doesn't have any stake in what I buy. I wouldn't consider a commission-based planner.

My husband and I are fine with 90% of our investing. I believe that I could manage the rest, but my husband would be more comfortable with professional help -- at least for the next few years. Hiring an honest and trustworthy planner for a reasonable fee seemed like a good idea to keep us both happy.

From what I'm hearing here, his fee is higher than "industry standard." I'll definitely consider that and maybe we'll look at a few more people. But I think that we're going to go with someone -- at least at this point in our lives.

[photo]

What types of investments does your advisor recommend? I mean, are they standard mutual funds and bonds type of investments, or are they non-standard, like REITS and buying debt? I believe the latter usually have to be purchased through a capital management investment firm, so your advisor, if he is really only fee-based, probably does not have access to those types of investments.

Also, do you know anyone who has used this advisor?

[disneysteve]

Originally Posted by jpg7n16

Is there a structure that once you get over $X, the rate lowers?

This is a great question to ask. Perhaps you'll start at 1.25% with 50K but it may drop as you cross certain portfolio levels, just as Vanguard drops their expense ratios when you have a certain amount invested with them.

[BuckyBadger]

These are good questions.

I'll know more about exactly what he invests in when I see his sample portfolio. He has examples of portfolios for different risk levels (4 of 10, 6 of 10, 8 of 10 etc.) that he then tunes to your specific goals. At our second meeting he will show us an example and then we can consider if we want to go with him. He is allowed to make changes without consulting us about every little thing as long as he stays within our agreed-upon risk tolerance. I know he uses a lot of EFTs. With a risk level that we are comfortable with he would probably also look to investments outside the US. He said that he sometimes invests in managed funds if they are performing well -- he called it "paying for a brain." But most of the investments have low inherent fees.

I don't know if his fee goes down once you reach a threshold. I will definitely ask him.

[disneysteve]

Originally Posted by BuckyBadger

He is allowed to make changes without consulting us about every little thing as long as he stays within our agreed-upon risk tolerance.

This would be a deal-breaker for me. No way am I letting someone else make trades on my account without my knowledge and consent. You can give me advice and I can pay you for that advice but the final investment decision should lie with me.

[disneysteve]

Originally Posted by jpg7n16

I don't think that DS needs a financial advisor. In fact, he could probably be one.

Thank you, by the way. I appreciate that.

[photo]

Originally Posted by disneysteve

This would be a deal-breaker for me. No way am I letting someone else make trades on my account without my knowledge and consent. You can give me advice and I can pay you for that advice but the final investment decision should lie with me.

Agreed 1,000%.

Bucky, I'm trying to imagine what changes he would need to make. Remember that with an ETF, you are charged a commission for every trade, unless you do it yourself with in-house funds at brokerages like Vanguard and such. We all need to re-balance every once in awhile, but that's something you should approve. Also, you can easily buy international bonds and mutual funds yourself. If you're looking for the right balance, there are innumerable sources where you can calculate recommended portfolios, based on your ages and income level.

[BuckyBadger]

Originally Posted by disneysteve

This would be a deal-breaker for me. No way am I letting someone else make trades on my account without my knowledge and consent. You can give me advice and I can pay you for that advice but the final investment decision should lie with me.

That presupposes that you know as much or more than the person advising you.

I may have a unique perspective. I have been riding and showing horses for about 20 years. In that business, you have to either do everything yourself (self care) or you have to trust the daily care of your horse to someone you trust, and whose program you trust. When I have my horse in training with someone, I am paying for her expertise and her experience. I don't want to worry about every supplement my horse is eating or if she needs to be jumped once this week or twice or when she needs her feet done. I want to discuss my expectations with my trainer and I want to know that when I get on my horse for a ride or for a show that she's prepped and prepared for me. As long as we're on the same page, she has a great deal of leeway with which to care for my horse. I am used to a "hobby" where you choose your people carefully and keep an educated eye on them, but once you have chosen a program you trust, you trust that program. You hire the person you trust and then trust them to do what they do best.

I don't have the time for self care, so I chose to carefully select a trainer to handle that portion of my horse's care for me. I look at a financial planner in the same way. Now, granted, I'm a lot better and judging the actions of a horse trainer than a financial planner, but that's why I'm asking here for advice.

I dunno. That's where I'm coming from at least.

[photo]

Originally Posted by BuckyBadger

That presupposes that you know as much or more than the person advising you.

No, not really. It's about giving control of your money to someone else. At that point, the person isn't advising you, he's doing whatever he wants, all with your permission. Very frightening.

[humandraydel]

Originally Posted by BuckyBadger

That presupposes that you know as much or more than the person advising you.

Here's a question for you: how often are you going to evaluate your portfolio and the performance of your financial advisor? Are you going to look at the expense ratios of the funds he puts you in? What if your financial advisor has a friend who sells mutual funds and he puts you in his friend's expensive loaded mutual funds?

To be honest, you can get the same or better advice around here for free. We can even use his "system" of risk tolerance - i.e. 6/10 - which, ironically probably just equates to percentage of stocks he'll put you in (6/10 = 60% stocks).

[kv968]

Originally Posted by humandraydel

Are you going to look at the expense ratios of the funds he puts you in? What if your financial advisor has a friend who sells mutual funds and he puts you in his friend's expensive loaded mutual funds?

To make this part kind of easy for you, if he starts talking about different "classes" of funds (i.e. "A" shares, "B" shares, "C" shares, etc...) you're either going to be paying up to, or possibly over, a 5.75% upfront load fee and/or a much higher than normal expense ratio for the funds you'll be investing in. And that's on top of the 1.5% he'll be charging you. Which you said you don't consider "commission based" but I do. A "flat fee" is when someone sits down with you for X amount of dollars and devises a plan for you, not taking a percentage of what you'll invest.

Let me just add, I'm not saying having a financial advisor would be a bad thing. I just want you to understand all the expenses that may be involved that don't seem too obvious.

[disneysteve]

Originally Posted by BuckyBadger

That presupposes that you know as much or more than the person advising you.

Not at all. What is an adviser but one who gives advice? You may choose to act on his advice or not but that decision should be yours, not his. Part of his job is to educate his clients and explain why he feels his advice is the appropriate course of action for your situation.

I guarantee that if you sit down with 5 different advisers, you will walk out with 5 different recommended plans. That's not to say that all 5 might not be perfectly reasonable options but you as the investor need to understand the advice and make an informed decision based on that advice.

Let me give you a real-life example. I am on the executive board and the finance committee for our synagogue. About a year ago, we hired a professional money manager to invest the liquid assets of the congregation, a move that I initially opposed because I felt we could do it ourselves and save thousands of dollars in fees. I was outvoted and we did establish this professional relationship. Since then, we've gotten very good professional advice, detailed monthly statements and reports and, most importantly, quarterly in-person meetings with our adviser. At those meetings, he sits down with us and goes through the reports item by item explaining why he feels each investment earned or lost money, what he feels are the prospects for the investments and what he feels we should consider changing going forward. The level of financial knowledge among the members of the committee varies dramatically and the adviser has done a great job of educating all of us regardless of our existing knowledge base. He is patient and answers all questions until people understand the issues at hand. HOWEVER, the ultimate decision of what to do lies with the committee. We strongly lean on his advice but the final decision is ours.

So far, we have pretty much followed his recommendations but nobody knows our money situation better than we do - including our adviser. The same goes for you. Nobody will ever know your situation better than you. Nobody will ever care more about your money than you. To hand over control of your money to another person just isn't a good idea in my opinion. I realize people do it every day but it just isn't a prudent way to go.

I have no problem if someone wants to seek the input of an adviser and pay an appropriate fee for that input but handing over the reins would greatly concern me.