Last week we talked about a big benefit from working with a flat fee financial planner. The focus was on fees you pay directly to your advisor. As a reminder, based on my average client size and industry averages, you would pay nearly $750,000 in additional fees over a 20-year period working with an average AUM advisor than under my flat fee. And once you factor in how this higher AUM impacts the overall growth of your portfolio, that number increases to $1.3 million less in your retirement assets at the end of that 20-year period.
Advisory fees are one thing. How about fees for investments? These are the fees you pay to companies like Vanguard, iShares and American Funds. This is another area where fees matter and the compounding effect makes a huge difference to your end portfolio value.
In the same study breaking down average AUM advisor-only fees they have information on average fees for the investment products. The average fee for a 60/40 mutual fund portfolio is .79% a year. For a $3 million portfolio this means another $23,700 of annual fees. My portfolios cost on average .28% a year, which results in an investment expense of $8,400. I swear it is just a coincidence it is the same cost as the fee my clients pay me. But maybe it is a sign.
Now, some investments range from pretty much nothing (there is no free investment, so get that out of your head right now) to around 2.5%. And I am just talking about mutual funds and exchange traded funds. This does not include things like structured notes, annuities and more. You know, all those commission-based investment products. Going back to the cost of mutual funds, Fidelity even references an average fee of 1.4%. My point is to just know how much you are paying on investment products.
Getting back to what higher investment fees mean to your net worth performance, well, as you can imagine, the higher the fee the worse your net worth number looks. If I follow the simple example I have been using and compare my flat fee with my annual investment fee of .28% to the average AUM advisor charging .88% whose investments are substantially higher at .79% a year, well, your net worth number looks more than $2 million worse under the average AUM advisor. And by worse I mean your net worth number is more than $2 million less under the average AUM advisor.
Again, you are taking the risk and putting up the money. Unfortunately, your reward at the end of 20 years is a net worth number that can easily be substantially lower than under a flat fee arrangement like I use in my practice. And just to be clear, net worth simply means your retirement assets. As I mentioned earlier, $2 million seems like it would make a hell of a difference in someone’s retirement. Especially when it is all the money you worked so hard to earn and save over the years. But what do I know.
One final benefit to mention with how I am set up as a flat fee financial planner. The fees my clients pay me are the only fees I receive. There are no commissions from product sales. I do no revenue sharing. So, if I recommend clients buy insurance or an annuity it is because that is what I truly feel would be best for their situation. I receive no payment for these types of recommendations so there is no distortion of recommendations based on financial incentives. In my world, the worse the product the higher the commission. Just know that I truly work under a fiduciary philosophy where the client always comes first and fiduciary is not something I just slap on my website for marketing purposes.
To wrap things up I just want to stress something I have mentioned a few times. It is key you know all the fees you are paying. Ask your advisor to put down on paper how much you pay them. Also, how much is going out to the investment companies you are using. Finally, it is worth asking if they are receiving fees for sales of products like annuities and insurance. There are certainly advisors out there worthy of some of the high fees I see. However, for my clients, they think there may be a slightly better way to pay for financial advice.
I’m Dan Johnson, CFP®, founder of Forward Thinking Wealth Management. I run a flat-fee financial planning and investment management firm located in beautiful Akron, OH. Although I am in Akron, OH, I work with clients regardless of location. I cater to owners of equity compensation positions who are looking to organize their financial lives, keep more of what they make, and do the things they want in retirement and even now.