Saving You $3 Million, One Client At A Time

Today’s article is a combination one. I am combining a comparison of what my average physician client would pay if they worked with the “average” financial advisor vs. my flat-fee, low-cost investment structure and also framing it in terms related to the economic concept of Opportunity Cost.

Opportunity Cost is simply the loss of potential gains from other alternatives when one of these alternatives is chosen.

Maybe I am the only person who thinks in terms of Opportunity Cost, but I do. Because of this perspective I wanted to give a few examples based on average fees vs what my clients pay.

Here is the background. And you know I love bullet points.

• My average client has investable assets of $3 million. 
• Based on the most recent reliable data I have access to, the “average” old school advisor charges a total fee of 1.4%. This includes the fee you pay them and additional  fees for the investments themselves.
• So, working with one of these average advisors costs you about $42,000 a year.
• My total fee for the same client comes in at $18,800. This is due to my flat fee of $10,000 and my focus on low-cost investments, which is the additional $8,800.
• As the Cleveland Cavs like to say, the Diff is the average advisor costs an additional $23,200 a year.

What does $23,200 buy this year? Let’s see what Google has to say.

• A new Volkswagen Jetta.
• Two weeks in Europe for two. And this seems to be at the higher end.
• A nice patio for the backyard.
• That new septic system for the house (I know this from a client.)
• Almost a full year of tuition at Ohio State.
• Membership in a country club or two. At least from what I hear.

Now, imagine this compounding over the next 10-15 years. A very basic analysis shows if you are paying an extra $23,200 a year compounded annually at 8.4%, over the next 15 years, this results in you losing over $700,000 of YOUR money. Suddenly, we are talking about a great vacation home vs a new Jetta.

You may want to sit down for this next part. Taking this out to 30 years (my average client is 50 years old so I am just carrying to age 80), that $700,000 number is in excess of $3 million. Imagine the legacy you could leave with $3 million!

Oh, and that 8.4% growth rate is actually lower than what a 60/40 portfolio has averaged annually since 1950. The true average is higher at 9.4%. I decided to be a bit more conservative with my projection. 

I think it is important to break the cost differences out and how focusing on lower fees can lead to millions for my clients. To paraphrase Jack Bogle, founder of Vanguard – clients put up the capital and take the risk. 

In my opinion, maybe, just maybe, someone else shouldn’t enjoy the reward from those substantially higher fees. There is nothing wrong with these old school advisors and their higher fees. Maybe they will send you a postcard from their two-week trip in Europe or invite you to lunch at their vacation home you funded. I would expect they ask you to pay for the lunch though😉

Ultimately, it’s your money, you should aim to reap the rewards from it!