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Defending the 1% AUM model for financial advisors

Last week, I asked a somewhat polarizing question on Twitter:

There were some good answers. A lot of them focused on how much 1% would cost over decades (a LOT) but a few brought up excellent points.

The two I wanted to highlight were from Chad and Rick Ferri:

The Rick Ferri tweet prompted a discussion that included a few financial advisors and I invite you dig into the money psychology behind those tweets and make your own decision.

The thread also surfaced this Whitepaper from Vanguard – Putting a value on your value: Quantifying Advisor’s Alpha. In “investing terms,” alpha is shorthand for value add. When you work with someone, like a financial advisor, what do they offer above and beyond what you can do? Oftentimes, we think of this as higher returns. But the paper offers up a framework to provide value in “relationship-oriented services,” rather than trying to beat the market. Interesting to see this coming from a firm known for low cost funds (but recently ventured into advisory services).

When your neighbors become your overlords [Vox] – “There are few things more delicious than a homeowners association horror story. All over the internet, you can find tales of people getting fined for parking their vehicles in their own driveways or having a potted tomato plant on their back porches or leaving a bottle of Gatorade out for one day. In Tennessee, a man returned from vacation to discover his car was missing; he thought it had been stolen, but in reality, his HOA had towed it because it had a flat tire. A Maryland HOA fined a homeowner $40,000 because the fence she built was 8 inches too long. A Missouri HOA threatened a family with jail time because they’d put up a play set that was — gasp! — purple.”

I’m glad we’re not in an HOA!