Last week, I asked a somewhat polarizing question on Twitter:
What are the benefits of paying a financial advisor a 1% fee on AUM? (trying to play devil's advocate)
— Jim Wang (@WalletHacks) April 21, 2023
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:
I'd actually think of it like this.
How many more folks would be better off if they paid the 1% to have the money managed. (Assuming advisor isn't garbage)
I'd guess more would be ahead making 7% instead of holding cash or worse.
Not for me just to clarify haha
— Chad | Money Matters (@Chadmoneymatter) April 21, 2023
First, there are often benefits to paying for financial advice.
Second, a 1% assets under management (AUM) fee isn’t for advice, it’s for portfolio management, and in today’s day and age, that’s about 0.75% too high.
— Rick Ferri, CFA (@Rick_Ferri) April 22, 2023
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!