Worried that you’re not receiving objective advice?

Problem 1

Conflicted Advice

In general, there are two types of licenses that an advisor may have: as a Broker or an Investment Advisor.

Brokers get paid a commission to sell products/investments, and their obligation is to their broker-dealer.

Investment Advisors get paid to give advice, and their obligation is to you, the client.

The term “advisor” can be used loosely as it’s not an actual designation or certification of any basic level of knowledge. To make things even more confusing, your advisor could hold both licenses as a Broker AND Investment Advisor, meaning you may be getting charged under both compensation models. Of course, this also means they may give you advice as a fiduciary, and other times as a salesperson.

Which hat is your advisor wearing when giving recommendations? You’ll learn how to search an advisor’s license status and mitigate this challenge in the solution.

Problem 2

Outdated Method for Determining Fees

Let’s say you find a fiduciary advisor that you trust, and they’re licensed solely as an Investment Advisor. You’re off to a good start, but how much will you pay in fees?

The overwhelming majority of Investment Advisors determine their fees based on what’s referred to as AUM, or assets under management. If your portfolio is $1 million and your advisor has a 1.25% AUM fee, you’ll be charged $12,500 for that year (the exact amount will fluctuate with your account size).

The problem with your account size being the measuring stick used to determine your fee is that it doesn’t correlate with the service you are paying for (imagine getting a quote to paint your house, but the painter first wants to know how much money you have, then you can have your quote).

This may surprise some people, but it takes almost no additional effort to manage $10 million of assets than it does $1 million (and certainly not 10x the effort, even though this is roughly how much more you’d be charged under an AUM model). In fact, some would argue that it’s more challenging to manage smaller accounts as there is less margin for error, and every available opportunity needs to be taken advantage of to make retirement work!

As you can imagine, it’s an uphill battle exposing this, as the industry is slow to change and certainly does not want to disrupt profits. Even though the AUM model looks absurd to many from the outside looking in (charging based on asset-size is illegal in many industries), retirees looking for something different find what we call a “sea of sameness” because almost everyone is swimming in the same waters. A person could interview 10 different Investment Advisors, and very likely find all 10 using small variations of the same AUM model.

Problem 3

Understanding All-in Fees and Their Impact

When we ask retirees how much they’re paying in fees, the most common response is some form of, “I’m not exactly sure.” In the rare cases that people do have an answer, they typically don’t have the full picture, quoting only part of their all-in fee. As mentioned before, you may have an AUM fee, but you may also see ‘sales loads’ on the front end, back end, or along the way if you work with a Broker.

While sales loads can be avoided, ‘expense ratios’ are typically part of any well-diversified investment plan. They can run as high as 2% or greater, but more often are found hovering in the 0.5–1% range. Other fees to be aware of include trading expenses, tax costs, and cash drag, which isn’t directly a fee but still negatively impacts long-term returns. Some advisors also charge a separate fee for financial planning (on top of investment management).

Many of these fees can be difficult to find, or flat-out omitted from your statement, which makes figuring out your all-in fees challenging!

See Loren’s example ⟶