Episode 33: Is the 1% advisor fee really worth it? ( listener question answered)

The Episode discusses the question of whether it is worth paying a financial advisor 1% fee, diving into the complexities of investment portfolios, fees, advisor services, and value provided. Hunter provides insights into the considerations of fees, investment strategies, diversification, flexibility, and the broader range of services financial advisors offer beyond managing investments.

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Is it really worth paying a financial advisor 1%. We'll discuss this question and more on today's episode of retire early retire now. And welcome to the 33rd episode of retire early retire. Now I'm your host hunter Kelly owner of Palm valley wealth management. And I host this podcast every week to help you either retire early or retire now. today, we're going to answer a listener's question that I had emailed to me or they it's a great question and worth. An episode to discuss because, it is very nuanced question. And so, uh, just want to answer that question. Yes. We're gonna answer that question. More precise center. More precise. Please. And welcome to the 33rd episode of retire early retire. Now I'm your host hunter Kelly owner of Palm valley wealth management. And I release these podcasts every Tuesday morning. To help you get educated on how to retire early or retire now. And so go ahead and listen to this podcast episode. If you like, what you hear. Go ahead and share it with a friend. Or leave a five star review to help expand and grow the podcast. this podcast will be good for anyone that's reevaluating their financial advisor. trying to understand what they're paying for and what they're getting, or maybe they're looking to hire an advisor. and so what has prompted this topic today is I received an email from a listener. wanting to, basically understand if the fee that she is paying her advisor is worth. that fee essentially. what I'll do is I'll start out with reading the question and then we'll break down the question and go into how I would answer it and hopefully help Karen. Understand if that 1% fee is worth. her time. And money that she is paying that advisor. So here's the question. Karen says I'm. Enjoying the retire. Early retired and. I'll podcast. I have a question. That I think. I think. Could be of general. General interests. That you could. Could potentially. Really answer on the podcast. I am. I'm 39. And I've worked. Worked with a CFP. CFP fee only wealth manager. For about. 10 years. And I have a little bit over 700,000. And dollars. Under management. My advisor. Visor has. I mean, what I understand. And the B. A pretty normal. Asset allocation. Of stocks. And bonds, including index funds mutual. Jewel funds domestic. and foreign. Oren mid-cap. Cap and small. All cab. I've always thought. Thought he's been. Great, but I've a friend who insist. I'm being scammed with. The 1%. Fi. He thinks. Thinks you should. I do. About. About 80. 80% into a single total market index fund and the rest in bonds, depending on your risk tolerance. I'd always heard that you have to diversify more than that so that you can get steady and predictable returns. But I have to admit, I suppose I would. We'd have a lot more money right now. If I had used my friend's strategy from the beginning. What exactly is the advantage of having more diversity in the portfolio, assuming that you have 10 years until retirement. Is it simply that it feels better and looks nicer on a graph to have slow, steady returns and less volatility. This is a great question for Karen. And so I want to preference all of this, these answers in this context with this is all I know about Karen. So I'm going to make some assumptions about Karen. And so if Karen you're listening, go ahead and take what I'm educating you on at the podcast, back to your advisor. Or meet with another professional to, talk about your specific situation and always key Palm valley wealth management in mind when making those considerations, but. there's really two main questions here. that I think you're really trying to ask. And one is the obvious. is specifically about the investments in my N a portfolio, that makes sense. And. Uh, is that 1% fee worth? What I'm paying? The advisor to do when I could just go to Vanguard or fidelity or whatever, and build this very simple, total market index fund with some bonds. and then the bigger question I think is probably more important to be asked that you didn't explicitly ask. But because your friend has raised this question. I think it should be asked. And that is what else is my advisor doing outside of managing my$700,000. Right. We'll get into this and answer these two questions, but I think where we should start is let's talk about Karen's current portfolio. I always talk about this. I've talked about this on a number of podcasts. With our investment. So we should control the things that we can control. On a day-to-day basis, you can not control what the rate of return is going to be for Google, apple, Amazon X, Y, Z mutual fund, or index one. And so worrying about the return on a day-to-day basis, a quarterly basis, a yearly basis. is really going to get you nowhere where you should put your focus is the things that you can control within those investments. How much am I. contributing to those investments. What is my allocation look like based off of my risk tolerance, my time horizon. my goals, what do I need to achieve? fees and what am I paying for those investments? And so that's where I kind of want to dive into, because that's the nature of the question here is about fees. Let's talk about Karen's portfolio and the fees that she should consider. One, obviously the advisor fee, the 1% fee is the about$7,000 a year that she's paying this advisor worth her time. And worth the value that she's receiving. Okay. And so that's the first beat to consider. And then normally there are some other fees that may not be as explicit on the statements and things that is your platform fee. So some advisors. Depending on how. They run their business. Could you use what's called a tamp. And so a tamp is just a third party manager. They are doing the day-to-day trading so that the advisor can specifically focus on client relationships and not. Uh, necessarily have to either hire someone in house to do the trick, like the rebalancing. Tax loss, harvesting. reporting things of that nature. you can hire that out to what's called a tamp and they can do all of that. But the advisor at the end of the day has the say on the risk tolerance. What type of, investments are inside that portfolio, so on and so forth. And so if they're utilizing a TANF, there's usually a platform fee. So you have the advisor fee. The platform fee. generally your money or your account, is that a custodian? Like Vanguard. fidelity Charles Schwab. I use Palm valley wealth management. company called SEI. private trust company. and so they potentially could have fees, like just to open the account, close the account. maintain the account, certain transaction fees, things of that nature. And then lastly, there could be fun fees. And so that could be the index fund, the mutual fund. Trading fees, things of that nature. And so these are all the fees that you should consider advisor platform, custodial and fund expenses. obviously those can get either super expensive or they can be super cost effective or are much cheaper. so you had to find that middle ground of where am I getting the most value for the amount that I'm spending? generally with an advisor fee, you're going to fall somewhere between that one. And let's call it 2%. All right. And so 2% is all a higher range, including the fun expenses. At all of that. And the 1% is probably more toward that average. And then obviously there's, there's some robo-advisors that are much cheaper and things of that nature, or you could just do it yourself and you can pick some very inexpensive. ETFs or index funds that are, is. Not no cost, but maybe 0.03% or three basis points. Things of that nature, right? And so I really like that your friend is kind of. focusing on the thing that he can control, right. That, that fee what he's paying. That is where I would focus. Right. And so how do I get that fee to come down? one, you could cut the adviser. If you could go to Vanguard, Schwab. Any retail investor, you could pick this total market index fund. You could cut your cost down to essentially nothing. and your return would be probably relatively the same. Maybe a little bit better since you're not having the fees. Right. And over time that would compound. But one of the things I would consider and we'll talk about this more in detail later is what else is out advisor doing right. the portfolio itself, I want to talk about the similarities and the differences. Of the portfolio that you have from the information than I have, and the portfolio that your friend would recommend. the similarities, uh, they both have. The likely. Um, Thousands of stocks in them. If you are invested in mutual funds and index funds, those are very spread. Then they have lots of holdings in them. And so you're going to have hundreds and hundreds, if not thousands of stocks within there. And they're going to be comprised of very large companies, very small companies. everything in between maybe some foreign companies, definitely domestic companies. Um, and so you're going to have that good mix, just like you kind of say, Hey, don't I don't, I need, um, diversity. You're also going to have that in the total index. Uh, the total market index fund. So let's take a, just a generic, they call it, I share this BlackRock's ETF, total market. and next fun. And it has about 2,500 holdings. So within both of these portfolios, your portfolio and the portfolio that your friend would recommend. You're going to be very spread over lots of different types of companies, industries. things of that nature. And so you're going to be going to be very diversified. So to answer your question, I guess in short form both of the portfolios, whether it's your visor or your front are going to be very well-diversified. And the volatility. Depending they have the same risk tolerance, everything else. Would likely be very similar. that's why I think the bigger question which we'll get to in a second. Is what else is my advisor doing for me? the one last thing I want to say, that's similar about these particular portfolios. Is that our guess that there's a lot of overlap in the stocks that are in both of these portfolios. There's probably a lot of Google, Amazon. A lot of Netflix, a lot of the companies you've heard before, if you go to like a small cap manager and then you look at the total market index fund, I bet there's a lot of overlap of same companies in there as well. And so. My bet is that these particular portfolios will look very similar from an Allocation standpoint, it just feels different because there's one holding of that total market index fund. And there's multiple funds with your advisor. And we'll talk about why. Um, that would be an advantage or disadvantage here in a second. And so the differences, obviously the fees are much different, right? You're paying the advisor. 1% you might have a platform fee, so on, so forth. And the total market index fund is probably a, at least the example that I'm giving with the I share is about three basis points or 0.03%. And so you're going to cut out a massive amount of fees. In that given situation. Now what's your, what you're losing with the total market. And the next one is a little bit of flexibility. And so why or how are you talking about flexibility? Flexibility in what? I don't know how your$700,000 is broken up. I don't know if that's IRAs Roth, IRAs, brokerage accounts, things of that nature. But assuming a portion of that. At the very least is in a brokerage account. If you're all in this total market, next one. You're going to lose Some ability to do what's called tax loss, harvesting. some years. Uh, you may want to capture a loss on paper by a similar fund and then rebuy that same fund so that you could take a. Thousand dollar loss or$10,000 loss,$20,000 loss. And then as that market recovers, you have that loss on paper. If you're in multiple funds or multiple holdings, like you are currently. You have the ability to kind of trade in and out. Particular winners and losers. Whereas the total market index fund is packaged all into one particular holding. And if you sell that holding a share or two shares or a hundred shares, whatever shares. You're selling all of those stocks. Versus a portion of those stocks to cash, or maybe it's a loss or capture some profits and reallocate it somewhere else. And so. You're going to lose a lot of flexibility. And when you get into, um, that. Single. Uh, holding of the total market and next one. And so depending on your income and a bunch of other factors to consider, it may make more sense. To pick a bunch of index funds that are specific to a certain asset allocation. maybe you build a total market index fund if you will, but you have individual funds so that when the market is volatile, you can take advantage of things like. tax loss, harvesting, another area where you'll lose a little bit of flexibility as well. Is when you want to reposition the portfolio, make minor tweaks to be heavier weighted in one area or another. If you're wrapped up in that. And that total market index fund. You're kind of at the mercy of the index fund, making those changes, whereas giving your specific situation, if you are able to take more risks than what that particular fund wants to do. Or tone it down a little bit more, based off economic indicators, or maybe you're getting ready to retire, whatever the case may be. You're just going to lose a little bit of flexibility to go. Maybe more small cap or more large cap or. More foreign, more value versus growth, things of that nature. having, multiple and next funds that are specific to certain. Industries or, asset classes, things of that nature. we'll allow you to have more flexibility in your portfolio. Than having a total market index fund and not that the total market and the next one is bad. you just have to understand that you're losing a little bit of flexibility there. Now. I want to ask another question. Right. And so is my overall return beating that total market. and next one. If it is, then I would say the. There, if it's speed in it by more than 1%. So if my advisor is winning more than 1%. over the total market index fund or the portfolio that my friend is recommending. Well, then I guess mathematically. Yes. It would be worth paying that 1%. But if you guys are performing the same and you're still paying that one, 1% fee then just from the investment management standpoint. Then maybe it wouldn't be worth paying that 1%. But over the last 10 years, has your advisor, stopped you from making an emotional decision to sell your stock or your funds irrationally in the last 10 years? so the most recent one I can think of is. is. 2020 when COVID hit the market depth, 30, 40% and how to Vielight recovery. So if you were, uh, at the bottom of that 40% and got out and were out for two, three months, while you missed. All of that. that. recovery. Right. you may be saying to yourself, no, that didn't happen. But if it, if he was able to kind of calm you down and say, Hey, this is our long longterm. Plan and so on and so forth and stopped you from selling at the wrong time. Then, he could have potentially saved you 30, 40, 50%. I don't know. Uh, depending on timing and everything else. that's one other area where I think maybe the advisor would be worth that 1% because yeah, maybe you would have a little bit more money if you were in this total market index on, but not if you were. emotionally selling your particular holdings and things of that nature based all of a sudden. Some news headline or, or political reason or something of that nature where the market just continue to trend up. So the next question we need to ask ourselves is what I think is the more important question about the 1% fee question. And that is what else is my financial advisor doing for me? And so the big misconception, and I'm assuming your friend has this misconception just based off. Hey, you're getting scammed with the 1% fee Whether they're a DIY or like your friend seems to be a, again, I'm making a big assumption there. or people would just lazy or bad advisors that don't do much more than put them into mutual funds and build a portfolio and just kinda let it go. People just don't realize the scope of what advisors can do. Advisors help with cashflow. We're budgeting, debt management, understanding how much I need to be saving for particular goals. Such as retirement. So retirement planning, getting to retirement, transitioning to retirement. When should I take social security? Tax planning. So asset location, how much should I have in a pre-tax versus raw versus post-tax doing Roth conversions reviewing your return for, corrections that potentially need to be made, making sure you're taking your proper deductions and getting proper credits, helping people with employer benefits, whether that be employer compensation, through like equity grants and things of that nature. So there's, there's a ton of different things and that is just a drop in the bucket of what financial advisors can help with. What we need to ask. What you need to ask yourself is okay. Over the last 10 years, has my advisor reviewed my tax return. Have they helped me create a budget or a savings plan to help me get to a retirement or whatever, buying a house, whatever goal that is. if I have. Significant amount of debt or are they helping me best pay off that debt? Whether that be a debt, snowball, or debt avalanche plan. consolidating it, if that made sense, or if I bought a home recently, am I getting the best interest rate or my shopping that out? Am I making a correct payment based off of my income and not paying too much for the house? all these different things. That advisors can do. You should ask yourself, is my advisor doing that? If they're not. Then the answer to your question may be. I am overpaying. And you should go to your advisory. You should say, Hey. Why aren't we doing these things? These are the things I want to accomplish. can you help me with that? And if they can't or they brush it off or. Whatever the case may be. You may need to find another advisor. But if you're saying yourself, oh yeah, we've, we'd done those things. They did help me with, showing me how much I needed to save or, oh, wow. We did a couple of things, a few years ago that seriously helped. Save on taxes or save for my kid's college or whatever. Right. And if you're saying yes to those things, then keep paying that guy. He's doing a great job. and you're on your way. And I would say to your friend, yes. If my advisor was only. managing my money for 1% and that's all they were doing. I probably would be, paying a little bit too much, but these are the four or 5, 6, 10 things that they've done. Over the last few years that really have helped me save money and make me more money and keep that money invested. So to finish up this podcast, I'll leave everyone with a few questions that they can take to themselves and ask themselves. to help either reevaluate their financial advisor and what they're charging, if it's worth it. Or. If they think they need to work with an advisor, what do they need from that advisor? Right. And so first question I would ask is what do I need from my advisor? What am I wanting to accomplish? Uh, whether that be retirement. Help with taxes. maybe you have some complex compensation from my employer. Whatever that case may be. Maybe it's just getting organized. I don't know. And then I would ask myself If I'm working with that advisor for. Two years, five years, 10 years. What needs to happen in that amount of time? For me to say, dang, not 1% was really worth it. Or what I paid for that. the value that I got was well above what I paid for that advisor. Right. And so. I will caveat this with, if your answer is I need X return on my investments. Go deeper with that question and ask yourself, why do I need. 1%, 2%, 10% more. return on my investments. Why do I need more money? And generally, if you dig down. As I try to do this with everybody I work with. What is the deep down root of why we need more money. And that's where we can really determine. Okay. What is Karen really want? What does a XYZ client really want? And then that can help us determine, well, what return do I really need? Based off their situation. Do we really need to go take all this risk? Of a volatile market or, can we be a little bit more conservative and make it a lot more predictable that Karen retires on time, or they're able to buy a house on, on this date or so on and so forth. Right. And so really dig deep if you're saying, Hey, I just see better returns. Well, ask yourself why and then look at your portfolio and make sure that your risk tolerance and your time horizon and what you're invested in matches kind of what. You were doing, and maybe you need to get a second. Pair of eyes on your situation. To have a expert look, if you don't feel comfortable doing that. And then the last thing I would say is, uh, since you've been working with a financial advisor for about 10 years, I would say, ask your advisor are, ask yourself, is your advisor fulfilling those needs? And those wants right. or if you're not working with an advisor at this point, Am I able to put enough priority on my situation to do this properly and most effectively and most efficiently. and if your advisor is, if you have an advisor. Good. Awesome. Keep that advisor work with that advisor. If they're not. Then you need your reevaluate. Can I do this? Kitten do I need to hire someone out because I just don't have enough time or expertise. and so those are two or three questions that you can ask herself. Is this 1% really worth what I'm paying? And hopefully the answer is always the value that I'm receiving. exceeds. Whatever I'm paying right. And so that's what I strive to do at Palm valley wealth management. I know a lot of other good advisors is strive to do the same thing. if you're in the market for a financial advisor, I would love to have a conversation with you. We prefer to work with attorneys and physicians. going through life, wanting to retire early. but we work with all kinds of different people. So if you're interested in having an introductory call, go to my website at Palm valley, uwm.com. you can look at our process there. and you can schedule a 15 minute call. It's no cost and we can kind of go through your situation. And see how we can help. So, hope you enjoyed this one. Phil excited about the next couple of episodes as well. So go ahead and leave a five star review and share this episode with a friend and we'll see you in the next one. And this podcast is for educational purposes. Only. It is not meant to be financial or investment advice. If you need help, please seek a. Financial tax legal or insurance professional about your specific situation. And please keep Palm valley. Well, Management in mind when making those considerations.