How a 1% Fee Can Cost You $1.7 million in Retirement
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- čas přidán 11. 09. 2024
- Investment fees can reduce your net worth by hundreds of thousands of dollars. In this video, we'll look at how even a 1% fee can cost a retiree $1.7 million in wealth over a 30-year retirement.
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While still working as a trial attorney in the securities field, I started writing about personal finance and investing In 2007. In 2013 I started the Doughroller Money Podcast, which has been downloaded millions of times. Today I'm the Deputy Editor of Forbes Advisor, managing a growing team of editors and writers that produce content to help readers make the most of their money.
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In the first 10 seconds, this is already set to be an EPIC, historical video! As always, nice work Rob! There are probably over 1000 videos like this one on CZcams alone and this topic STILL does not get enough attention from the masses.
People rather not know as they are not interested to ( or scare of) learn to manage their own money.
I would love to see legislation that allowed investment advisors to charge whatever fee they wanted, but it had to be invoiced and paid by the investor each month or quarter. They get away with their 1%+ AUM fee only because it gets buried in their customers' account statements.
Thats a very good suggestion
1.7 mil! So incredible and I believe it! I changed everything in 2021 to low expense ratio ETFs and refused to hire a financial adviser. Most are really commission based salesmen.
It’s abundantly evident why advisers insist on at least 1M AUM for retirement. The more you save and invest the more they make.
$1M AUM in retirement is what the entire 4% withdrawal study is based from. That’s why you need $1M, to make it work.
@@came7494to make what work?
@@came7494 that is not true. The 4% rule applies to any accumulation value.
@@came7494 it scales whether you have 100,000 or 1,000,000 or 10,000,000
I was aware that high cost funds and an advisor were costly in the long run, but I had no idea they were THAT costly! Thanks for quantifying it for me.
And as a well known advisory firm often says ……we do better when our clients do better. The problem is that as the clients do a little better, the advisor does A LOT better.
I heard your mistake last night during the live stream. I commend you for doing this video and pointing out your mistake. Nice job as always, Rob.
hes the goat
It is not 1% it is higher. The reason is they place your money into options which directly or indirect pay them additional money as commissions or other management fees.
That 1% fee is a nice retirement fund for a lucky, fee based Financial Advisor.
No financial advisor would ever earn a 1% fee if it had to be invoiced and paid in cash.
@@tdaveniii Just because the 1% fee is not listed on the quarterly statement so we don't see it....too bad for us.
Reworded: If you just educate yourself, thru Rob and others, and set up your portfolio accordingly, you will make A LOT MORE money! Thanks for your help in doing that, Rob.
The only defense of this is if the advisor keeps investors from making big mistakes along the way.
Not everyone is cut out to be self directed, and i say this as someone who is 100% self directed.
this, exactly. There's a lot of people who freak out at any sign of the market dipping and do the absolute worst thing: pull your money out. The 1% is worth the piece of mind for some people to know someone who's smart with investing managing things. It's still sad that this stuff turns out to be really simple to self-direct though and lose so much potential gains in the process, but that's the way of things.
@@Boblonious and @DavidSmith-wq3wu yes, and importantly, one with a $1M porfolio could pay an advisor $3,000/yr, every year (what most would consider "high" fees if paid by check at $750/quarter, or $250/month) and still come out WAY ahead of a 1% of AUM (not to mention if you keep them from putting you in load funds or ones that charge 0.75% fees too!). That fact is so hard to communicate when, with apologies to Upton Sinclair, a financial advisor's salary depends on his clients' not understanding this!
@@Boblonious It does not have to be 1% it can be $1000 for a 2 hour call when market dips
@@hero108zero3 Then you've hired a therapist
If they can't manage it, they can just buy a few index funds.
I ran a 5 year experience to have two RRSP accounts( like 401 K in US), one managed by an investment company, the other by myself & both are balanced portfolio. They delivered 5.3% annual return after fee, I managed to generate 8.6% after MER. Now I only have 1 account, guess which one I have kept.
This is precisely why we fired our AUM advisor even though their fee was less than 1%.
I would actually contend it is much worse than this. We are here only modeling taking on this advisor when we retire, what about the people who used the high cost funds and advisor to build up their wealth as well? What does that 1-2% in fees look like over 60 years of investing? Has to be absolutely staggering.
I love how you make such an effort to speak precisely and clearly. Thank you for the great content!
Yes, people need to educate themselves on fees, they really add up! I missed out on growth in my 401K because I had to pay them so I ended buying the company's stock and that had no fee so I made a lot of it up.
Rob is our guy. He is the endangered species of finance you tubers. Retail investors should protect him against financial advisors. Many Thanks
While we were not paying our Brokerage an AUM fee, he did have us in some higher cost funds. I did my homework, read a lot of books, watched many You Tube videos and did my own online research. I found my guru- John Bogle and I finally convinced my husband to let me pick the funds, the broker tried to talk me into staying in some, but he knew I was determined. Now we're completely out of mutual funds and our portfolio is trimmed way down to mainly Index ETFs, US Treasuries and one REIT and it is doing better than before. Anyone can do this, and if you really don't have time just do a simple 3 to 5 fund portfolio of Stock Index funds and Bond funds, it will likely do better than your advisor can do. In fact there is research out there that proves that advisors don't beat the market in most cases.
Thanks, Rob, for all your great content, I have learned so much.
BTW That same advisor has tried several times to sell us Long Term Care policies. We have enough to self fund future healthcare and I am adamant that we can grow that money ourselves. He knows not to bring up the topic anymore. I would completely leave and do Vanguard or Fidelity but I can't hubby on board- YET....
The average investor doesn't really understand there is a difference between financial planning and wealth management. It's true a lot of money can be wasted with wealth management firms who call themselves advisors. It's also true that some advisors and planners can be helpful-for financial planning.
I just realized after all these years i hadnt been subscribed. Fixed that! Thanks for the content Rob.
Is there any reason why fees based on a percentage of assets makes sense? I'm not sure I would balance my holdings any differently for $500K than $1.5 million or more. What additional work is involved? What are you actually paying for?
Typically the AUM fee decreases as assets increase. Also AUM fee allows the advisor to say they’re on the same side of the table as you are.
Same reason you pay 0.22% with a vanguard etf.
It makes no sense. Most investors are fooled by what sounds like such a small percentage, not realizing how much it costs over a long period. Larger accounts are not going to require additional work as for as managing the portfolio.
That's why fee-only advisors are better.
You’re paying for someone to tell you not to sell when the market bottoms out.
Most people I know don't get an adviser until they are 60ish and protecting themself in retirement and some only have it on a portion of their retirement investments (like 10 to 20 %) and then loosely copy it with the rest. So I would think the numbers would be drastically different.
Most I know get an advisor in their 30s or 40s.
That is closer to my situation. I can't put my 401k under an AUM anyway and money in special loan funds either. But am thinking of putting a portion with a manager who charges 1%, is a fiduciary and has a very low minimum AUM.
@@MsTubbytube Why would you do that? You don't need an advisor if you invest in index funds.
One of the benefits of an advisor is tax planning, for example roth conversion strategy, SS Tax torpedo, etc. Having only a portion in there destroys the advisor's number 1 benefit. Anybody can make a 70/30 portfolio
I get tax planning and all of those things and only have 10% with a advisory firm.
An investor knocks on a door... Would you like to invest my money for only 1.7m dollars?... Hey... we are busy today, come back tomorrow... Hee-hee!
Loved the video Rob excellent work on the analysis of management/investment fees and impact on withdrawal rates and overall position
Also missing is the question of whether the help of that 1% fee advisor enabled you get to that $1M retirement balance to start with, or whether his 1% fee kept you from having more than $1M to begin your retirement with.
And obviously, a 1% fee paid to an advisor has essentially the same effect as investing in funds with a 1% higher expense ratio.
Compounding over a long time is what makes these retirement plans work, and the loss of the compound earnings on the paid-out fees is why even a 1% fee is so costly over time.
Yep, if you lack discipline and self-control, then maybe a good idea. Otherwise, total scam imo.
Thanks for the update! Your videos got me looking at the fees I WAS paying, no more. Thanks
Love all your vids. Another great one. However the videographer in me is compelled to suggest that you “cool down” the white balance on your camwra and they would look so much better. There is a significant yellow color cast across your videos. Adjusting this would look so much better. Cheers and keep up the great info!
Rob brought this up briefly in response to similar comments that I and others made on the live stream last night. He indicated it was due to a teleprompter that he was using (not for the livestream but for other calls). I agree that the color lessens the professionalism of the videos, and gives them a dated feel, somewhat akin to looking at photos from the 60s and 70s in a photo album.
Another way to look at it is how much less Risk can I take without the fees? Maybe I can get the same results on my own as with an advisor , but by having a 40/60 portfolio instead of a 60/40 which is required by Bengens 1994 study. Taking out fees in down years is especially painful and is reverse dollar cost averaging.. doesnt work . NOT to mention but I will is the bias advisors have... ie not to recommend Roth conversions because it lowers overall portfolio value.. and thus their salary. OR worse to put investor clients in high commission products that have low IRR..
I can’t believe how many people will follow the flock by investing in high fee products when a simple low cost index fund is all that is required for most investors. Inflation is bad enough. Fees will further erode any returns you get. We need financial literacy classes
Great video. We cannot talk enough of fees.
You show the bottom line in such a clear example even financial illiterate like me can understand and take action. Thanks Bob!
Brilliant, thank you.
Fees matter!
Great video!
Its a great teacher that can admit he was even more right than he said he was. Thanks for the cx
In 40 years, I've never paid an advisor. Same with doing my own taxes. Now I'm educating myself on tax strategies in retirement.
Advisors put you into horrible front loaded funds if they can get away with it.
That’s the old John Bogle story
The safe withdrawal rate (SWR) offset versus the 1% AUM fee is dependent upon a couple things, but in particular asset allocation and then inflation adjusted withdrawals versus a fixed fee withdrawal. In this example the asset allocation is 75/25. If you're a more conservative household whether by choice or need then that 4% SWR at 75/25 will not be 3.6%. It may be 3.5% or slightly less. The algorithm is based on averages over a 30 year timeframe where the stock/bond markets go up and down and in some decades have major declines. The 1% fee amount does not get adjusted for inflation across all those ups and downs whereas the initial withdrawal amount is adjusted for inflation which accounts in large part for the reason why it's not a 1-to-1 reduction in SWR to AUM fee percentage. Setting SWR aside the average person has to evaluate it as whether or not the 10k per 1MM multiple for 1% AUM offers them value each year. That's a separate topic.
It would have been nice to explain why a 1% fee reduces the safe withdrawal rate to 3.6%
I believe to pay the advisors fee, without reducing the original account balances.
@@chrisholenstein9476 But why 3.6% and not 3% or 3.3%?
I would like to understand this more and how the ficalc algorithm works. It would seem that the advisory firm is taking out their 1% the same way as we would. How is their 1% magically 0.4%?
Great video! Yet I have recently read some studies conducted by brokerage firms on how they quantify the value of an advisor, which they value as achieving a return greater than 1% to cover that fee. Vanduard has one called "quantifying vanguard advisor's alpha". I'd love to see you make a video on that!
Yes, please!
He already did. Look it up.
@@GoKU-xx2vg You right!
Great video. But, isn't is actually even a bit worse than that since you pay the advisor in after tax dollars. If you have to take money from a tax advantaged account, and many people will, you then have to paying ordinary income tax on the withdrawal. With a $1M portfolio, if you're in the 22% tax bracket, you would have to take ($10k/(1-0.22)) $12,821 from your account to pay the 1% fee. Leaving you even less to compound over time.
It would be a good mental exercise to compare monthly withdrawals for retirement income rather than annual total compared to quarterly AUM fee withdrawal. I'm a simple DIYer, but at some point in time, I will want and need to hand over to AUM advisor simply because there will be a point in time in the future where my mental faculties are not as sharp. Now, how to foresee the transition point before I lose my mind is the hard part.
My mom is 86 and still handles all her investments herself. Unless you get dementia, there's no guarantee you wouldn't be able to manage it yourself.
@@user-oh8jj8ht1s Sure, there are exceptions, but the fact is you will not be as mentally acute. There's a reason older people are targeted for scams so much.
Same here. I have started talking more openly with one of my adult sons, both to share ideas and test my strategy, in the hope that we will both get smarter. I through this ongoing process expect that at some point he will say; dad, maybe you should have me more actively work with you, or my widow, to look after your finances.
i attended a free dinner presentation by a local Merrill office last month. it's funny they go on with their presentation about the stock market but no discussion of what they are offering and for how much so asked about their fees for assets under management: 1.25% for the 1st $M then 1% between1 up to 5M and negotiable for greater than 5M. i enjoyed asking them questions though i had no plans to avail of their services. this afternoon, the local Fidelity rep cold called me again asking if i had any questions and if i wanted to check in with their local office. i presumed as a segue for a spiel about AUM. i asked about fees but the local rep didn't know. he was asking about bringing over other assets to Fidelity.
Can you list the “one time fee” advisors you recommend?
using the 4% rule, can you use a new 4% of the value of your investments each year vice the 4% from the first year of retirement.
What would we do without the voice of reason ?
Rob - great video. Just out of curiosity, wouldn’t you have to factor in something for the value of the advice. If the advice earned you more than what you could otherwise do on your own isn’t this an offset to the $1.7M cost?
I have always had trouble justifying fees as was substantiated here in Rob's video.
To look at fees though without understanding the potential benefit of an advisor is a bit short sighted. If your advisor finds a way for your portfolio to make back that 1% through smarter choices, it's a wash.
If he finds a way to make back more, then this whole discussion is moot.
Is there an objective way to evaluate an advisor's performance vs no or self advisor? How would one know?
My philosophy in finance is fairly simple: Why pay more for ANYTHING if you don't have to?
Rob… thank you!
Another excellent video.
Please...bullcrap. I started investing in 1993...NO INTERNET, NO LOW COST ETFS, MUTUAL FUND FEES >1%...Retired at 59.
Rob, thanks for the correction and update. However, I think you may have missed a POSSIBLE issue. If you're paying the advisor the 1 % fee, but there guidance and adjustments in your portfolio create MORE than a 1% increase than what you were doing on your own, even after the advisor fee, one could end up making more. I just went to an advisor today and he ran all the funds I was invested in through the 1, 3,5,10 & YTD comparison to what 500 stocks he would suggest and it was anywhere from a 4-7% increase for every scenario.
How often does any actively managed portfolio's performance beat a low-cost index fund over a 5 or 10 year time horizon? Have you seen the studies on this? I think Rob has done a video on this topic. The vast majority underperform the index.
he is recommending 500 stocks? then go into index funds for less cost. nobody knows the future regarding individual stocks.
Then take his advice on those 500 stocks he picked, and say 'thanks', and go invest in them on your own, and skip his annual fee.
@@RobSabella , So is my logic above sound ? In that Rob did not address/taek into fact that an actively managed portfolio by an advisor may produce more growth then just someone investing in S&P 500 mutual funds with low fees ? Offsetting the 1% fee an advisor may charge?
I share your sentiment, but I too can increase my return if I'm willing to take on more risk. Apples to Apples is tough.
I started by using a 1% advisor, but it didn't take long to see this wasn't in my best interest. Went to a full-service flat fee advisor for way less and the cost is locked in so as the portfolio grows his annual fee doesn't. You mention you had a flat fee advisor list on your web site, but I couldn't find it, is it removed?
3:58 Question regarding fees. For example, if I get a return of 9% using low cost index funds. Using an advisor and I get an 11% return after fees. Am I not better off using the advisor regardless of the fees? Is the assumption that an advisor will never outperform the low cost index funds over time?
The answer to your question is yes. Over time index funds always win, similar to a casino.
Ask the advisor for a "performance guarantee" and see what happens 😊.
Yes, and that assumption is backed by data. Research shows that most advisors aren't able to (consistently) beat market indices. In fact, after fees, most advisors *under*-perform the market.
It also works the other way. If the market is down 9%, but your advisor took some different bets and he's down 11%, that becomes -12% after the fee
The assumption is even softer, the returns of the managed fund is not going to consistently beat the cheap index fund by enough to make the extra expenses worthwhile. Yeah, only an idiot would be upset about expenses if this weren't the assumption.
I wonder why a famous study by Vanguard provider of extremely low cost funds say advisors save on average investors 3% a year (vs doing it on their own). Study’s like this only look at the cost and not the benefits. Most of it is behavior coaching by the advisor to the client.
Everyone gets charged the same fee, not all need the same behavior coaching. If the advice is do not sell, many give that advice even for free, like here
@@hero108zero3 then the service is not for those that don’t require the coaching. There are plenty that do.
how does this compare to the 1% boost that robinhood is offering? how big of an influence can that truly make if u invest for next 30+ years, contributing on avg 1k a month
Planner fees are outrageous
I was expecting Rob would have to reduce withdrawals by 10,000 in order to get back to 96% rate. But he only had to reduce by 4000 ( to 36,000). My understanding is that the AUM fees are made pre tax.if that’s true, then maybe that is why ? Does Ficalc take this into account?
If AUM fees are paid from a pre tax IRA that is being managed, taxes are not due on the fees
Also miscellaneous fees for transfer of funds and RMDs too.
Thank you for the great video! I have some mutual funds that cost me 0.65% and I am starting to feel the damage into my retirement in about 10 years. But what should I do? Is it better if I just sell these now and put them in low cost index fund or two?
My local Fidelity shop cold-called to "check in". I told them I was invested in their Zero version of the S&P 500, just like Warren Buffett advised. (Buy and hold at the lowest cost.) Thanks, though! :)
hey, i got called this afternoon by my local fidelity office also to check in and follow up. they must have a quota of calls to go through.
@@Patrick-iq1do Interesting that they want you to switch to a more expensive product. My discount broker called me to push their managed account as well.
They're trying to make a living and feed their families. I can't blame them. And some people like to work with an advisor. Different strokes.
@@user-oh8jj8ht1s True, both of my siblings have 1% AUM advisors. *shrug*
@@user-oh8jj8ht1s I blame them for not always being transparent about their fees-and being deceptive about being able to achieve results better than can be reasonably expected. I understand they need to make a living.
White Coat Investor CZcams with Michael Kitces as guest explains why AUM is the preferred method for advisors.
Good for advisers, bad for investors.
@@PassivePortfolios Yep, total scam.
I been watching a lot of you content, you mentioned income lab access one but can't remember the company you used.
Where is the list of advisors on your site? can't find it.
robberger.com/low-cost-financial-advisors/
Are the calculator predictions based on historical data ranges or is it just a random Monte-Carlo type prediction using a data range?
Even ten million with a 0.155 percent expense ratio is $15500 a year. 😅 But if you're earning $600000 in compound interest, which is like a conservative six percent, it should be acceptable to pay that cost of having an advisor or owning a mutual fund or exchange-traded fund. 😂
I prefer 0 to 4 basis points.
So age of passive investing is ending it was sweet congrats boomers. It be a new era but won’t be apparent till it’s over hopefully everyone makes it. Enjoy little bit more bull markets.
Taxes, spending, insurance & stopping bad decisions it’s not just investing side that saves money. I stopped advising due to these attitudes I easily made them 20% tax savings alone but I was the exceptions everyone wanted a grey beard pretending to know stocks & was friendly. I rarely came across any advisor worth the 1% fee on investing advice alone.
Making behavioral poor choices is far more expensive for the individual than a fee. Although that fee should be closer to 50 bps. Man you are wrong a lot!
Are you saying that advisors charge, on average, just 50 bps?
I don’t mind paying out 1% when I get 10% returns..But it’s not always the case
Trying to be smarter about fees but therein lies the problem.
Learn how to manage your own money and ditch the adviser. Save a ton of money on fees. Read "Asset Allocation" by Roger Gibson and learn how to do it yourself.
1.04 or 1.05?
Where is the Untuckit? New shirt?