a different take on the one percenters

Who are the new one percenters?

They are the financial advisers who charge you 1% of your assets under management to invest in passive index funds which are readily available to everyone.

I recently worked with a financial adviser who was a very nice guy.  He was well dressed, wore a nice watch, and drove a Mercedes.  I drive a Volkswagen.

My wife and I talked with the adviser at length about our goals and ambitions.  We provided financial documentation which he entered into a program that would analyze our portfolio to look for gaps and overlaps.  The program also told us if we were on track for our target retirement date based upon our current savings and spending.   We learned that we were in great shape due to years of maxing out our 401k, saving a ton, and keeping our spending in check.  It was a great feeling!

When we all spoke about entering into an agreement with the adviser, he told us about his fees which were 1% of the total assets he managed.  I thought nothing of it.  1% is nothing right?  I mean a penny is 1% of a dollar.  Almost worthless.

After we agreed on the funds we were going to invest in I prepared the transfer of money from an old 401k as well as some funds from a savings account.  It was a substantial number…almost $500k.

I felt uneasy.  The reality of putting that much money into one decision started to give me cold feet.

I searched the internet for a financial fee calculator.  I entered my data of $500k, 1% fee, and 6% rate of return.  I ran simulations for 10, 20, and 30 years.  

When the calculator spit out the results I almost fell out of my chair.  That meager 1% fee turned into tens and hundreds of thousands of dollars of lost growth for me.  Even if I never invested another dime in the funds, the loss of that 1% per year to fees turned into major losses over time due to the opportunity cost of not being able to invest that fee amount.  When compounded over time it can lead to staggering effects on your account balance.  

10 years – lost $85,000!

20 years – lost $291,000!

30 years – lost $747,000!

I am sure the advice from my adviser is good and well intentioned but I cannot trade the overall portfolio losses in exchange for it.  I will seek an adviser who charges by the hour when I have very direct questions that are out of my comfort zone.  Life events such as college tuition, retirement tax planning, and sale of a business are areas I will need help.  For the moment I believe I am perfectly capable of using low cost Vanguard index funds at .05% to meet my goals.

I’ll be writing a follow up post about rolling over my old 401k and which funds I chose and why.

Remember your due diligence when working with advisers.  They use percentages for psychological reasons, but when you actually do the math you will learn that 1% is a lot bigger than you ever thought possible.

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