Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
New DOL Retirement Security Rule will require advisors to act as fiduciaries for retirement advice. Rule will affect 401k/403b to IRA transfers, high-fee products, purchases of annuities, etc. Starting from 9/23/24, advisors must disclose that they are acting as fiduciaries, and all aspects of the Rule must be implemented by September 2025. This may limit advisors who can provide retirement advice; e.g. RIAs must act as fiduciaries, but other licensed advisors/brokers can use diluted Reg BI or weak suitability standards.
A retiree pays about 1% (plus or minus) advisor fee annually on their entire portfolio balance.
So, a $1M portfolio would net the advisor about $10K/year in advisor fees.
Let say, at retirement, a retiree decides to take a 4% "safe withdrawal" from that $1M portfolio. That would be a $40K withdrawal on that $1M portfolio.
Collectively - Advisor fee WD ($10K) + Retiree WD ($40K) equals $50K. So this retiree is actually taking a 5% withdrawal.
This advisor's 1% fee (on your total portfolio balance) is effectively 20% ($10K/$50K) share of your "retirement withdrawals" for the year. Or you could say that $1 dollar out of every $5 withdrawn ends up in your advisor's pocket. Of the $4 you are handed, $1 will go to Uncle Sam (@25% tax bracket).
For those with Advisor's:
How often does your advisor talk with you about their advisor? What risk does your advisor take compared to the the risk you take? Remember the advisor fee is paid on the portfolio total balance, not based on the gains (or losses) of the portfolio’s performance.
The math is even more depressing when you calculate the lost opportunity cost that these annual 1% advisor fees caused during your entire accumulation phase of life.
Even a 1% fee, over a lifetime of investing, can significantly reduce the value of a portfolio. Using Vanguard data, we know that from 1926 through 2019 an 80% stock and 20% bond portfolio returned 9.7% a year. Let’s imagine we invest $1,000 a month over a 40-year career. Using this savings calculator, we know that the portfolio would grow to about $5.8 million.
Yes, compounding is a beautiful thing.
Let's now assume we pay an advisor 1% of our investments for their services. That's a standard fee in the industry, although you can find less expensive and more expensive advisors. The result is that on an after fee basis, our returns drop from 9.7% to 8.7%. The result is a portfolio of just $4.3 million. The one percent fee cost us about $1.5 million, or 25% of our wealth.
@bee. It took me many years to convince my spouse that there is no point in paying for advice that should more, or less, boil down to a few funds covering equities and bonds if you are dealing with someone reasonably honest.
Thanks for the link to the article. I look forward to sharing it.
Comments
A retiree pays about 1% (plus or minus) advisor fee annually on their entire portfolio balance.
So, a $1M portfolio would net the advisor about $10K/year in advisor fees.
Let say, at retirement, a retiree decides to take a 4% "safe withdrawal" from that $1M portfolio. That would be a $40K withdrawal on that $1M portfolio.
Collectively - Advisor fee WD ($10K) + Retiree WD ($40K) equals $50K. So this retiree is actually taking a 5% withdrawal.
This advisor's 1% fee (on your total portfolio balance) is effectively 20% ($10K/$50K) share of your "retirement withdrawals" for the year. Or you could say that $1 dollar out of every $5 withdrawn ends up in your advisor's pocket. Of the $4 you are handed, $1 will go to Uncle Sam (@25% tax bracket).
For those with Advisor's:
How often does your advisor talk with you about their advisor? What risk does your advisor take compared to the the risk you take? Remember the advisor fee is paid on the portfolio total balance, not based on the gains (or losses) of the portfolio’s performance.
The math is even more depressing when you calculate the lost opportunity cost that these annual 1% advisor fees caused during your entire accumulation phase of life.
Here’s a 3 year old article from Robert Berger (who I have been following lately):
how-a-1-investment-fee-can-wreck-your-retirement
Thanks for the link to the article. I look forward to sharing it.
Amen !