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Steve Braun
Financial Adviser
734-844-8770
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It's your
money. The more you keep, the better off you'll be.
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Are Your Assets Costing You Money?
(Click
here to
download a copy of this article to save or print.)
Financial advisers don't work for free. Clients understand
this and don't mind paying reasonable fees for services
rendered. The structure of those fees and the manner in
which they are paid, however, can have a significant impact on
the advice clients receive and on their pocketbooks. (See
Are There
Conflicts In Your Portfolio? for a related
article on conflicts of interest.)
There are two basic fee structures used by most "fee-only"
financial
advisers:
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Annual
Asset Management Fees - charging a
percentage of the assets under management
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Hourly Rate - charging per hour of
work
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It
is estimated that 95% of all "fee-only" financial advisers
use the asset management fee structure for compensation and
here's why.
Asset Management Fees: The Cost
Annual asset management fees vary from 0.5% to 3.0% of
assets under management, but typically
average in the 1.0% to 2.0% range. The following table outlines
the costs (in red):
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Annual Asset Management Fees Paid |
| Asset Value |
$100,000 |
$250,000 |
$500,000 |
$1,000,000 |
| 1% Fee |
($1,000) |
($2,500) |
($5,000) |
($10,000) |
| 2% Fee |
($2,000) |
($5,000) |
($10,000) |
($20,000) |
Asset Management Fees: The
Devastating Impact
These
fees are paid every year. Think
about the devastating impact on your overall wealth.
Example #1 - Let's say you have $500,000 in assets and are paying
$5,000 per year in asset management fees (at a 1% rate). You
are also contributing the maximum amount to a Roth IRA for
you and your spouse (that's $3,000 each for a total of
$6,000 in 2003). That means you are essentially suffering
a staggering 83.3% loss on your Roth IRA contributions ($5,000/$6,000). How long can you afford to do
that?
Example #2 - Let's say you have $250,000 in assets and you are paying
$5,000 per year in asset management fees (at a 2% rate). You
are also contributing $10,000 each year to your 401-k plan.
That means you are essentially suffering a 50% loss on your
annual 401-k contributions ($5,000/$10,000). Even the 1% fee
will cost you $2,500 or a 25% loss on your annual contributions. Is that what you're working hard to save
for?
Example #3 - Let's say you are a recent retiree looking forward to the
good life. You're not super-rich but you're not hurting
either. You're wondering whether or not you'll have
enough money to survive a long life without scrimping on
your lifestyle. How much can you safely spend each year? Here's the conventional wisdom:
The normal threshold for retirement spending is typically 4%
of your accumulated assets. That is, under most scenarios
you can safely spend 4% of your accumulated assets and not
go broke before you die (depending on your longevity, rate of
inflation, and investment returns, etc.). If you spend
anything over 4%, you increase the odds of going broke
before you die. Anything less than 4% is considered pretty safe.
So, if you are paying 1% in annual asset management fees to
your financial adviser, you are effectively
giving up 25% of
your wiggle room to stay under the 4% threshold. That is,
your spending threshold is lowered to 3%. Does it
make sense to do that?
Example #4 - Finally, consider how asset management fees may devastate
your portfolio over the long-term. The table below details
the impact of annual asset management fees over a 30 year
period (in red), based on average annual rates of return of 6%, 8%,
and 10% in a tax-deferred account.
|
Long-Term Asset
Management Fee Impact |
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Annual
Fee |
6% |
8% |
10% |
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$2,500 |
($209,504) |
($305,866) |
($452,360) |
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$5,000 |
($419,008) |
($611,730) |
($904,718) |
If
you are paying just $2,500 in asset management fees
every year for 30 years, it will cost you $452,360 at an average annual return of
10% over 30 years. That's a lot of retirement money to give
up. Is the service you receive from your financial adviser
going to be able to replace that money?
How Can You Avoid These
Extraordinary Costs?
At
Liberty Financial Planning, we believe that compensation
based on an hourly rate for services rendered is
just more sensible for clients because it saves them money
versus the traditional commission-based or asset management
fee structures. You keep more of your hard earned money
working for you.
Give Liberty Financial Planning a call today for a free
initial consultation to see how we can serve you.
We
appreciate your business!
Think we're nuts? Check out these related articles to see what others have to say:
1. Your Financial Security - How to Get It Back,
article condensed from Arthur Levitt's (former SEC Chairman)
book, Take On the Street, Reader's Digest, November
2002.
2.
Morgan Stanley Fund Sales Get Close Look, Tom
Lauricella and Randall Smith, Wall Street Journal, April 1,
2003.
3. Getting Going, column by Jonathan
Clements, Wall Street Journal:
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Finding a Financial Adviser Who Won't Sneer at Your
Little Nest Egg, February 19, 2003
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Here's Some Advice Worth Paying For: Most Financial
Planners Cost Too Much, August 7, 2002
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If You Think Picking Stocks Is Hard, Just Try Choosing a
Financial Adviser, May 22, 2002
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