Understanding the Impact of Financial Advisory Fees

Advisors' fees impact portfolio value over time; tiered fees with added value can significantly increase the terminal portfolio value.

### The Impact of Financial Advisers on Portfolio Value Over Time
* 💰  A common belief is that financial advisers can significantly reduce portfolio value over time due to fees, with a **1% fee potentially costing a substantial portion of the terminal value**.
* 📈  However, this belief is based on simplistic assumptions that do not reflect real-life scenarios, such as **fees decreasing as the portfolio grows** and the value advisers provide in terms of **structuring, decision-making, and behavioral coaching**.
* 🔄  A more realistic example considers an adviser adding **2% annually** (half of the average **4.2% found by Vanguard**) with a tiered fee structure that **decreases as the portfolio size increases**.
* 💼  In this example, a do-it-yourselfer with $10.2 million after 25 years would end up with **$113.1 million with an adviser**, representing a **275% increase in terminal portfolio value**.
* 🏦  Advisers can help optimize tax efficiency by structuring investments based on **tax location**, timing withdrawals to **minimize taxes**, and planning for **estate and legacy goals**.
* 💡  For those who feel they have reached a level of success but have blind spots or lack knowledge, the expertise and experience of a financial adviser, who has spent **decades in the field** and **helped numerous clients**, can be **invaluable**.

[Music], and I want to walk you through some mathematics that we see out there in the social media world that frankly is pretty frustrating, right? And I think this is really, really interesting. Look at how fees affect you. We're specifically going to talk about assets under management. So maybe you've seen this: you have an individual that has a $1.5 million portfolio, and someone says, Okay, well if you have a million-dollar portfolio and you can earn 8% over the next 25 years, it's going to turn into X. Well, if you add an advisor, that advisor is going to cost you nearly a quarter of the value over the life of your relationship. And so we actually ran the math on this. We said, Okay, someone that starts with $1.5 million earning 8% over 25 years is a do-it-yourselfer. At the end of that 25 years, their portfolio without any additions would be worth about 10.2 million. That's the way the math plays out. And so then what this is: Oh, if you had an adviser, and that

advisor char a 1% fee. By the time you got to the end of your 25 years, your portfolio is only going to be worth seven, almost uh, 7.9, almost $8 million. That advisor, that 1% fee, took 22% of your total terminal value. Yeah, I mean, I love how simplistic that is, but the problem is it's excluding some pretty big assumptions. As you've already shared, the fees go down the bigger you are. So this person, as they started having success in their portfolio, reach 2 million, 3 million, 5 million, you're going to see some prices of it comes down substantially. This assumption only has value if you assume the fee stays 1% the whole time, even as you're getting bigger. And then you also assume you got no value out of the relationship, meaning that you should have just stayed a do-it-yourselfer and maximize this journey. And we kind of agree with you if your life is simple and you don't feel like you're ever needing to reach out to

an adviser for proper structure, making the right decisions, protecting you from making that fear and greed decisions that sometimes derail us. Then what are you doing, but there are a lot of faults with the math of the way. Now the math is right, but it's kind of like an error way works practice. Yeah, it's the, it's it's it's still broken from reality because this isn't the way the math is really done in real life. Okay, so let's see what a more realistic example would look like. You have the do-it-yourselfer, and then you have the poor example of the 1 fee. What if you have an advisor, and that adviser has a tiered fee that decreases as the portfolio grows? And then we said let's do this Vanguard, which was the study we looked at a couple minutes ago, said that an adviser, on average, could add 4.2% over annualized over the life of working with you based on all the stuff that they're doing. And we said but you

know you guys are financial mutants so let's not even give the advisor credit for adding 4%. Let's cut it in half. Say you have an adviser because you're a really, really good do-it-yourselfer or as a financial mutant. But hiring an adviser for you will add only 2%, where Vanguard found that it would actually add 4%. How does that break down? And just so you know, because you guys are going to ask the question, we went ahead and said let's use our fee schedule. Our fee schedule here at Bound Wealth is 1 and a quarter percent on the first million, 1% on the next two, .75 on the next two, and half a percent over five. So as your portfolio grows, the effective fee that you're paying decreases. What does that actually look like through time? Well, you can see in this example, if an adviser charges a fee but is able to add just 2% annually instead of your do-it-yourselfer, ending with $10.2 million at the end.

of 25 years. That person with an advisor actually ended with $113.1 million, which is a 275% increase on Terminal portfolio value. Well, let's put something of this 'cause cost is what you pay, value is what you receive. If you're thinking about what your net result is, somebody who helps you structure your multiple million-dollar portfolio to where you know how to put your investments where they're more tax-efficient. Tax location matters. If you have somebody who helps you when you have all this tax-deferred, it's say because we all know the first account to reach million-dollar status for wealthy people is their 401K. Well, that's also probably going to be taxed at ordinary income tax rates. Wouldn't it be nice if somebody could help you structure the timing of how you're going to de-cumulate, meaning you're going to withdraw that money out in a tax-favored way where instead of you paying 37%, we can get it down to maybe even below 15%. Those things matter. And then when you

get into the estate planning the Legacy goals. This is what we're talking about. If all this sounds like who needs that, if that's not you, take the free stuff. But if you were listening to this and you say, man, I've had some success, and I am just realizing I just don't know what I don't know. I have blind spots. I also worried what happens when I'm not here. Maybe I'm the financial mutant, but my spouse is not. You can't tell me that a person who has spent decades doing this thousands of hours, helped people do this hundreds of times. There is value in knowing what your skill is that 10,000 hours versus somebody who's coming in green as they can be and wondering, hey, am I making the right decision? Who knows? Shucks, let's let it rip.

The Real Impact of Financial Advisor Fees (A Case Study)

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The Impact of Advisor Fees on Investment Portfolios

Advisor fees can significantly reduce the total value of an investment portfolio over time, with a 1% fee potentially taking 22% of the total terminal value.

However, the analysis does not account for the fact that fees tend to decrease as the size of the portfolio increases.

Additionally, it assumes that the advisory relationship adds no value beyond investment management.

The Impact of Hiring an Advisor on Investment Growth

Hiring a financial advisor with a tiered fee structure can potentially add 2% annually to investment growth.

The advisor's fee decreases as the portfolio grows, resulting in higher returns compared to a do-it-yourself approach.

In a specific example, with a 2% annual addition by the advisor, the investment could grow to $10.

The Impact of Tax Planning on Portfolio Growth

Proper tax planning can significantly increase the value of a portfolio, as demonstrated by a 275% growth in the terminal portfolio value over 25 years.

Tax-efficient investment structuring, especially for tax-deferred accounts like 401ks, can help reduce tax rates during the withdrawal phase, potentially lowering it to below 15%.

Having an advisor to assist with these strategies is crucial for maximizing the net result of investments.

Understanding the Value of Estate Planning and Legacy Goals

Estate planning is crucial for those who have achieved success and are concerned about their legacy.

The expertise of a seasoned professional in this field is invaluable for making the right decisions.

It's natural to have blind spots and worries about the future, making it important to seek guidance in estate planning.