Episode Transcript
Brenton: [00:00:00] Your typical investment advisor may charge you a percent or more to manage your investments on your behalf. And in some cases, they're not even the ones that are doing the managing. In this episode, we talk about how the relationship works and cover when you should know if it's worth the expense or something that you can avoid in your circumstance.
Let's get started.
Brenton: Hello, my name is Brenton Harrison of New Money, New Problems, and your host for the New Money, New Problems podcast. I will be completely transparent. This isn't the episode that I was expecting, to release this week.
I know I said that we were gonna do an extension of the investment series last week, but if you're following along in the news, this is the week that the Supreme Court is set to announce what [00:01:00] they've decided on the Biden Student Loan forgiveness program. So I actually thought they would've announced it by now, and that was gonna be the episode we did, but they will have definitively announced it by next week.
So that's what we'll cover in today's episode. I want to talk briefly about the relationship between a client and an investment advisor representative. We have been stair-stepping you through the various relationships that you can have when it comes to not only how your investments are picked, but who's managing that expense and the like.
We've also talked about robo-advisors, where you establish a risk profile and based on that risk profile, there is an algorithm that makes the investment decisions for you. And I've told you that there are plenty of times where that is a sufficient relationship to have when it comes to the picking of your investments.
It's a low fee option. If you have access to other financial tools and you've covered some basic areas of your finances, then you may be able to completely benefit from. Having that RoboAdvisor at a fourth of [00:02:00] what an investment advisor representative may charge and save that money, thus saving you money on your investments over the course of however long you have that account.
One of the shortfalls, however, of using a RoboAdvisor when it comes to the totality of your finances is that the questions that they ask you are essentially the risk tolerance questions that we covered in a previous episode of the podcast.
But while those answers are instructive, they don't really do anything beyond picking the investments for that account itself. They don't tell you about how they impact the rest of your finances if you've taken into consideration the other elements of your planning.
Cuz you know, as I've said that nothing in your finances happens in a vacuum and unfortunately, if you haven't surrounded yourself with those extra resources to address those other parts of your planning, you could definitely have some serious gaps in your finances that were overlooked because you did not have that professional eye that's looking at everything.
You just had a computer that was assessing what they should choose for that one account.[00:03:00]
So there are times when there is value to adding an investment advisor representative. So what is an investment advisor representative? An investment advisor representative is someone who essentially acts in some cases as the entity that is picking the investments and making the trades for you and other scenarios, which is actually the way in which I operate they act as somewhat of a middleman. They are bringing to the table third party managers to which you may not have access unless you come to them through that investment advisor representative. So let's go into what those types of advisor can be. If you have the type of advisor that's picking accounts on your behalf, then you're essentially paying them. They are assembling the portfolio for you. They are walking you through what's included, why they included it, on a quarterly basis or a semi-annual or an annual basis. They may be telling you about trades that they've made and why, and you're paying that fee from the client to the investment advisor representative.
And in many organizations, what they have offered you [00:04:00] is what's called an amp, an advisor managed portfolio.
And that's one way to have professional management experience at a lower cost than actually the way that I charge. I charge as an investment advisor representative that chooses third party investment managers to bring to the table, and that adds an extra expense.
If you're looking at the relationship where that investment advisor is picking the investments themselves, you might pay them a percent to manage assets. That's kind of the standard fee. Some people will charge 1% for assets under a million dollars or 1.25, or in some cases 1.5% for assets under a million dollars.
So if you have a hundred thousand dollars account and they're charging 1%, you're paying $1,000 to have access to those services. And if your account grows to $150,000, then in that scenario, you're paying $1,500 to the investment advisor.
So that 1%, I won't say standard, I'll say typical fee is something that you might also see decrease the more money that hits the account. And when that happens, it's something called a fee [00:05:00] breakpoint.
So it's a period at which your investments exceed a certain point, and every dollar above that breakpoint is charged a lesser fee. As an example, you might have an advisor that charges 1% of all assets below 2 million. And from everything from 2 million to 5 million, they might charge 0.75%. So it's not 0.75 on the whole account.
It's 0.75 on the dollars exceeding 2 million going up to 5 million, and then on 5 million or more, they might charge half a percent. This is the effect of fee break points in action. Which serve to lower the average cost you're paying for the fees to your investment advisor over time. But in that relationship, you pay that directly to them, and that's the expense.
When you operate as I do, where you use third party managers, there's actually two layers of fees. You are paying me as the investment advisor representative, and you are also paying what's called, in many cases, a program fee [00:06:00] or an account fee to a third party manager to come to the table and make those investment decisions on your behalf.
Now, many third party managers are companies that might manage pensions. They might manage endowments, they might have huge relationships where typically if you are a company that wanted to have them manage your assets, you might have to have millions and millions and millions of dollars. But what these third party managers often do is that if you have a client that comes to them through an investment advisor representative, they will lower that minimum.
And make it, I won't say an approachable price point, but a lower price point than what they have for their typical institutional investors. Now, there are third party managers who will let you have access to their services for as low as $10,000. There are also third party managers who won't accept clients, who have a household account size of less than a million dollars.
So there's a wide range amongst these entities. There's also a wide range of services that they provide, as you can imagine, [00:07:00] based on those minimums.
So as an example, if you have an investment advisor in that scenario, who's charging you a percent and then you have a third party manager who's charging a program fee or an account fee of 0.25 or 0.4%, then that client may be paying 1.25, 1.4%, and the cost can really add up.
And if you're looking at this and wondering, well, Brenton, if it adds cost, then why don't you just manage the investments yourself?
The fact of the matter is, that's not my strong suit. You have to know the things that you do and don't bring to the table as the advisor. And one of the things that I know I bring to the table as an advisor is the ability to sit down and work with the client on the emotional elements of navigating the process.
One of the things I know I'm not good at is determining when is the exact time to sell index fund or ETF fund ABC.
What that does, however, as an advisor is because those costs can add up. It puts me in the scenario where I have to be radically transparent with my clients when I'm telling them when it is or is not worth paying that [00:08:00] fee, and believe it or not, even from someone who manages and gets paid to manage these investments for a living.
There are plenty of periods where it isn't appropriate to add that fee, but there are also plenty of periods where it makes perfect sense depending on that client. And after the break, we'll go through some of those scenarios.
[00:09:00]
Brenton: When it comes to people who may not see much value in adding the expense of an investment advisor representative, as I said, it's mostly people who have access to similar resources in other areas of their life. There are some, financial advisors who don't charge a separate fee to oversee investments.
They just charge a planning fee. Which is something that we also do in many occasions. There are others who might just have access to advisors through their employment or things of that nature, and in those scenarios, you may not need to add that extra expense that comes with hiring an investment advisor [00:10:00] representative. But to me, when you get into the periods where it is worth it, it often has to do with something called fiduciary advice and the value that it brings.
Now when it comes to what people see online, when they type in fiduciary or fiduciary rules, when it comes to being an investment advisor, they often see reference to something that says A fiduciary is someone who is required as an advisor to put their client's needs above their own needs When making a recommendation. And it's easy to see that and think that being a fiduciary just means that a court of law is forcing you to be a good citizen and not screw someone over.
But that's not really what it means in my opinion, in terms of the value of having a fiduciary. What a fiduciary's role is, is to make sure that whatever recommendations that they make are not just appropriate at the time that the recommendation is made, but that they're continuously appropriate.
Now both parts of that, the start of the relationship and the continuity of that relationship and its appropriateness are extremely important.
Let's begin with the start of the relationship. There [00:11:00] are plenty of people I come across who by just fear of action or based on their money stories that we've talked about, the things that just keep them up at night, they will not take action on an investment account unless they have assistance.
They may be the type of person who just feels they need to have 12 months or 24 months expenses set in cash. And if somebody doesn't come and tell them, Hey you have significant dollars here that are sitting and not working on your behalf, then they will never open that investment account. You have others who may just be so afraid of going through the process of picking an investment or so overwhelmed with the busyness of life that they just never get around to it.
And in years where there's losses, maybe they feel like that's a good thing. But in years where there's substantial gains, which over the course of history there are plenty more years in the market where there are gains than losses, it's a real missed opportunity, and that inaction is something that has a cost to it.
So the first thing an investment advisor can do in these scenarios is give [00:12:00] them the tools to take action. That could be the confidence that's needed to let them know that putting their money in the market doesn't mean that on a scale of one to 10, they're automatically going to a 10. It could be the ability to let them walk through a risk tolerance profile and understand that the investment profile for this non-qualified account may not need to be as aggressive or the same type of investment as what they have in their 401k through their employer.
But it's also the benefit of having that investment advisor go through the rest of your finances to ensure that it is appropriate given the status of your wealth journey when it comes to your insurance planning, your estate planning, your tax mitigation strategies.
All of those things a proper advisor is trained to come in and make sure that they're working together and that they're not bumping heads. Everything needs to be working to the same objective.
So at the beginning of the relationship, if you're paying that human advisor a fee that may be four times or more what you're paying the computer, they should not just be asking you the risk tolerance questions.
They should be [00:13:00] asking you about the status of your relationships at home. They should be talking to you about how you should name the beneficiaries on that account. They should be helping you evaluate the investment managers that you have at your disposal, including them, and they should be able to make sure that you can articulate back to them the reason you're choosing that investment and why it's appropriate, because those are the things that can make it worth the expense at the relationship's infancy.
Now the power of the ongoing relationship is that your needs will adjust over time. You will have relationships that come and go over time. You will have equity compensation, you will start businesses, and all of these things are things that impact not just those elements of your finances, they also impact what you should be doing in that investment account. And when you have a fiduciary advisor, they are legally required to meet with you at least once per year, to not just assess the performance of that investment, but also those other elements of your finances.
Now, that's not something that you see with a RoboAdvisor, with a RoboAdvisor. Once a [00:14:00] year, they'll send you a questionnaire that is, again, a glorified risk tolerance questionnaire to make sure that that account is okay, but a true fiduciary is going to go through the whole picture to make sure that you're in good standing.
Now, in all scenarios, is it worth that added expense?
Of course not. If you think about it, if you have a million dollar account with someone and they're charging you a percent, that's $10,000 per year that you're paying them, and you have to think about that relationship and see is the value that they're providing me right now worth that expense? And I'll tell you that's a two-way street. It's on both of us to assess on a yearly basis and say, are you really getting the juice out of the squeeze?
Or is this a, or is this a relationship that simply run its course?
But there are also plenty of people I can point to where, when it comes to the things that just naturally occur in life, the value of having a trained professional beside you, who has not only seen it happen in your life, but has seen it happen in dozens, if not hundreds of other people's lives to be able to assess the things that could or could not happen [00:15:00] is invaluable.
And when you think of the percent that you're charging, I can tell you that in many cases you may be underpaying that advisor, but you have to make sure that this situation stands on its own two feet. Am I assessing what I need? Am I assessing what this advisor brings to the table? And not just when it comes to the services they offer, but truly the relationship that you have with that person to know that as your life changes, they are the right person to be beside you. And that by having them beside you, what they're charging you is worth the expense. So I hope this episode was valuable to you. Next week we will be talking about the status of the Biden Student Loan forgiveness program and what it means to federal student Loan borrowers, and I hope you will be here to tune in then.
See you soon.
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