The Uncomfortable Truth About Financial Advisors

20:46So that also impacts the financial advisors operating this way.

20:51Brian Preston:So where the hourly model has some shortcomings, enter in the retainer or the flat fee model. And this is a little bit different. Rather than tracking the hours that you're spending, there's an agreed upon scope of work and an agreed upon fee that that will cost. It can be one time or in a lot of circumstances, it's an ongoing flat fee. And usually this can be anywhere from$2 ,000 to$7 ,500 a year. But for more complicated engagements or larger scopes, it could even be up as much as tens of thousands of dollars a year. Yeah. What I do like about this is it's nice and it's appealing to have fixed costs.

21:25And I also like that if think about if you're a younger person, big income, but you just haven't had time to build up assets and you don't have assets to manage necessarily, it is nice that this is available to smaller asset sizes if you needed that type of advice. The only thing is, is that there is some type of the con wise, there is some friction in the fact that it's less likely to be concierge service because look, they've put boundaries on how much of a scope that you can do in projects. There's a defined scope of work. There's a defined, and then there's also the incentive volume. Because if you have set where the limit is on the relationship, that means there is a goal to take on more and more clients.

22:04And there could come problems when it comes once again to scaling of that business model.

22:09Brian Preston:And now there is a time and place where the flat fee structure does make a lot of sense. And if that's specifically what you're looking for, if that sounds like that might be a fit for where you are, keep listening because we actually do have a solution to share with you there. And then there's the third fee model. And this is one you hear us talk about a lot, because this is what we do here to Bound Wealth Management. And it's the assets under management fee model. And what that means is the way that the advisors compensate is based on the size of the portfolio or the size of the assets that they are tangibly helping you manage.

22:41Yeah. And this is, you can imagine on the pro size, the aligned incentives, meaning the more money you make, the more the advisor makes. If the account loses value, the fee also comes down. It is more likely going to be more of the concierge services that we talk about. It's more of a premium product, so there's no limits on the service necessarily. And then what we talk about decreasing effective fee. What that basically means is the bigger the account size, there is a bigger and bigger discount based upon the assets that you are having managed.

23:08Brian Preston:But there are downsides. One of the downsides of the assets under management model is that it does generally require a focus on higher net worth clients. In our world, we want to be able to build intimate, deep, ongoing relationships with our clients. The only way to be able to do that effectively is if you have some sort of minimum fee service or minimum level of client that you work with. And because of that, there tends to be a higher cost. Again, this is holistic planning, not just looking at investments, but looking at the entire financial picture to bring it all together. So those are the three different fee-only models.

23:42Brian Preston:That's how much an advisor could cost. So now let's see. Okay. When you think about the fee, how does that ultimately affect you? Let's break it down. Let's use a common example that we see in social media all the time. Let's assume that you have a do-it-yourself investor. And this person has a portfolio of a million and a half dollars and they decide, hey, I'm not going to hire an advisor and I'm going to have a diversified portfolio. And over the longterm, I'm going to make an 8 % rate of return. Well, if that do-it-yourself investor invest that million and a half dollars at 8 % over a 25 year time period, they would have over$10 million by the time they get to the end of that 25 years.

24:18Brian Preston:That is remarkable. Do-it-yourself investors have the potential, have the ability to do that. We said at the beginning, we don't think that every single person needs to hire a financial advisor. Now, here's where social media always goes wrong. They say, okay, but if this do-it-yourself investor would have hired an advisor and that advisor would have charged a 1 % fee, rather than this client ending up with$10.2 million, they would only have$8 million. That's a 22 % haircut on how much money they would have had. Now, let's pause there for a moment before we even talk about anything else. If that were your circumstance and that were your situation, and on your own, you could have 10 million, but then you hire an advisor and you're only gonna have 8 million, you should never do that.

25:06Brian Preston:That doesn't make any sense at all, and we would agree with that. But when it comes to this illustration, there's something you ought to know. Well, first of all, everybody should know is that most people we work with, millionaire and beyond, they can vote with their feet and move their assets. They're not idiots. This is really smart people, and every year they re-sign back up. There ought to be his first clue. But the other thing is that really irks me about when people do this math, it's a straight-up math crumb. It's because they assume, you know, and I alluded to this earlier, is that if you've got a million dollars, but now you've grown it to$10 million, and they're doing the math on their 1%, just assuming it's a flat 1%, it's probably because it's easier to do that math and it creates this huge spread.

25:58But it's back to my point. When you show up with more assets, just like when you go to Costco, and you can take it back to when toilet paper became the most premium precious thing in the world that it was on nightly news. It's the same way with asset management. The more you show up with, the cheaper your fee is. Guys, you show up to a financial planner, a good holistic planner, and you tell them you've got$15 million, watch how good they can sharpen that pencil in their fees. And that's the thing is it's a math crime to assume that people are going to be paying 1%. There are break points. There are discounts.

26:33There are effectively lower fees the more money you have and you get invested. And people kind of, I don't know why they skip over that. It's a little disingenuous, but it does always get skipped over. So for example, if you want to take a bound,

26:46Brian Preston:well, this is our fee structure. We charge one and a quarter percent on the first million, 1 % on the next 2 million, 0.75 % over the next 2 million, and then half a percent over 5 million. So the math crime, number one, is they didn't factor in that our fee actually decreases effectively through time. But the bigger math crime, and I think this is the more egregious one, if all you do is hire an advisor and all the advisor does is take 1 % of what you would have otherwise made, then that's not a favorable trade-off. All you're doing is spending money, getting nothing in return. Because when you hire an advisor, you ought to get value for that service you're paying for.

27:26Brian Preston:So we said, all right, Russell did this analysis where they said that on average, an advisor can add 4.9 % annualized to the value of a client. We said, what if we just took half of that? Cut 4.9 and half, so we have 2.46 % and factor in the effective fee. So in reality, the client with an advisor ought to be able to do better than he can do on his own through all of the different areas where an advisor adds value. In that scenario, after you fact in the effective fee, after you fact in the value add, this client over a 25 year time horizon would actually end up with over$14 million. That's 39 and a half percent higher than they would have ended up with on their own.

28:13Yeah. You know, this is what I'll, you have to be careful when you just look at raw stuff and that's what, cause it's back to the, the, the, what is the value that an advisor is doing? And I love, cause I look, I've had even my own clients who fall and pray to, they see some of this stuff on social media. And I had a client who'd been with us for 15 years. And I literally feel like I have dragged this client into financial independence because he's not a natural saver. He's not very good at understanding deferred gratification. So every time we've had our meetings throughout the years, I have really held him accountable and squeezed a little bit more out of him.

28:48But fast forward, now he's a multimillionaire, even though he never made huge incomes and I've pulled him through for the last 15 years that he's been a client. He's like, man, I just watched something. I'm getting close to retirement. I see how expensive his fee is. And I was like, pause. I was like, we're about to reach where we're going to be doing annual Medicare analysis. We're going to be doing Roth conversions. We're going to be, and I named off this whole list of all the things, plus the annual stress testing that we do for our, and I was like, you realize that we have grown this thing to a level of value now that you're about to get even more value out of this.

29:24This is the worst time to, because, and after I showed that, he's like, you know, I didn't even think about that. I was just thinking about this analysis I saw where somebody said, this is what you're paying. It's also about what you're actually receiving in the services. Like I said, a lot of these people are smart people. They wouldn't do this. And I tell you that because I'm unapologetic that this is how we get paid because just like your time is the thing that helps compound growth and helps you build wealth, it's also your limitation. You know, I am no longer a young man that I'm limitless on my time.

30:00We only can work with so many clients. And you'll find, I think when you interview people, We were just in some calls in the last week where you get in a room with attorneys, accountants, and others, and you realize, oh, my God, how many people can you help speak the language and make sure that this person's not trying to nerd out and show how smart they are from ego? This person's trying to show somebody's got to be humble in this room and actually help the client understand what each of you are saying and then bring it all together. And that's what I love we get to do. And I'm not trying to, I say this because I'm not, it's not a defensiveness.

30:35Don't mishear this. It's more about I'm so passionate about what we do that it breaks my heart if you think that people can just charge fees and not add value and it's going to end in a successful place. And that's just not where it's at. And I think that's probably a great segue, Beau, to our next uncomfortable truth. And this is what makes us unique. We don't think everybody needs an advisor. Hence, back to the origin story of why the Money Guy Show even exists.

31:01Brian Preston:Yeah, if your life is relatively simple or you're a do-it-yourself or you have a special affinity for this, it's why we have all the free content out there. It's why there are books and YouTube channels and courses and deliverables and the financial order of operations. All of this is out there to help you do money better. There's advice on how to pay off debt. There's advice on how to save for color. There's advice on how to allocate a portfolio. And a lot of that stuff is out there for free. So that's why I say a lot of folks, up until a certain stage, you might not need a financial advisor.

31:37Brian Preston:But some people say, okay, I hear you. And I believe that. And that was true. And I have been doing it yourself, but I'm just kind of the place where I want that second set of eyes. Or I want to make sure that there aren't things that I'm missing, or I need to figure out how do I answer these questions that I have? I'm not quite ready for that full service thing yet. I'm not quite ready for that concierge white glove treatment, but I would love something to help me do a little better than I am now. I'm not ready for taking the relationship to the next level. I just want to figure out how to level up my finance.

32:12Brian Preston:And that's why, or that's one of the areas where the flat fee model makes a lot of sense. You can start as a do-it-yourselfer, but then you can move to a planning forward, flat fee type service like Level Up until you're ready to ultimately go to the full concierge, holistic, all-in-one approach when you take the relationship to the next level. That's what I love is I feel like we reach people in all the places they might be. If you're just at the beginning of your journey and you just want to maximize what's going on in your mind, please go take advantage of our free stuff. You know, we listed the financial order of operations because it is your all-terrain, all-weather vehicle to help you know what to do with your next dollar, but go to moneyguy.com slash resources.

32:55We'll load you up with all kinds of free stuff and it's going to help you out. If you have reach, or maybe you're one of those unique people that you have a great income, but you just, you're not quite there. Maybe your assets are below 500 ,000, but it's coming in quick and you just don't know what you don't know. You need more of that doctor or mechanic type view. Go check out our level up, you know, because that's one of the things we're trying to help people do with a fixed fee type option. And then, of course, when you get to a point where your life is complex and Bo's going to give you more signs that you need a financial advisor, I want you to, this is where I'm hoping you will remember what a bound wealth has planted with all the seeds because your life will get complex when you reach some level of success.

33:38Brian Preston:Well, that's a great question. How do I know or what's a sign that it might be time for me to hire a financial advisor? Well, number one, complexity finds you. When we start out, our life is fairly simple, but inevitably, as life goes on, as our wealth builds, it naturally gets more complex. We don't really understand or know all the things we don't know. Or maybe you arrive at this conclusion that, man, the numbers are so big that the decisions I make right now carry a lot more gravity than they used to. If I make a uh-oh on$1 ,000, it's probably not going to change my life. But if I make an uh-oh on a million dollars, now it's going to be life-changing.

34:16Brian Preston:or, and again, this is something that a lot of folks, as you get into your 30s, get into your 40s, and even into your 50s, you recognize that the things I know that should be important, like doing my estate documents, reviewing my tax return, rebalancing my portfolio, they just fall on the back burner because I literally don't have enough hours in the day. If you find yourself at any one of those places, or maybe you find yourself at multiple of those places, that might be a sign that it's time to think about getting a professional to step in and help. Okay, let's go ahead and transition. So somebody says, yeah, I'm realizing I need to take the relationship to the next level.

34:51I don't know what I don't know. What do they need to look for when it comes to finding a good financial advisor? Because as I've already alluded to, they're not all created equally.

35:00Brian Preston:Well, I think one of the things you can look for that's an easy litmus test is, are they credentialed? What is the substantiating thing that says they actually know what they talk about? And what's difficult is there's an alphabet soup of a thousand different letters out there that people could have behind their name. So you want to make sure the ones that they have behind their name actually matter and actually what you're looking for. Some great ones to look for, certified financial planner, the CFP designation. That's kind of like the gold standard of someone who wants to take a holistic approach to financial planning.

35:30Brian Preston:But then there's also investment specialists like the charter financial analyst, tax specialists like a certified public accountant, insurance specialists, the chartered life underwriter, or even the chartered financial consultant, which is a slightly lighter designation. all of these would be ones that would be materially substantive to say this person is actually doing financial planning and there's a high likelihood they know what they're talking about. The next question, look, we did just spend a lot covering the fees, understanding. I think there needs to be some transparency with what you're paying.

36:01So what's their fee structure? How do they get paid? What are the conflicts of interest? Look, everybody's got conflicts of interest. So you just need to know that. And it's okay as long as you have a conversation to understand what are each business model's conflict of interest and how do you overcome that to make sure you're getting the best advice for your personal situation.

36:22Brian Preston:And then with the individual that you're looking at, do they meet your needs and your money beliefs? Are they solving the role? Do you need a mechanic? Do you need a doctor? Do you need a personal trainer? Is the advisor that you're working with, are they going to be able to satisfy that? Or do you need multiple of those at one time, is that person going to actually be able to deliver on that? And then I've already talked about this earlier, but it's worth repeating is what's the number of clients they work with? Because as I've already shared, we're pretty transparent in the fact that we believe in the Dunbar principle, 150 relationships is about all a human can do.

36:57So that's a good question to ask somebody because you're going to be, it's going to be alarming. You find out they're working with 450 households. You're like, well, where do I fit into this from an actual relationship? Or is it okay that they have a ton and this is more of a transactional thing. I just want you to know what you're getting into on the front side of it.

37:14Brian Preston:How do they communicate with you? What's their style? Are they deep in the weeds and spinning your head or can they break down complex topics into simple, easy to understand metrics or are they just totally surface level and there's no depth? You need to make sure that the person you're working with matches you where you are. Yeah. And then the specialization. Look, we've already shown you when you, when you look at that study is how does an advisor add close to 5 % better long-term value? 25 % is how good they are with taxes. Taxes, and I'm always amazed when I talk to other advisors and you find out how woefully unprepared, and maybe it's because I have 16 years of tax prep and reviewing and actually representing clients before the IRS, that that's in the DNA of our firm.

37:59But a lot of people just don't know what they don't know. And it's, you see the same thing when you talk to attorneys, when you're structuring the estate plan. So figure out where does specialization, if that ties into your need, whether it's tax planning, whether it's estate planning, and even retirement education planning, make sure the person you're working with has that expertise.

38:17Brian Preston:And then as an advisor, do you have aligned views on how money works? Some advisors believe a lot in philanthropy and some don't and some advisors, this is not a statement on, okay, was this person aligned with me politically or something like that? But did they take the time to understand what it is that you care about, what it is that you value, and are they able to deliver advice that can allow you to use your money to be the thing that you want it to be, to reach the life goals that you have? I hope you weren't feverishly taking notes because we've made this easy for you. If you want to go to moneyguy.com slash resources, we actually have eight questions to ask your financial advisor.

38:56This is going to give you a huge leap forward in trying to make sure you can navigate this process to figure out which business model or what type of advisor is the perfect type of financial advisor to make you live your best life and have that piece of mind that we talked about earlier.

39:13Brian Preston:Not all financial advisors are created equal. Not all clients are created equal. Make sure you understand what it is that you're looking for, why you're looking for it, and what would be a great fit for your financial circumstance. And then I'll close it out and say the obvious thing. Look, we love what we get to do for a living. I think you can tell we have hearts of educators. That's what the start of this in 2006 was. I really did feel like the market and the public had a need, that they needed somebody just telling them, how does money work? Tell me the real stuff. And then I realized this was not done as a business model.

39:46It was done as truly an education play, a passion project. And then I realized after starting this in 2006 and 2008, a number of you started reaching out and saying, hey, I like your philosophy. I like how you process and think about money. How can I work with you? And then fast forward to, I think it was like 2013, 2014, and we had an advisor say, are y 'all not asking for business on the show? And I was like, no, I'm too worried it's going to sound like an infomercial. And I'm like, no, I think you've done enough goodwill with the show that you can start asking for business. And then we went to a whole nother level.

40:18So that's why now we're unapologetic is that we know if we trust in our skillset, you see our knowledge, We lay it bare for you with our passion, our expertise, but we know when your life gets complex, there is a better way to do money, and we're going to leave the porch light on for you. And if we invite you, if you've learned, if we planted that seed of knowledge that created any ounce of your success, when you come to the point with your complex life that you want to take the relationship to the next level, give us a shot. Go to moneyguy.com, become a client. We welcome the opportunity, and we work with clients all across the country.

40:51I'm your host, Brian, joined by Mr. Bo, Money Guy team. out.

40:55Brian Preston:The Money Guy Show is hosted by Brian Preston and Bo Hanson. Brian and Bo are partners with Abound Wealth Management. Abound Wealth Management is a registered investment advisory firm regulated by the Securities and Exchange Commission in accordance and compliance with the securities, laws, and regulations. Abound Wealth Management does not render or offer to render personalized investment or tax advice through The Money Guy Show. The information provided is for informational purposes only, may not be suitable for all investors, and does not constitute financial, tax, investment, or legal advice.

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