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Jeff, 50, is a surgeon by profession. His wife, Susan, 48, is a stay-at-home mother. Although Jeff earns an enviable annual income of $665,000, the couple, who have been married for 19 years, still struggles to pay the bills.
The couple called financial guru Ramit Sethi’s podcast “I Will Teach You to Be Rich” for help (1).
After taxes, Jeff earns $426,000 per year, but he didn’t start making that much money until he was about 40 years old. As his income grew, so did the family’s discretionary spending.
Sethi noted that people can feel money anxiety and develop bad spending habits, whether they make $50,000 or $500,000 a year.
“If you feel bad about $50,000, you’re probably going to feel that way too when you’re making 10 times your income,” he told the couple.
But it turns out flashing cash isn’t the only problem. This was the missing piece of the puzzle for Jeff and Susan.
Sisi first pointed out some psychological issues. For example, Susan didn’t have a lot of money growing up, and while she often deprived herself of small expenses like pedicures, she also had a hard time saying no to her children when it came to big-ticket items.
However, Sethi said one of their biggest problems has to do with financial advisors.
In a recent YouTube video posted on Sethi’s channel, he said, “I will never pay a percentage of assets under management(2).”
As your wealth grows, so do the percentage-based fees, meaning the amount you end up paying to your advisor keeps increasing.
But Sethi clarified that he is not opposed to working with professionals, saying: “I am willing and have been comfortable hiring a financial advisor to help me and revisit my asset allocation.”
Sethi advocates a fixed advisory fee—a safer way to keep more of your investment earnings as your wealth grows.
As for Jeff, he has two brokerage accounts managed by an advisor who charges 1.24%.
“My overall feeling is that most people are good people and they’re not trying to rip us off,” Susan said.
But when she asked her financial advisor about the fees, “he told me, ‘Oh, it’s like 1 percent or so.'” I’ll never forget, his look was like, oh, it’s not that serious. “
Sethi said he knew that face.
“Most advisors make money as your portfolio grows, which is why they like older people and wealthy people because they specifically don’t understand the commission structure,” he said.
Read more: Nearing retirement but no savings? Don’t panic, you’re not alone. Here are 6 easy ways you can catch up (and fast)
If you’re looking for an advisor but don’t know where to start, you can try Advisor.com.
All you have to do is answer a few basic questions about yourself and your financial goals, and Advisor.com will match you with up to three nearby advisors. The best part? Because they are fiduciaries, they have a legal obligation to act in your best interests.
From here, you can schedule a call for free without hiring to see if they’re a good fit for you. Be sure to ask if there is an administration fee if you are concerned.
However, if you are a high net worth individual like Jeff and Susan, you may need more specialized help depending on your income level.
This is where Range can come into play. Range provides complete white-glove financial services to high net worth individuals. Traditional advisors typically charge between 0.5% and 2% AUM, or $1,000 to over $3,000 for a comprehensive advisory plan, which with taxes can add up to a sizable loss.
If this sounds like a familiar question, you can book a free online demo with Range to see if the quality of their advice matches your wealth.
Jeff and Susan have $460,000 in two brokerage accounts. If they live to age 85 and live another 35 years without making any further contributions to these accounts, and assuming a conservative 5% return, the 1.24% fee adds up to $863,170, Sethi said.
Currently, the couple pays about $6,000 a year in fees – about $500 a month. But fast forward 35 years — 420 months — and they would be paying an interest rate of 1.24% on a larger portfolio, averaging about $2,054 per month, according to Sethi.
Jeff and Susan could leverage the money by investing in low-cost ETFs or index funds to achieve similar returns, rather than using the money to pay high fees. By doing so, they can also pay much lower fees, Sisi said.
This is where robo-advisors can take some of the pressure off, especially ones that can be tailored to your risk tolerance.
For example, with Acorns, every purchase you make with a credit or debit card is automatically rounded to the nearest dollar. From here, your change will go into smart portfolios that fit your investing style. $4.25 for coffee a day? Now that’s a 75 cent investment in your future.
If you want to grow your investment, Acorns also allows you to make recurring monthly donations. You pay a fixed monthly subscription fee and a small ETF fee to invest in index funds. According to Charles Schwab, the average annual fee for stock ETFs is typically less than 0.25% (3).
Plus, if you set up a term deposit of $5 or more, you can get a $20 bonus investment when you sign up for Acorns.
Another important consideration for Jeff and Susan is their asset allocation. Ideally, they should minimize the fees they pay to advisors and investments. But they should also make sure to invest in a range of different asset classes.
For example, they may also want to invest in alternative assets such as real estate to build a diversified, risk-resistant portfolio. Commercial real estate, in particular, can offer many tax benefits to investors.
But historically, direct access to the $22.5 trillion commercial real estate sector has long been limited to a handful of elite investors—until now.
First National Realty Partners (FNRP) allows accredited investors to diversify their portfolios through grocery store-focused commercial properties without the responsibilities of a landlord.
With a minimum investment of $50,000, investors can own a share of properties leased by national brands such as Whole Foods, Kroger and Walmart that provide essentials to their communities. Thanks to triple net leases, accredited investors are able to invest in these properties without having to worry about tenant costs impacting their potential returns.
Just answer a few questions (including how much you want to invest) to start browsing FNRP’s full list of available properties.
Another alternative asset that Jeff and Susan could consider adding to their portfolio? Art.
The following examples illustrate why this investment could be a smart addition to their portfolio.
In 1999, the S&P 500 plummeted and took 14 years to fully recover.
today? Goldman Sachs forecasts a price return of 9% from 2024 to 2034 (4). Meanwhile, Vanguard offers a more conservative estimate of around 5.5% (5).
In fact, prices for just about everything are near all-time highs — stocks, gold, cryptocurrencies, you name it.
That’s why billionaires have long carved out a portion of their portfolios in asset classes with low correlation to the market and strong rebound potential: postwar and contemporary art.
This may sound surprising, but since 2019, more than 70,000 investors have followed suit through Masterworks. Now you can own a stake in the work of Banksy, Basquiat, Picasso and more.
To date, Masterworks has sold 25 pieces of art, with annualized net returns of 14.6%, 17.6% and 17.8%.
Moneywise readers get priority access to Arts Diversity: Skip the waitlist here
Please note that past performance is not indicative of future returns. Investing involves risks. Please see important Regulation A disclosures at Masterworks.com/cd
So what do you do if you’re working with a financial advisor who charges you a percentage of your assets and you want to quit?
Everything Jeff and Susan have paid so far are sunk costs. But the most important step in the process, Sethi says, is realizing you need to make changes. The rest are just details—although that can make for an uncomfortable conversation, especially if you’ve been working with the same financial advisor for years.
Sethi recommends explaining to your financial advisor (preferably via email) that you have decided to transfer your brokerage account because the fees you are paying are not part of your financial goals. By physically transferring your brokerage accounts and moving assets as-is from one account to another, you avoid “selling them and triggering a taxable event,” he said.
However, if you do want to continue working with an advisor, Sethi says, “you need to pay a flat fee, not a percentage.”
Some consulting fees are even negotiable, according to the Wall Street Journal. They recommend, “If you are considering working with a specific advisor, ask them if they are willing to adjust their fees(6).”
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I Will Teach You to Be Rich (1), (2) Charles Schwab (3); Goldman Sachs (4); Vanguard (5); Wall Street Journal (6)
This article provides information only and should not be considered advice. It is provided without any warranty of any kind.