Understanding the math behind AUM
Jeff and Susan have $460,000 in two brokerage accounts. If they live to age 85 — for another 35 years — without making any further contributions to these accounts, and assuming a conservative 5% return, that 1.24% fee adds up to a whopping $863,170, according to Sethi.
That’s because fees grow as your portfolio grows.
Right now, the couple pays about $6,000 a year in fees — about $500 a month. But fast-forward 35 years — 420 months — and they won’t be paying just $500 a month. Rather, they’ll be paying 1.24% on a much larger portfolio, averaging about $2,054 a month, according to Sethi.
“This is what happens with a 1.24% fee on a modest $460,000 portfolio that’s not even being added to,” says Sethi. “That 1.24% fee seems modest in the early days, but it’s back-loaded.”
Instead, Jeff and Susan could invest their money in a low-cost ETF or index fund and get a similar return — but with that extra $800,000 in their pocket funding their retirement, says Sethi.
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So what can you do if you’re working with a financial adviser who charges you a percentage of assets and you want out?
The fees Jeff and Susan have paid up until now are a sunk cost. But the biggest step in this process is realizing you need to make a switch, says Sethi. The rest are just details — though it could mean uncomfortable conversation, especially if you’ve been working with the same financial adviser for many years.
Sethi recommends explaining to your financial adviser — preferably over email — that you’ve decided to move your brokerage account because the fees you’re paying are not part of your financial goals. By transferring your brokerage account in-kind, which means moving them as-is from one account to another, “you’re not selling them and triggering a taxable event,” he said
However, you may want to continue using a financial adviser. If you do, “you want to pay a flat fee, never a percentage,” he said.
More: How to choose an online financial advisor
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