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Jeff, 50, is a specialized surgeon. His wife Susan, 48, is a stay-at-home mom. Even though Jeff earns an enviable $665,000 a year, the couple – married for 19 years – still struggle to pay the bills.
The couple turned to financial guru Ramit Sethi’s podcast, I’ll Teach You to Be Rich, for help (1).
After taxes, Jeff takes home $426,000 a year, but he started earning that much around age 40. As his income increased, so did the family’s discretionary spending.
Sethi pointed out that people can feel money anxiety and develop bad spending habits whether they earn $50,000 or $500,000 a year.
“If you feel bad about money at $50,000, you’ll probably feel that way when you’re making 10 times your income,” he told the couple.
But it turned out that flashing his money wasn’t the only problem. Here is the piece of the puzzle that Jeff and Susan were missing.
Sethi first pointed out some of the psychological issues at play. For example, Susan grew up without a lot of money, and while she often skips small expenses like pedicures, she has a hard time saying no to her kids when it comes to big-ticket items.
But according to Sethi, one of their biggest problems has to do with their financial advisor.
In a more recent YouTube video posted on Sethi’s channel, he states, “I would never pay a percentage of assets under management (2).”
Percentage-based fees increase as your wealth grows, meaning you could end up paying more and more to your adviser.
But Sethi clarified that he is not against working with a professional, saying “I would and would happily pay a financial advisor to help me, take a second look at my asset allocation.”
Sethi advocates fixed advisory fees – which are 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 a 1.24% fee.
“In general, I feel like most people are good and not trying to rip us off,” Susan said.
But when she asked their financial adviser about his fee, “he said ‘oh, it’s about 1%.’ I’ll never forget, he made this face like, oh, it’s not that much.”
Sethi says he knows that face.
“Most advisers make their money when your portfolio grows, which is why they love older people and rich people who don’t specifically understand commission structures,” he said.
Read more: Approaching retirement with no savings? Don’t panic, you are not alone. Here are 6 easy ways to 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 then Advisor.com will match you with up to three advisors near you. And the best part? Because they are fiduciaries, they are legally bound to act in your best interest.
From here, you can book a free no-obligation call to see if they’re right for you. Make sure you ask about any admin fees if you’re worried.
But if you’re a high-net-worth individual like Jeff and Susan, you may want more specialized help based on your income bracket.
This is where Range can come in. Range offers comprehensive financial services for high net worth individuals. Traditional advisors typically charge fees between 0.5% and 2% AUM, or $1,000 to over $3,000 for comprehensive advisory plans, which can add up to quite a fee when coupled with fees.
If this sounds like a familiar problem, you can book a free online demo with Range to see if the quality of their advice matches the weight of your wealth.
Jeff and Susan have $460,000 in two brokerage accounts. If they live to age 85 — another 35 years — without making any further contributions to these accounts and assuming a conservative 5 percent return, that 1.24 percent tax adds up to $863,170, according to Sethi.
The couple currently pays about $6,000 a year in taxes — about $500 a month. But fast-forward 35 years — 420 months — and they’ll be paying 1.24 percent for a much larger portfolio, averaging around $2,054 a month, according to Sethi.
Instead of putting their money into paying high fees, Jeff and Susan could put that money to work by investing in a low-cost ETF or index fund and get a similar return. By doing so, they could also pay much lower taxes, says Sethi.
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 there, your spare change goes into a smart investment portfolio tailored to your investment style. That $4.25 daily coffee? Now that’s a 75 cent investment in your future.
If you want to supercharge your investments, Acorns also allows you to make recurring monthly contributions. You’ll only pay a flat monthly subscription fee and a small ETF expense to invest in index funds. According to Charles Schwab, the average annual fee for a stock ETF is typically less than 0.25% (3).
Plus, if you set up a regular deposit of $5 or more, you can get a $20 bonus investment when you sign up with Acorns.
Another important consideration for Jeff and Susan will be asset allocation. Ideally, they should minimize their fees paid to advisers and investments. But they should also make sure they are invested in a number of different asset classes.
For example, they may also want to invest in alternative assets such as real estate to build a diversified, risk-tolerant portfolio. Commercial real estate, in particular, can offer a number of tax advantages for investors.
But historically, direct access to the $22.5 trillion commercial real estate sector has long been limited to a select group of elite investors — until now.
First National Realty Partners (FNRP) allows accredited investors to diversify their portfolio through retail anchored commercial properties without assuming the responsibilities of ownership.
With a minimum investment of $50,000, investors can own a portion of properties leased by national brands like Whole Foods, Kroger and Walmart that provide essential goods to their communities. Thanks to triple net leases, accredited investors can invest in these properties without worrying about cutting tenant costs into potential returns.
Answer a few questions – including how much you’d like to invest – to start browsing FNRP’s full list of available properties.
Another alternative asset that Jeff and Susan might be looking to add to their portfolio? Art.
Here’s an example of why this investment could be a wise addition to their portfolio.
In 1999, the S&P 500 crashed and it took 14 long years to fully recover.
Today? Goldman Sachs forecasts a 9% price return from 2024 to 2034 (4). Meanwhile, Vanguard presents a more conservative estimate, projecting around 5.5% (5).
In fact, almost everything feels priced near all-time highs – stocks, gold, crypto, you name it.
That’s why billionaires have long carved out part of their portfolios into an asset class with low market correlation and strong return potential: postwar and contemporary art.
It may sound surprising, but over 70,000 investors followed suit in 2019 through Masterworks. Now you can own fractional parts of works by Banksy, Basquiat, Picasso and more.
Masterworks has sold 25 artworks to date, producing net annual returns of 14.6%, 17.6% and 17.8%.
Moneywise readers can get priority access to diversify with art: Skip the waiting list here
Note that past performance is not indicative of future returns. Investment involves risk. See important Regulation A information at Masterworks.com/cd
So what can you do if you’re working with a financial advisor who charges you a percentage of assets and you want out?
The fees that Jeff and Susan have paid so far are sunk costs. But the biggest step in the process is realizing you need to make a change, says Sethi. The rest is just details – although it could 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’ve decided to move your brokerage account because the fees you’re paying aren’t part of your financial goals. By rolling over the brokerage account and moving the assets as they are from one account to another, you can avoid “selling them and triggering a taxable event,” he said.
However, if you want to continue working with an advisor, Sethi said, “you want to pay a flat fee, never a percentage.”
According to the Wall Street Journal, some advisory fees may even be negotiable. They recommend, “If you’re considering working with a particular advisor, ask if they’re willing to adjust their fees (6).”
We only rely on verified sources and credible third-party reports. For details, see our ethics and editorial guidelines.
I’ll 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 construed as advice. Offered without warranty of any kind.
