You might know Ramit Sethi as the host of Netflix’s “How To Get Rich,” as a New York Times bestselling author or as the host of the “I Will Teach You To Be Rich” podcast. Recently, Sethi posted an article on LinkedIn regarding his opinion on fees for financial advising related to investments.
Here’s why Sethi said a 1% advisor fee is worse than you think.
Also see how much a financial advisor costs.
Sethi: A 1% Fee Can Cost You 28%
In a recent LinkedIn post, Sethi queried, “Think a 1% fee isn’t that much?” Then, he explained the math.
He said to imagine that you’re 30 years old and you choose to invest $50,000 and make contributions of $1,000 per month.
“In 35 years, with a low 0.2% management fee and assuming a 7% return, you’d have just over $2,000,000,” he said.
It’s worth noting that Sethi said the way to maximize your returns is to look for management fees — also known as expense ratios — that are low, around 0.2%. He said you can find index funds at Fidelity, T. Rowe Price and Vanguard that offer excellent value.
“But if you pay a financial advisor 1%,” Sethi continued, “you’d only have $1,700,000. That’s more than $380,000 going into your advisor’s pockets in fees! By the way, if you pay 2%, that’s over $750,000 in fees! This is what I mean when I say that a 1% fee can cost you 28% of your lifetime returns.”
Sethi went on to say that conflicts of interest can exist with financial advisors because they are often paid with commission and often will direct you to funds that have more fees. Plus, he said, “Most experts cannot beat the market.”
For these reasons, Sethi said you’re much better off managing your investments on your own.
“If you want an expert to look over your numbers, look for a financial advisor who charges a flat fee,” Sethi said. “Never pay a percentage of your assets.”
A Certified Financial Planner’s Take on Sethi’s Advice
To get a certified financial planner’s take on Sethi’s advice, GOBankingRates interviewed Sean Lovison, CFP, CPA and founder/lead planner at Purpose Built Financial Services, LLC.
As a Financial Advisor, What’s Your Take on Sethi’s Advice?
“As a financial advisor, my perspective aligns with Ramit Sethi’s emphasis on the importance of fee structure in investment management,” Lovison said. “Flat-rate, fee-only planning presents an equitable model that avoids the conflict of interest in percentage-based fees. It ensures that the advisor’s income is not directly tied to the assets under management, thus aligning the advisor’s incentives with the client’s best interests. This model also provides a transparent and predictable cost structure for clients, which can contribute to a stronger, trust-based client-advisor relationship.”
Should You Ever Pay a Percentage Fee To Have Investments Managed?
“There may be a situation when the client doesn’t have enough assets to make it worthwhile to pay a flat fee,” Lovison said, “and a percentage of assets may be the only way to get advice. It should be noted, however, that the industry standard is to tier clients, and lower assets level clients will typically receive a lower level of service.”
Should the Average Person Try To Learn How To Manage Their Own Investments?
“While it is beneficial for the average person to have a foundational understanding of investment management, the complexities and time required to manage investments effectively can be substantial,” Lovison said. “Professional advisors not only provide investment picks but also behavioral coaching, which has been proven to increase net returns.
“They also help in identifying tax-planning opportunities, creating a holistic financial plan and providing the discipline necessary to stick to that plan. A comprehensive study by Vanguard, often referred to as the ‘Advisor’s Alpha,’ has quantified this additional value at around 2%.
“The expertise of a financial advisor can be especially pivotal during market downturns, where emotional decision-making can lead to detrimental financial outcomes.”
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