“I don’t trust my finance guy.” I’m 67 and trying to live on Social Security of $2.2 Ka a month. I have $500,000 with an advisor who charges 2%, but last year the return was 26%. What’s my move?
Ask: “I am 67 years old and live – or try to live – on Social Security benefits of $2,200 per month. I don’t trust my finance guy. I handed him an IRA of about $500,000 without really digesting how much his 2% AUM fee would make. He invested in about six different funds, Class A, which cost me a lot up front. He charges 2% to add extra money. My return was 26%, but I know this will vary from year to year.
He keeps bugging me about extra money for an individual account (which I currently have on a 5% CD due in March). I need to get out of this situation, but unfortunately I don’t have much knowledge about investing. Even though I probably wouldn’t get a 26% return, can I move that money into an online Vanguard or Fidelity account? Should I let a robo-investor do his thing? What if they don’t accept my money? Should I hire a new financial advisor to help me, and if so, which one?
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Answer: At the highest level, if you don’t trust your advisor, leave – and that may be especially true in this case, as his fees are very high. “A 2% AUM fee is immediately quite high, regardless of whether the advisor only manages your portfolio or provides comprehensive financial planning services. To put you in loaded investment funds, from which he or she also directly benefits, is scandalous in my opinion,” says certified financial planner Bruce Primeau of Avantax. Normally an AUM fee is around 1%, and sometimes it can be negotiated from that point.
Plus, the charge you paid for the money is a sunk cost, Primeau says. “In other words, you won’t get that back if you decide to leave your advisor and sell that money. My recommendation is to find an advisor who is a fiduciary to you – and not to the company they work for – who will strive to minimize your costs and invest your portfolio more tax-effectively,” says Primeau. In short, if you work with someone who pays sales fees or commissions, he or she is not a fiduciary because there is a clear conflict of interest that could interfere with what is actually best for you.
The extra 2% he charges you on top of the 2% AUM could be a sales charge, says certified financial planner Matt Bacon of Carmichael Hill & Associates. “It’s worth asking your current advisor more about their business model so you really understand how they charge. Plus, you can always move your money,” Bacon says. “That 26% return sounds like your account is probably aggressively invested, so it may be worth talking to someone else to make sure you have the right allocation in retirement.”
In other words, your situation raises major red flags because charging a 2% fee and taking commissions sounds like double-dipping. “That is not acceptable. Commissions can complicate investment decisions because they can create incentives that don’t align with your financial goals,” says Ryan Haiss of Flynn Zito Capital Management.
It’s understandable that you want to continue to make good returns, but it’s crucial to understand whether 26% was actually a good return because right now the S&P 500 has returned over 30% in a year, so you might have you would do better if you didn’t have to pay such high commissions, says Alonso Rodriguez Segarra, certified financial planner at Advise Financial. “The relationship between a financial advisor and a client should be based on fiduciary criteria, which means looking for what is best for you and not the advisor. If trust has been damaged, it is always good to look for another option. Fortunately, other good advisors may not charge you more than 1%, or as you say, a robo-advisor will charge you significantly less,” says Segarra.
Yes, another option is to deposit the money into a Vanguard or Fidelity account that you would manage yourself (note that a rollover accepts most money), but it doesn’t sound like you’re going to a DIY self-route tends.
It depends on a number of factors, including whether you want to talk to a human or not. “A robo-advisor can be good if you don’t want to do it yourself but don’t really need or want someone to talk to if something goes wrong,” says Bacon. It can also save you money, as the robot route is typically cheaper than the human route, and usually has no or low account minimums. This guide can help you decide between robo-advisor or human.
That said, if you want to discuss your investments with someone, a human advisor can be a good option. Even if you don’t want to go the AUM route, “you can hire a CFP who works on an hourly or project basis and is a fee-only advisor who will manage your portfolio and give you a second opinion without a conflict of interest,” says Segarra. In addition to meeting rigorous educational requirements and thousands of hours of work-related experience, CFPs must fulfill a fiduciary duty and put their clients’ interests above their own.
Also keep in mind that investing your money is just one of the many dimensions that financial planning encompasses. “You have to add tax planning, estate planning, long-term care costs and much more,” Segarra says. To find a CFP who can give you a second opinion, Rossby Financial’s Andrew J. Evans recommends getting a referral from a like-minded friend. “Or you can use online tools to find another advisor. Willow is one of several advisor ranking and research tools that individual investors can use to find like-minded people,” says Evans.
Ultimately, the choice is yours whether you work with a human or computer program. “My experience is that working in person has advantages over working with a computer. You will mainly receive answers to the questions you have. The answers will not be broad, but will respond to your specific circumstances,” says certified financial planner Mark Humphries of Sentinel Financial Planning.
Do you have a problem with your financial advisor or are you looking for a new one? Email picks@marketwatch.com.
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