Tag: Fees

Lug Nuts

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John Wooden is the greatest college basketball coach of all time, winning ten NCAA championships as the head coach of the UCLA Bruins. The Wizard of Westwood paid attention to small details, especially socks and shoes.

Each season, Coach Wooden instructed his players on how to correctly put on their socks and tie their shoes because if a player had trouble with their feet, they would not play well. He wanted to eliminate blisters and untied shoes that slowed down his players.

In the book Wooden – A Lifetime of Observations and Reflections On and Off The Court by John Wooden and Steve Jamison, he talks about how all the parts are needed for a car to run correctly, but if it had loose lug nuts, the wheels would fall off. Lug nuts are cheap and cost about $45 for a box of 24, and I doubt anybody ever considers them when buying a new car, but they’re a vital component for a functioning automobile. Coach Wooden had star players like Bill Walton and Kareem Abdul-Jabbar, but if the other players on the court did not play well and support each other, the team would lose. Bench players, substitutes, and lug nuts help complete the process and make things work.

Successful investors must pay attention to small details, like fees and expenses. Review your advisor fees and expense ratios on your funds. Try to cut the number of funds you own as well. Your funds have significant overlap if you own a few dozen or more, and you don’t need four or five large-cap mutual funds. A quick search on Yahoo! Finance can help you research your fund’s allocation, holdings, and fees. The ADV highlights your advisor’s costs.

Also, check your spending and budget. Can you eliminate recurring payments or reduce nuisance fees?

Your 401(k) is another detailed battleground. If you own a retirement target date fund, you don’t need to own anything else. A key component in your plan is the employer match, and it’s paramount that you match the match. For example, if your employer offers a 5% match, contribute 5% of your pay to the plan. If your plan offers automatic rebalancing, select the annual option. An annual rebalance keeps your risk tolerance in check.

If you pay attention to the small details, they will add up to big wins.

Failing to prepare is preparing to fail. ~ John Wooden

May 4, 2023

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on your asset level.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor. Prices and yields are for today only and are subject to change without notice.

What Is Your Fee?

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A prospect recently visited a financial planner’s website and had the following conversation.

Welcome to my office. How can I help you today?

I viewed your website and am impressed with your credentials and firm status, but I have several questions regarding your fees.

Sounds good; fire away.

Okay. I noticed you have several fee options, but I don’t understand the difference. Can you explain why you have so many choices?

Absolutely. We offer multiple fee schedules because clients like to choose the best structure that fits their needs. We offer four distinct plans: an asset management fee, a flat fee, an hourly rate, and a financial planning fee.

I Got it. What’s the difference?

It’s simple, really. We charge a 1% asset management fee for managing your money and completing a financial plan. For example, if you invest $1 million, the cost is $10,000, and if your account increases to $2 million, your new rate is $20,000.

I see. The 1% fee seems high. Is it not?

No way. It’s the industry standard, and we profit when you profit.

What’s next?

We offer a flat fee for asset management and financial planning of $10,000 per year.

If my account is $1 million, I pay $10,000. Is that not a 1% fee?

It is, but it’s a flat fee. Do you see the difference?

No, not at all.

If your account rises or falls, you only pay $10,000.

What if my account drops to $500,000?

It’s still $10,000.

Now my fee is 2% per year – correct?

Technically, yes, but it’s a flat fee of $10,000, and we don’t use percentages or refer to it as a fee-based account if we charge you a flat fee. Does this help?

No. Let’s move on to your hourly rate.

You bet. Our hourly rate is $500 per hour.

Wow. How many hours does it take to finish a plan?

About twenty hours, give or take.

Really? Your hourly rate is $500, which takes twenty hours, so your fee is $10,000? It Is the same rate as your two other options.

I guess it is, but different because it’s an hourly rate.

Let’s move on to the last one, financial planning only. Let me guess. Is it $10,000?

How did you know?

It’s just a hunch.

Our financial plan only module is $10,000. We set up your plan with instructions on how to implement it yourself.

My self? What do you mean?

We give you the finished document, and then you select your investments, manage your assets, and rebalance your accounts. Also, you’ll need to implement our recommendations for creating trusts, buying life insurance, changing beneficiaries, etc. It’s a simple process.

Simple?

Absolutely. You can open a Vanguard account, select two or three mutual funds, and you’re up and running! After opening your accounts, you can Google estate planning attorneys, life insurance agents, CPAs, etc. They will assist you with the remaining areas of your financial plan.

It sounds like I’m doing most of the work. Is your plan worth $10,000?

Yes, on both accounts.

What if I need to update my plan?

Your fee is good for one year; we charge $500 per hour to update your plan.

All your fees are almost identical.

I guess they are. I’ve never noticed that before. Odd.

I’m going to check with a few more firms to compare notes. I’ll get back to you soon if I want to proceed.

Thank you. When you check out other firms, please ensure you only work with an advisor with an “O” and not an “E.” There is a big difference.

Really?

You bet. Good luck with your due diligence, and thank you for coming to my office today.

May 30, 2022

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management, located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

My Fee Is Better Than Your Fee!

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Good morning and welcome to the first annual financial planning and investment management fee summit. My name is Nate Narrator, and today we will talk to a panel of financial advisors, planners, and brokers to discuss their fee schedules and how they charge clients.

Our distinguished panel includes Andy AUM, Rebecca Retainer, Hank Hourly, Cindy Commission, Frank Flat Fee, and Patty Planner.

Let’s meet the panel.

Andy AUM. Andy charges an asset under management fee of 1%.

Rebecca Retainer. Rebecca charges a monthly retainer fee that ranges from $125 to $500, depending on your annual income.

Hank Hourly. Hank charges an hourly consulting fee between $250 and $500 per hour, depending on your annual income, assets, and complexity.

Cindy Commission. Cindy charges a commission on everything you buy and sell, regardless of whether it’s a stock, bond, mutual fund, or insurance product.

Frank Flat Fee. Frank charges a flat fee of $5,000 regardless of your annual income, assets, or complexity.

Patty Planner. Patty is a financial planner. Her fee ranges from $2,500 to $25,000 for a comprehensive financial plan. She also has a fee schedule for one-time modular plans like education, retirement, asset allocation, or cash flow planning. The modules cost $1,500 each.

Nate:

Andy, tell me about your assets under management model.

Andy:

Thanks, Nate! My fee is a function of the assets we manage for our clients. The fee, as a percentage, will drop as our client’s assets grow. The fee includes financial planning and investment management; it’s all included in our fee model.

Nate:

Thank you. As the accounts grow in value, you’ll also make more money – correct?

Andy:

Yes, but so will my clients.

Nate:

What if the accounts drop in value as they did in 2018 or March 2020?

Andy:

The client’s fee will decrease if the account value drops; my fee will also be lower.

Nate:

Hank, please tell me about your hourly model.

Hank:

Will do. I charge an hourly fee for my services. The initial client meeting typically lasts one hour. The financial plan, preparation, and presentation usually take 8 to 10 hours. I should add, the initial consultation is free.

Nate:

So, about 8 to 10 hours to get a client up and running with their plan and your recommendations?

Hank:

Yes, that’s correct.

Nate:

At $500 an hour, the client’s projected fee is $4,000 to $5,000?

Hank:

Yes, that’s correct. It could be more or less depending on the project or the complexity of the client. Some clients come to me for an investment review, others for a full-blown plan. My fee also includes driving time, research, lunch, etc.

Nate:

Thanks, Hank. Rebecca, please tell me about your retainer model.

Rebecca:

Thanks, Nate. I’m excited to be here today. My retainer model is a monthly subscription fee based on a client’s annual income – like a car or mortgage payment. The client can add my fee to their monthly budget as they would for their other expenses.

Nate:

A car payment?

Rebecca:

Yes, our retainer fee ranges from $125 to $500 per month, depending on income. We require our clients to sign on for a one-year commitment.

Nate:

Interesting. So, if someone’s income is $50,000, your retainer fee will be less than someone earning $500,000, correct?

Rebecca:

That’s correct. Our client’s income determines the fee they pay.

Nate:

How long do your clients pay your retainer fee? How long do they stay in this arrangement?

Rebecca:

Our clients typically stay with our firm for three to five years.

Nate:

What if a client wants to invest with you based on your recommendations?

Rebecca:

We don’t manage money. We refer our clients to another fee-only advisor or recommend a robo-advisor platform, like Betterment.

Nate:

Cindy, your fee schedule is probably the oldest and most known to those in the audience. Tell us about your fee model.

Cindy:

Thank you, Nate. Commissions have been around forever, and it’s a straightforward fee model. If a client places a trade, we charge a commission.

Nate:

So, the more you trade, the more you make?

Cindy:

Yes, that is true. However, our investment recommendations are suitable and with the client’s best interest in mind.

Nate:

Of course. What’s the commission on a mutual fund trade?

Cindy:

The commission on a mutual fund trade will cost the client 4% to 5% of the purchase price.

Nate:

If a client gives you an order to buy $100,000 of XYZ mutual fund, they’ll pay $4,000 to $5,000?

Cindy:

Yes, it’s a one-time charge.

Nate:

What about an annuity purchase?

Cindy:

The client won’t pay a front-end sales charge, but they’ll incur a fee if they liquidate the annuity during the deferred sales charge period.

Nate:

Give us an example, please.

Cindy:

Sure, if a client purchases ABC annuity with $100,000, 100% of their money goes to work from day one. If they sell their annuity during the first ten years, they will incur a fee that ranges from  10% to 1%.

Nate:

10%? That seems outrageously high. Am I wrong?

Cindy:

It’s a high fee, but our clients are long-term investors.

Nate:

What would your fee be if they purchased the ABC annuity?

Cindy:

It is 5%, or $5,000.

Nate:

Will the client incur any other fees?

Cindy:

Mutual fund expenses run about 1% per year; annuities will cost about 3% to 4% per year. Individual stocks or bonds don’t have any fees after the initial purchase.

Nate:

Thanks, Cindy. Frank, tell us about your flat-fee model.

Frank:

Yes sir. Just as it sounds, it’s a flat fee regardless of income or asset level.

Nate:

A client with $50,000 in assets will pay just as much as someone with $5 million in assets?

Frank:

Yes, sir. However, we have an account minimum of $500,000 because we only work with high-net-worth clients.

Nate:

If a client pays you a flat fee, what’s your incentive to manage the account? You get paid a consistent fee regardless of whether their account goes up, down, or sideways.

Frank:

Well, the fee is more than an asset management fee. I also get paid for advice and financial planning. We also offer a concierge service to help our clients with dry cleaning, walking their dogs, or obtaining tickets to sporting events.

Nate:

How do you manage the assets for your clients?

Frank:

We use mutual funds and ETFs.

Nate:

Do the clients pay a fee to purchase the funds?

Frank:

It depends on the custodian – some charge, others do not. The fee can range from $10 to $45 per trade, which goes to the custodian. I don’t receive any portion of the custodian’s fee.

Nate:

Thanks, Frank.

Nate:

Let’s hear from Patty. Patty, tell us about your fee structure.

Patty:

Thank you, Nate. I only charge a client for advice and financial planning.

Nate:

Interesting. What about managing assets?

Patty:

I don’t manage any assets. I refer clients to another fee-only advisor or send them to a robo-advisor as Rebecca does.

Nate:

Okay. If a client comes to you for financial planning and advice, what does it cost?

Patty:

The financial planning fee ranges from $2,500 to $25,000, depending on a client’s complexity.  Once complete, the client is free to choose any investment platform they want. I’ll give them a few suggestions, but it’s their choice. I don’t get paid for investment advice, nor do I receive a referral fee from any advisor.

Nate:

Okay, thank you all for your input. To compare the different models, let’s look at a client with $500,000 in assets and an annual income of $250,000. Who wants to go first?

Andy:

I will. My fee would be $5,000 per year or 1% of $500,000.

Rebecca:

My fee would be $6,000 per year or $500 per month.

Hank:

I will charge $500 per hour for 10 to 12 hours of work during the year, so our fee would range from $5,000 to $6,000.

Cindy:

Her assets would qualify her for a breakpoint for the mutual fund company I use, so the commission would be $20,000 – one time.

Frank:

My flat fee remains the same regardless of a client’s assets or income. It would be $5,000.

Patty:

This planning fee for this client, based on the assets, would be $5,000.

Nate:

Hmmm. It looks like all your fees are similar, except for Cindy’s, but over a 3 to 4-year period, all your costs are similar, correct?

Panel:

Yes.

Nate:

Also, regardless of the stock market’s performance, you get paid.

Panel:

Yes.

Nate:

Last question: Who’s model is best?

Panel:

(In unison): Mine.

Nate:

(laughing), Okay! Thank you all for your time today.

“A rose by any other name would smell as sweet.” ~ Romeo and Juliet

December 2, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.

My Fee Is Better Than Your Fee

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Advisors, brokers, planners, bloggers, vloggers, Fin Twit experts, and other pontificators are praising the benefits of their own fee models while bashing all others. Strong opinions about whose fee schedule is best is a common thread. At the end of the day, however, a fee is a fee regardless of how it’s charged.

Firms may combine fee platforms or institute pricing tiers with minimum fees. For example, advisors may bill you hourly for their financial planning services while charging you an asset management fee.

One of my clients has been hounded by a stockbroker who has been trying to sell her an annuity. He told her the purchase would not cost her anything. After some research, I found out that he was going to receive a 5% commission.

Several years ago, an insurance agent approached me about buying a whole life insurance policy with an annual premium of $100,000. I was also told I wouldn’t incur any out of pocket expenses or fees. He was going to make $55,000 if I had purchased the policy.

If a broker tells you it won’t cost anything, you’re probably going to get fleeced.

Fees are confusing, especially if they’re called something else. It’s all semantics. Here’s a guide to help you navigate the murky waters of fees. This will help you identify the various types you might incur when you’re meeting with a financial professional or reviewing your account statements.

Commissions. If you buy or sell a stock, a commission will be added to or deducted from your trade. Bonds will also trade with a commission ranging from $1 to $30 per bond. If you purchase 100 bonds ($100,000) and you’re charged $10 per bond, your fee will be $1,000. This is referred to as a markup or markdown. Exchange traded funds and options will also trade with a commission. The more your broker trades, the more commissions they’ll earn.

Front End Load. Mutual funds with a front-end load will have commission rates ranging from 1% to 5% or more and it will be deducted from your purchase. If you invest $100,000 into a fund with a 4% front-end load, your fee will be $4,000, so $96,000 will be invested. The most common type of front-end loaded mutual fund is referred to as an “A” share.

Back End Load or Deferred Sales Charge. Funds and annuities with a deferred sales charge will charge a fee if you liquidate early. A declining sales charge is applied based on the number of years you own your holding. A fund may have deferred sales charge that declines over five years where 5% is deducted the first year, 4% the second year, 3% the third year and so on. If you invest $100,000 into a fund with a deferred sales charge and you sell it in year three, the fund company will deduct 3%, or $3,000 from your proceeds. The most common share class with back end loads are “B” and “C” shares.

Wrap. A wrap account will charge a percentage based on your investment but not charge a commission for your trades because the commissions are wrapped into the fee. Wrap accounts are popular with brokerage firms. They’ll offer you an investment account that owns 50 to 70 stocks or more. Depending on the size of your investment, you may own 2 to 3 shares of a company and If you were paying commissions, the fees could climb quickly. I worked for a large brokerage firm several years ago and our wrap-fee program charged clients 3% per year – an extremely high fee.

AUM. The asset under management fee model is popular with Registered Investment Advisors. An advisor may charge you a fee of 1% on the assets they manage on your behalf. The fee drops with the more assets you have under management.

Retainer. A retainer fee model will give you access to an advisor or planner for a specific project or timeframe, but it may not include managing your assets. It’s similar to an a la carte menu at a restaurant.

Flat Fee.  Your fee is flat, or fixed, regardless of your asset level. This model favors large accounts and punishes smaller ones. Advisors will charge a flat fee for financial planning and investment management services. This fee differs from the retainer model because the relationship is intended to be long-term.

Hourly. This model works well if you want a limited scope offering or a one-time analysis like a second opinion. It also appeals to investors who want to pick their own investments but want guidance with their asset allocation or financial plan. Advisors may charge $250 to $500 per hour to create a financial plan, review your investments, or give you guidance on a special project.

Subscription. This is a relatively new model primarily aimed at millennials or high-income earners with little assets. A fee is charged based on your income or net worth and it’s billed monthly, like a car payment. Services may include budgeting, cash flow planning, debt reduction, 401(k) guidance, and investment selection.

Hedge Fund. Hedge funds typically have a 2 and 20 model. They’ll charge you 2% on your assets and receive 20% of your trading profits. For example, if you invest $1,000,000 and it grows to $2,000,000, your hedge fund will earn 2% on $2,000,000 and receive $40,000 in fees. They’ll also earn $200,000 on your trading profits.

Regardless of where or how you purchase a mutual fund, exchange traded fund or annuity, they’ll have ongoing fees and expenses. Mutual funds and ETF’s have operating expenses (OER) and the fees vary wildly. Mutual funds may also have a 12b-1 fee, charging you another .25% on top of the OER. An annuity has fees for mortality, riders, administration, and investments – to name a few. Annuity fees can climb to 3% or more. Individual stocks, bonds and options do not have ongoing fees or expenses after they’re purchased.

Fees come in all types of flavors, so pick one that works well for you and your family. If you’re concerned about fees, then open an account at T.D. Ameritrade, Fidelity, Vanguard, E*Trade, or Schwab and only buy individual stocks, bonds or low-cost index funds. The commissions and fees will be low so long as you don’t day trade your account.

Fees are important, of course, but it’s more important to work with an advisor you trust. One who puts your interest firsts and acts in a fiduciary capacity is recommended.

What about our fees? We charge .5% ($5 per $1,000) for assets under management which includes a financial plan. Our stand-alone financial planning fee is $800.  Good conversation, fellowship and bad jokes are free.

In the long run, we shape our lives, and we shape ourselves. The process never ends until we die. And the choices we make are ultimately our own responsibility. ~ Eleanor Roosevelt

June 25, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation.

 

 

 

 

 

What Is Your Fee Schedule?

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Good morning and welcome to the first annual financial planning and investment management fee summit. My name is Nate Narrator and today we’ll talk to a panel of financial advisors, planners and brokers to discuss their fee schedules and how they charge clients.

Our distinguished panel includes the following individuals: Andy AUM, Rebecca Retainer, Hank Hourly, Cindy Commission, Frank Flat Fee, and Patty Planner.

Let’s meet the panel.

Andy AUM. Andy charges an asset under management fee of 1%.

Rebecca Retainer. Rebecca charges a monthly retainer fee that ranges from $125 to $500 depending on your annual income.

Hank Hourly. Hank charges an hourly consulting fee between $250 and $500 per hour depending on your annual income, assets, and complexity.

Cindy Commission. Cindy charges a commission on everything you buy and sell, regardless if it’s a stock, bond, mutual fund, or insurance product.

Frank Flat Fee. Frank charges a flat fee of $5,000 regardless of your annual income, assets, or complexity.

Patty Planner. Patty is a financial planner. Her fee ranges from $2,500 to $25,000 for a comprehensive financial plan. She also has a fee schedule for one-time modular plans like education, retirement, asset allocation, or cash flow planning. The modules cost $1,500 each.

Nate:

Andy tell me about your assets under management model.

Andy:

Thanks Nate! My model is based on your level of assets. The fee, as a percentage, will drop as your assets grow. The fee includes financial planning and investment management. It’s all rolled into one fee.

Nate:

Thank you. As the accounts grow in value, you’ll also make more money – correct?

Andy:

Yes, but so will my clients.

Nate:

What if the accounts drop in value like they did in 2018?

Andy:

The fee will go down if the accounts drop in value. My income will be lower as well.

Nate:

Hank, please tell me about your hourly model.

Hank:

Will do. I charge an hourly fee for my services. The initial client meeting will last an hour. The financial plan, preparation and presentation typically takes 8 to 10 hours. I should add, the initial consultation is free.

Nate:

So, about 8 to 10 hours to get a client up and running with their plan and your recommendations?

Hank:

Yes, that’s correct.

Nate:

At $500 an hour, your fee will run $4,000 to $5,000?

Hank:

Yes, that’s correct. It could also be more or less depending on the project. Some clients come to me for an investment review, others for a full-blown plan. It also includes driving time, research, etc.

Nate:

Thanks Hank. Rebecca, please tell me about your retainer model.

Rebecca:

Thanks Nate. I’m excited to be here today. My retainer model is a monthly subscription fee based on a client’s annual income. The fee works just like a car or mortgage payment. The client can add my fee to their monthly budget like they would for their other expenses.

Nate:

A car payment?

Rebecca:

Yes, our retainer fee ranges from $125 to $500 per month, with a one year minimum, depending on income.

Nate:

Interesting. So, if someone had income of $50,000, their retainer fee will be less than someone with $500,000 income, correct?

Rebecca:

That’s correct. It’s based on income.

Nate:

How long do your client’s pay a retainer fee? How long do they stay in this arrangement?

Rebecca:

Our clients stay with us for about three to five years before they move on.

Nate:

What if a client wants to invest based on your recommendations?

Rebecca:

We don’t manage money. We refer them to another fee-only advisor or recommend a robo-advisor platform.

Nate:

Cindy, your fee schedule is probably the oldest and most known to those in the audience. Tell us about your fee model.

Cindy:

Thank you, Nate. Commissions have been around forever and it’s a straight forward fee model. If a client places a trade, a commission is charged.

Nate:

So, the more you trade, the more you make?

Cindy:

Yes, that is true. However, our investment recommendations are made with the client’s best interest in mind.

Nate:

Of course. What’s the commission on a mutual fund trade?

Cindy:

The front-end commission on a mutual fund will cost the client 4% to 5% of the purchase price.

Nate:

If a client gives you an order to buy $100,000 of XYZ mutual fund, they’ll pay $4,000 to $5,000?

Cindy:

Yes, it’s a one-time charge.

Nate:

What about an annuity purchase?

Cindy:

The client won’t pay a front-end sales charge, but they’ll incur a fee if they liquidate during the deferred sales charge period.

Nate:

Give us an example please.

Cindy:

Sure, if a client purchases ABC annuity with $100,000, then 100% of their money goes to work from day one. If they sell their annuity during the first 10 years, they will incur a fee of 10% to 1%.

Nate:

10%? That seems outrageously high. Am I wrong?

Cindy:

It’s a high fee, but we encourage our clients to be long-term investors.

Nate:

What would your fee be if they purchased the ABC annuity?

Cindy:

It is 5%, or $5,000.

Nate:

Will the client incur any other fees?

Cindy:

Mutual fund expenses run about 1% per year; annuities will cost about 3% to 4% per year. The individual stocks and bonds don’t carry a monthly fee after their purchase.

Nate:

Thanks Cindy. Frank, tell us about your flat-fee model.

Frank:

Yes sir. Just as it sounds, it’s a flat fee regardless of income or asset level.

Nate:

A client with $50,000 in assets will pay just as much as someone with $5 million in assets?

Frank:

That is true. However, we have an account minimum of $500,000.

Nate:

If a client pays you a flat fee, what’s your incentive to manage their account? You get a flat, consistent fee regardless if their account goes up, down or sideways.

Frank:

Well, the fee is more than asset management fee. I also get paid for advice and financial planning.

Nate:

How do you manage the assets for your clients?

Frank:

We use mutual funds.

Nate:

Do the clients pay a fee to purchase the funds?

Frank:

They do. The fee is $25 per trade which goes to the custodian. I don’t receive the fee.

Nate:

Thanks Frank.

Nate:

Let’s her from Patty. Patty tell us about your fee structure.

Patty:

Thank you, Nate. I only charge client for advice and financial planning.

Nate:

Interesting. What about managing assets?

Patty:

I don’t manage any assets. I refer clients to another fee-only advisor or send them to a robo-advisor, like Rebecca does.

Nate:

Okay. If a client comes to you for financial planning and advice, what does it look like?

Patty:

The financial planning fee ranges from $2,500 to $25,000 depending on a client’s complexity.  Once the plan is done, the client is free to choose any investment platform they desire. I’ll give them suggestions, but it’s their choice. I don’t get paid for investment advice, nor do I receive a referral fee from any advisor.

Nate:

Okay, thank you all for your input. Let’s look at a client with $500,000 in assets with an annual income of $250,000 so we can compare the different models. Who wants to go first?

Andy:

I will. My fee would be $5,000 per year, or 1% of $500,000.

Rebecca:

My fee would be $6,000 per year, or $500 per month.

Hank:

For a client with this profile I’d charge $500 per hour. We’d meet for about 10 to 12 hours during the year, so the fee would range from $5,000 to $6,000.

Cindy:

Her assets would qualify her for a breakpoint for the mutual fund company I use, so the commission would be $20,000 – one time.

Frank:

My flat fee remains the same regardless of a client’s assets or income, so it would be $5,000.

Patty:

This planning fee for this client, based on her assets, would be $5,000.

Nate:

Hmmm… It looks like all your fees are similar, except for Cindy’s, but over a 3 to 4-year period all your fees will be about the same, correct?

Panel:

Yes.

Nate:

Also, regardless of the stock market’s performance, you’re all getting paid?

Panel:

Yes.

Nate:

Last question: Who’s model is best?

Panel:

(In unison): Mine.

Nate:

(laughing), Okay! Thank you all for your time today.

“A rose by any other name would smell as sweet.” ~ Romeo and Juliet

April 3, 2019

Bill Parrott, CFP®, CKA® is the President and CEO of Parrott Wealth Management located in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose.

At PWM we charge .5% on the first $10,000,000 and then .35% above this amount. Our financial planning fee is $800.

Note: Investments are not guaranteed and do involve risk. Your returns may differ than those posted in this blog.

My fee will be less than $2,000,000.

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In the mid-90’s I received a call from a client asking me how I would invest a lot of money.   I asked him how much money.   He was reluctant to give me an answer at first because of the large sum of money.  He had to eventually tell me the amount so that I could give him my advice.  The money he received was life altering for him and his entire family.

As the story goes, my client received an inheritance from his uncle who lived in the mid-west.   My client was the sole beneficiary to his uncle’s estate.    He was both delighted and nervous to be in a position to receive this substantial inheritance.   When the money arrived we decided to invest it in a 6 month U.S. Treasury Bill so we could buy some time to develop a plan while taking advantage of the government guarantee.

Here is the rub.  His uncle did not have any type of estate plan.  As a result, my client had to write a check to the IRS for over $2,000,000 to cover the estate tax!   This was a tough pill to swallow.   My client had just written the largest check of his life and it went to pay taxes!

After the money had been sent to the IRS, we started to build a game plan so that his beneficiaries would not be burdened with sending one red cent to the government when he and his wife passed away.  I referred him to an attorney who helped him establish a number of trusts so that the assets would be protected for the generations to follow.  I assembled a portfolio that consisted mostly of California tax free municipal bonds and high quality dividend paying stocks.

What is behind the $2,000,000 fee?  Not long after he wrote his colossal check to the IRS he asked me what the fee would be to set up the investment accounts and family trusts.   I told him my fee will be less than $2,000,000.   He got a nice chuckle from my comment.

He and his wife passed away a few years ago and the trusts and investments that we set up are still going strong today and his beneficiaries did not send any money to the IRS for estate taxes!

A little planning can go a long way potentially spanning generations.

For I know the plans I have for you,” declares the Lord, “plans to prosper you and not to harm you, plans to give you hope and a future.  Jeremiah 29:11 

Bill Parrott is the President and CEO of Parrott Wealth Management, LLC in Austin, TX.  www.parrottwealth.com.

12/14/2015

 

 

 

 

What’s the YTB?

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“What’s the YTB?” an elder broker bellowed from the back of the conference room.

“5%!” responded the wholesaler.

“Sweet!” answered the broker, “I will sell your fund!”

I was attending one of my first branch meetings as a newly minted broker and had never heard the term YTB.  I had heard of other yield acronyms like YTM for yield-to-maturity and YTC for yield-to-call but not YTB.

The YTB is referred to as the yield- to-broker.  The YTB is what the broker was going to earn for selling the mutual fund.   The broker didn’t care about the features or benefits of the fund; his only concern was what he was going to get paid for selling the product to his clients.

Brokerage and insurance products are sold and not bought.   Brokerage firms and insurance companies are product manufacturing machines.  Their product creativity and distribution system is without peer.  Full service investment firms and discount brokerages have a vested interest to sell you their products.  These firms may earn a commission when you buy their fund and they’ll receive an on-going fee while you own your investment.

When you purchase a product from a brokerage firm or insurance company it’s buyer beware or caveat emptor.  The product may have a front-end commission where the fee is deducted from your investment or it may have a back-end sales charge that triggers when you sell your fund.   It’s important to read the small print before you commit your capital to a new investment.

When I started my own advisory firm, I had a visit from a life insurance agent who wanted to show me one of his permanent life insurance products.  The example was a $1 million policy with an annual premium of $100,000 for ten years.  I asked him what his commission was going to be if a client invested in this policy.  He told he his first-year commission would be $55,000!  I stopped listening to his sales pitch after he told me what his fee was going to be.   We haven’t done any business together.

As you invest your hard-earned dollars take some time to ask questions about the fees you’ll be paying.  Here are few questions to get you started.

  1. How do you get paid?
  2. What is the fee or commission on this product?
  3. Is there a penalty for selling early? How early?
  4. Are there any other fees?
  5. How does this fee compare to other fees?
  6. Do you own this same investment?
  7. Does your mother own this same investment?
  8. Are there investments with lower fees?
  9. Is the fee tax deductible?
  10. Does the fee go down if I invest more money?

Keep an eye on your costs.   You can control the fees you pay when you invest.  The lower your fees, the higher your returns.

Honest scales and balances belong to the Lord; all the weights in the bag are of his making. ~ Proverbs 16:11

Bill Parrott is the President and CEO of Parrott Wealth Management and is in favor of lower fees and transparency.     For more information on investment management and financial planning, please visit www.parrottwealth.com.

March 27, 2017