Debunking the Myth: “Paying a 1% Fee is Outrageous”

Why Personal Finance Gurus Might Be Getting It Wrong

In personal finance, a loud narrative insists that paying a 1% fee to a financial advisor is nothing short of excessive. Personal finance gurus often promote this perspective, advocating for DIY investing and reducing costs to the bare minimum. However, this view oversimplifies the equation, focusing solely on fees paid instead of the value received.

So, is the claim that a 1% fee is outrageous really in your best interest? Or is it just another catchy slogan designed to grab attention? Let’s unpack this myth using facts and real-world scenarios to understand why this notion doesn’t hold up under scrutiny.

The Reality Behind 1% AUM Fees

Consider a portfolio of $500,000 managed by a fee-only fiduciary advisor who charges 1% annually. This equates to $5,000 per year or roughly $416 per month. If the advisor’s hourly rate is $300, that fee would translate to about 16.5 hours of work annually or 1.39 hours per month.

Now, compare this time allocation with the extensive list of responsibilities your advisor undertakes, which often extends well beyond this calculation. Here’s a snapshot of activities included in a typical advisor’s service:

Annual Client Service Activities at Finomenon Investments

• Initial Setup: Data gathering, financial plan development, and delivery.
• Plan Execution:
  • Portfolio construction and management.
  • Ongoing capital deployment and re-balancing when needed.
• Tax Optimization: Collaboration with your CPA to minimize lifetime tax liability (via F2ON).
  • Planning Roth Conversions
  • Planning Asset Location in Portfolio
  • Tax Loss Harvesting
• Behavioral Coaching: Guidance to stay disciplined during market volatility.
• Investment Evaluation: Reviewing investment opportunities, including alternative options.
• Annual Reviews and Ongoing Calibration: Two formal 90-minute meetings each for financial goal and plan performance reviews.

Quick Tip:

If you don’t expect your advisor to dedicate at least 1.5 hours each month for managing and reviewing your portfolio, it might be worth reconsidering whether an advisor is the right fit for your needs.

What the 1% Fee Truly Represents

The conversation about fees isn’t complete without considering the value received. An advisor charging 1% isn’t merely selecting stocks or funds—they’re delivering a comprehensive suite of services aimed at improving your financial outcomes.

1. Growth and Protection:
   Advisors don’t just grow wealth; they help protect it. Avoiding bad decisions, managing risk, and staying disciplined often outweigh the cost of the fee itself.
2. Cost of Avoiding Mistakes:
   DIY investing can lead to expensive errors—selling in a downturn, failing to capitalize on tax-saving strategies, or holding too much cash. A 1% fee serves as an investment in mitigating these risks.

Hidden Costs of DIY Investing

While personal finance gurus promote DIY strategies, the reality for many is far from optimal. Despite knowing the principles of compounding, diversification, and tax efficiency, clients often come to us with portfolios that reflect:

• Poor Asset Allocation: For example, 40% cash and 20% stocks at age 35.
• Unoptimized Stock Benefits: Neglecting strategies like the 83(b) election.
• Random Investments: Portfolios built on casual advice instead of research or conviction.
• No Performance Metrics: No framework to evaluate how investments perform relative to opportunity cost.

Why Knowledge Doesn’t Always Translate to Action

Knowing what to do is one thing; consistently acting on it is another. Psychological barriers often hold people back from making optimal decisions. Here’s how to overcome them:

1. Start Gradually: Begin with small, consistent steps toward creating an investment process.
2. Automate Investments: Regular contributions via dollar-cost averaging reduce the emotional burden of decision-making.
3. Focus on Long-Term Goals: Visualizing where you want to be in 20 or 30 years helps shift focus from short-term fears.
4. Consider Professional Help: Advisors offer both technical expertise and emotional guidance to build confidence and consistency.

Measuring Value: Outcomes vs. Fees

The true measure of an advisor’s value isn’t binary—it’s not just about fees or returns. Instead, it’s about outcomes that influence your overall financial health, including avoiding costly mistakes, optimizing tax strategies, and staying disciplined.

At Finomenon Investments, we believe in aligning services with measurable client outcomes. Our fee-only model ensures unbiased advice, as we have no affiliations with broker-dealers, banks, or institutions.

Assumptions Recap

• Annual Fee (1%): $5,000
• Hourly Rate: $300
• Hours per Year: 16.67 hours
• Hours per Month: 1.39 hours

Its Never That Simple

Don’t let oversimplified claims discourage you from seeking professional advice. A fiduciary advisor provides value far beyond what’s visible on a fee statement. When evaluated through the lens of outcomes, a 1% fee becomes less about the cost and more about what you gain—financial stability, discipline, and confidence in achieving your long-term goals.

Disclaimer:

Nothing here should be considered investment advice. All investments carry risks, including possible loss of principal and fluctuation in value. Finomenon Investments LLC cannot guarantee future financial results.