I have typed up some thoughts about investing with a financial advisor. I have never worked with an FA and I don't know any personally. So, I'm wondering if my thoughts are fair at all? Would I be out of line telling this to someone? I would much appreciate any feedback, comments, etc. The last thing I want to do is steer someone wrong or misrepresent something. Thank you.
John Doe (JD) leaves his job where he has $500,000 in a 401(K) and invests it with financial adviser Suzie Joe.
She takes him to lunch and explains he can rollover his $500,000 to an IRA and she’ll manage his money for him, charging a 1% asset under management (AUM) fee. He’s convinced this is a good deal because, as she says, “The more money you make, the more money I make.” He comes to her office later and fills out the paper work.
FA Suzie Joe is largely finished with JD now, although she’ll never tell him that. She has no interest in looking at or fiddling with his portfolio and little interest in speaking with him. Here’s why and how:
She will invest his $500,000 into mutual funds with a 5.9% commission (load), so she will earn an upfront $29,500 immediately. Not bad for about 3 hours worth of work – the lunch meeting, the office paperwork, and then the money rollover and mutual fund purchases. Nearly $10,000 per hour.
The 1% asset under management fee? If the $500K earns 10% this year, JD will have earned $50,000 which will bring his total balance to $550,000, of which Suzie Joe will earn $5,500. She’s happy to have this and even happier to have 20 or more of these, as it’s easy money, a nice guaranteed income.
What about “The more money I make for you, the more money I make?” It is really, really hard to beat the S&P 500 index. There’s maybe a 20% chance, so maybe 1 out of 5 years she might beat it while underperforming the other 4 years, which is unpleasant to explain. But lets say Suzie Joe does spend 3 hours over the course of the year and does increase JD’s earnings from 10% to 12%. What does that look like for him and for her?
$500,000 times 12% = $60,000, which is $10,000 better for JD than $50,000 with 10%.
Suzie will earn 1% of that additional $10,000. So she will earn an additional $100 for her additional 3 hours of work.
Now, think about it: When Suzie Joe the financial adviser is setting her business goals, does she choose to allocate 3 hours to maybe beat the S&P 500 and make $100, at $33 per hour? Or does she choose to allocate 3 hours to recruit a new client and maybe make $29,500, at about $10,000 per hour?
The obvious answer is the FA makes tremendously much more money recruiting new clients with large sums to invest with him or or. Of course, the FA wants to maintain a nice relationship with each client for the small but regular income, and also especially for the referrals to get new clients.
Note that by year’s end the FA will have made $29,500 plus another $5,500 and JD didn’t write a check nor see an invoice. The commission comes out behind the scenes with no active input from JD.
John Doe (JD) leaves his job where he has $500,000 in a 401(K) and invests it with financial adviser Suzie Joe.
She takes him to lunch and explains he can rollover his $500,000 to an IRA and she’ll manage his money for him, charging a 1% asset under management (AUM) fee. He’s convinced this is a good deal because, as she says, “The more money you make, the more money I make.” He comes to her office later and fills out the paper work.
FA Suzie Joe is largely finished with JD now, although she’ll never tell him that. She has no interest in looking at or fiddling with his portfolio and little interest in speaking with him. Here’s why and how:
She will invest his $500,000 into mutual funds with a 5.9% commission (load), so she will earn an upfront $29,500 immediately. Not bad for about 3 hours worth of work – the lunch meeting, the office paperwork, and then the money rollover and mutual fund purchases. Nearly $10,000 per hour.
The 1% asset under management fee? If the $500K earns 10% this year, JD will have earned $50,000 which will bring his total balance to $550,000, of which Suzie Joe will earn $5,500. She’s happy to have this and even happier to have 20 or more of these, as it’s easy money, a nice guaranteed income.
What about “The more money I make for you, the more money I make?” It is really, really hard to beat the S&P 500 index. There’s maybe a 20% chance, so maybe 1 out of 5 years she might beat it while underperforming the other 4 years, which is unpleasant to explain. But lets say Suzie Joe does spend 3 hours over the course of the year and does increase JD’s earnings from 10% to 12%. What does that look like for him and for her?
$500,000 times 12% = $60,000, which is $10,000 better for JD than $50,000 with 10%.
Suzie will earn 1% of that additional $10,000. So she will earn an additional $100 for her additional 3 hours of work.
Now, think about it: When Suzie Joe the financial adviser is setting her business goals, does she choose to allocate 3 hours to maybe beat the S&P 500 and make $100, at $33 per hour? Or does she choose to allocate 3 hours to recruit a new client and maybe make $29,500, at about $10,000 per hour?
The obvious answer is the FA makes tremendously much more money recruiting new clients with large sums to invest with him or or. Of course, the FA wants to maintain a nice relationship with each client for the small but regular income, and also especially for the referrals to get new clients.
Note that by year’s end the FA will have made $29,500 plus another $5,500 and JD didn’t write a check nor see an invoice. The commission comes out behind the scenes with no active input from JD.
Statistics: Posted by Sunsphere82 — Fri May 17, 2024 1:54 pm — Replies 0 — Views 41