How Much Should a Financial Planner Cost?

Korean restaurant bill

Check, please!

“Not everything that counts can be counted; and not everything that can be counted counts.”
–Albert Einstein

“Spending can be investing – if you spend on the right things and really use them.”
Ramit Sethi

How are financial planners like vacation timeshare salespeople? Read on and you’ll find out plus you’ll learn how to actually calculate how much your planner is truly costing you.

For some reason, financial planners like to be very circumspect about how much their services cost. Part of the obfuscation is understandable – nobody likes to commit to a price until they find out how complicated the project is going to be. I used to face that all the time in the software development company I co-founded. We’d have potential customers want us to do three weeks of investigative work to come up with a price tag for how much a project would be. That would never fly, so we gave them very broad price ranges with lots of wiggle room, and we promised that after three weeks of paid work, we could give them a much better estimate of how much it would cost as well as documentation they could use to go vendor shop if they so desired.

Financial planning has some of that mystery too. People’s situations could be very simple, and they could be very complex, and sometimes, we can’t really say how much a properly executed financial plan should cost until we’ve had some time to get to know you, your family, your situation, and your goals.

Part of the reasoning, too, is competition. One financial planner doesn’t want another financial planner to find out how much he’s charging lest he be undercut and lose out on price.

If you’re looking for the cheapest financial planner you can find, then you’re going to get what you pay for.

There’s a reason, after all, that Yugos were unreliable cars that nobody liked.

In a sense, being led to the cost discussion with a financial planner is very much like being led through a vacation timeshare presentation. If you’ve ever been through one of those, you know how it goes – you’ll go to some really nice location. The salesperson will meet you, offer you drinks, cookies, take you snorkeling, whatever. They walk you through the wonderful sales model and tell you all of the benefits of what you’ll get by buying a timeshare. They’ll address every objection under the sun that anyone in the long history of timeshare presentations has ever come up with.

Once they have you fully and wholly hooked on how owning a timeshare will be better than curing cancer or winning an Emmy, then, and only then, do they pull back the curtain and reveal the price.

I’m pulling back my own curtain before we even have a conversation.


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Six Areas Where I Disagree with Dave Ramsey’s Investing and Retirement Withdrawal Advice

Boxing Ring

Not necessary to settle differences.

“A good financial planner is going to do more than pick your funds.”
–Dave Ramsey

Very recently, personal finance guru Dave Ramsey engaged in a heated discussion on Twitter with several financial planners regarding the appropriateness of his investment and retirement withdrawal advice. The questions were (and are) very legitimate ones, namely:

Why does Dave Ramsey keep telling people to invest 100% in equities and that they can expect 12% returns?

and

Why does Dave Ramsey keep telling people that they can safely withdraw 8% of their net worth each year in retirement?

Dave Ramsey’s responses?

Here’s what he has to say about people who question him.

Instead of actually addressing the questions with a cogent, thoughtful, defensible response, he resorted to ad hominem attacks against financial planners who hold a fiduciary duty to their clients, Carolyn McClanahan and James Osborne.

I’m a fan of Dave Ramsey’s debt advice. I regularly tell people to go to the local library and check out The Total Money Makeover if they’re deeply in debt because there’s no point in paying me to get the same advice that they can get for free by checking that book out of the library.

But, I have serious and deep concerns about the investment and retirement asset management advice that he gives to his listeners.

Six Areas Where I Disagree With Dave Ramsey’s Advice

There are six areas of disagreement I have with the investment and retirement advice that he provides to his listeners and to his readers.

Investment advice disagreement #1: You can expect a 12% average return

Even if the average returns of the market were 12%, which they’re not, he’s making a very simple, basic mathematical mistake. He is confusing average returns and compound returns. In average returns, the sequence of returns doesn’t matter. In compound returns, the sequence of returns does matter.

Let’s look at an example.

Say you invested $1,000 in Widgets, Inc. The first year, Widgets Inc. loses 10%. At the end of the year, you have $900 of Widgets, Inc. stock. The second year, Widgets Inc. gains 20%. At the end of year 2, you have $1,080 of Widgets, Inc. stock.

The average return during that two year period was 5%. But, applying an average 5% return over a two year period would mean that you should have $1,102.50 in Widgets, Inc. stock. You don’t. You only have $1,080 of Widgets, Inc. stock.

Your compound average growth rate (CAGR), or compounded annual return, was 3.92%.

If you report the average annual return, you get to say that you averaged 5% per year.

If you return the annual return that you see in your personal holdings, then you averaged 3.92% per year.

Compounded over time, that’s a big difference.

I don’t believe that Dave Ramsey is trying to mislead anyone here. I think he really thinks that the average annual return is the correct number to report when it’s not.

He does argue two counterpoints to this issue. The first is that saving 15% per year during your working lifetime for retirement is more important than the returns that you’ll get. He’s right, but not by the wide margin that he tells his audience. Furthermore, his newsletters encourage working backwards from a 12% return rather than saving 15%. That advice is contradictory.

If an average family, earning $52,762 (the national average family income), saves 15% of their income every year for 40 years and receives the compounded average growth rate of the market, adjusted for inflation, which is 6.69%, that family will end up with $1,556,686.83. Using a 4% withdrawal rate (which contradicts his advice, a point we’ll address below), that provides the family with $62,267.47 per year. The family will be in good shape, but not in the shape that a 12% return assumption would lead them to believe – $6,799,510.70 versus $1,556,686,83 – a 77% difference.

The second counterpoint is that he uses 12% as an educational example and that he can point to mutual funds which have made 12% over a long period of time. We’ll deconstruct his picks further down, but using 12% as an “educational example” brushes over an important aspect of the differentiator between a “guru” (which he undoubtedly is and deserves the title) and an actual, fiduciarily bound advisor. He’s not bound by a fiduciary duty. It’s not investment advice. That’s why he won’t tell people which mutual funds to invest in. I can’t either, unless you’re a client, but I can certainly tell you which ones to avoid, such as mutual funds that have exorbitant loads. Again, more on this later.

If you think that you’re going to get a 12% average return, then you’ll simply plug 12% into your numbers each and every year, and that’s wrong. The market has ups and downs. To simply say 12% per year every year is naïve and can lead you to significantly overestimate the value that your nest egg will hold when it comes time to retire. It is possible to become anchored (to read how the anchoring bias affects your retirement decisions, read “The Difficulty of Predicting Your Retirement Number”) to the 12% return and not follow the 15% savings rule, and that will lead to serious repercussions when you reach retirement age if you save less because you think that you can get a higher return than you probably will.

Which leads me into the second area of disagreement.

Investment advice disagreement #2: Continuing to be invested completely in stocks in retirement

Once you retire, you’re basically trading sources of income from wages to money produced by the assets you’ve saved up and invested in. While some of you may plan on working part-time in retirement, it’s quite possible to expect that you may not be able to work once you’re in retirement. Furthermore, as you age, the probability that you can get back to work declines, both because of mental and physical frailties and because the absence from the workforce will make it increasingly difficult to get a job.

Thus, unless you’re the rare person who will work until age 103 and die at the desk, you’re going to have to rely on your nest egg and Social Security to support you. In most cases, Social Security will not be sufficient to allow you to maintain the lifestyle you had during your working years (and hopefully, many of you will be able to retire before Social Security starts), so you’re going to need an additional source of income.

That income will come from your assets.

Now, it’s possible that you may never need to purchase bonds in retirement, but you will need some source of income. Relying solely on the dividends and capital gains provided by stocks is an extremely risky way of doing so unless your asset base and the dividends it produces far exceed your income needs.

It’s not wise to go completely in the other direction, either, and dump everything you have into CDs. If you choose that route, while you won’t lose money, you will lose purchasing power. Ultra-safe, income-generating investments like CDs and money markets do not beat inflation. This means that, over time, what you can buy for your money will decrease. Given that the biggest increase in expenses and the biggest inflationary cost in retirement is healthcare, this failure to match or beat inflation will mean that when you need more money to cover declining health or long term care, you won’t have the financial wherewithal to afford the care that you need.

That’s why I generally suggest that people aim to have 110 – age as a percentage of the portfolio to keep in equities and the remainder in income generating assets. If you are retired and have all of your investments in equities and the market tanks, then you’re going to be faced with a double whammy of a shrunken nest egg and having to withdraw from it when it’s been hit. Since bonds and equities usually are countercyclical, the impact of a down market year won’t be as bad.


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“If you own a home with wheels on it and several cars without, you just might be a redneck.” –Jeff Foxworthy There are people who view their cars as an expression or extension of themselves. Then, there are people who view cars as a means to get from point A to point B. I used […]

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Bronze May Be the Most Precious Metal Under Obamacare

Note: This article is intended to give you a framework for how to evaluate different ACA plans. Based on the plans available in your state, your results may be different. This framework is based on the initial plan released by California in June, 2013 and is illustrative. Up until now, health insurance has been an […]

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