292 | Ask Hilary: Is Paying an Advisory Fee For Ongoing Financial Support Really Worth It?

[INTRODUCTION]

[00:00:34] Hilary Hendershott: Welcome to Love, your Money^®, where we’re flipping the script on traditional financial advice. This is an Ask Hilary episode where I answer your real questions about investing, tax planning, money mindset, and more. Because Ask is one of the 7 Steps to Wealth, and whether you’re asking questions that help you learn more and empower yourself or seeking out the support you need to take the next step in your wealth-building journey, asking is an essential step to building clarity, confidence, and momentum with your money. Let’s dive in.

[EPISODE]

[00:01:07]  Hilary Hendershott: This is one of my team’s favorite questions to answer when it comes up in our prospecting calls, is the question about advisor fees. “Is paying an advisory fee really worth it, especially when I could manage things myself or pay hourly for a plan?” It is a great question. Basically, “Hilary, justify your existence,” which I can do. Which I can do. So, let me just first say, I do have to caveat this with, obviously, I have a dog in this race, right? If people didn’t pay advisory fees, I wouldn’t have a business. I just wouldn’t. I wouldn’t employ a team of nine people. I would have to have a different job, right? So, just saying, I have a dog in this race.

[00:01:51] I also have intimate knowledge of what we do for clients and what we do all day. So, the question is, can I manage things myself, or can I just pay hourly for a plan? Let me just say, certainly, when you’re 18 years old, you probably don’t need a financial advisor unless you inherited some kind of trust fund. At some point, though, for most people, if you’re following the rules of money and you’re really intending to build wealth, there are complexities that arise, right? So, these complexities might come when you need to make fork-in-the-road decisions.

[00:02:27] Some example of a fork in the road is, “I’ve been working for 10 years. I have $600,000 in my 401(k). I’m going to a new job. I’ve heard that you should roll over your 401(k) into an IRA instead of rolling it over to your new company’s 401(k),” which I generally agree with, by the way. That’s generally the advice we give our clients. I’m not going to get off track and start talking about that, but that’s a kind of a fork-in-the-road decision. Inheriting money is a fork-in-the-road decision. Getting money in a divorce is a fork-in-the-road decision. Retiring is a really big fork-in-the-road decision, right?

[00:03:03] So, there’s a time in your life when your finances are simple, like you need to worry about paying your credit card bill at the end of the month. You need to worry about getting to a place where you’re maximizing your 401(k) contribution every year. You need to worry about keeping your FICO score high so you can borrow money to buy your first house and things like this. And then there are lots of financial advisors who offer one-time plans. My experience is those one-time plans range in cost from $2,500 to $7,500. As a point of information, now that I just told you the average price of a good financial plan, you can understand why I question why people would value a free financial plan, which is what some advisors use to sell their services. Like, why are you going to give me $2,500 to $7,500? Probably because it’s not worth the paper it’s printed on.

[00:03:52] Anyway, yes, you can get a one-time plan, and these one-time plans can help you work out how to navigate fork-in-the-road decisions. There’s even one-time plans to give you a plan for an IPO or to maximize equity compensation. Like, I don’t know that there are many things that happen in your financial life that someone won’t do a one-time financial plan for you that would cost you less than a 1% of your account balance advisory fee over time. That said, is this a situation where you get what you pay for? I used to do those one-time plans. I think everybody does in my role when you get into the industry, and here’s what I really saw. This is my real experience, and I wanted the money, I needed the money at the time, so I was doing them.

[00:04:40] More often than not, people don’t know how to execute the plan, or they don’t do it right. They make mistakes, and then you’ve got kind of your professional credibility on the line. That’s my perspective. And this person doesn’t have the kind of life I designed for them. There are mistakes in there. There’s things undone. There are potential pitfalls. There are very real risks. And then they might come back five years later because, of course, they’re figuring– they’re amortizing the cost of that plan over five years, and you find out, I found out, lots of opportunities were missed. Once they get to a place where they’re hiring a financial advisor for a one-time plan, I’m saying they, in this case, I’m talking to you, you the listener.

[00:05:21] Once you get to a place where you have one complexity in your financial life, you’re probably going to have more. They’re probably going to start to compound. And then as the advisor, in my role, I found that people were making mistakes along the way, costly mistakes, that if they had been on my purview, they had been a client of mine all that time, they wouldn’t have made, and it was heartbreaking for me. And that may be hard to believe that an emotional decision led me to stop offering– to sort of lop off a whole service offering. But that is what happened. It just wasn’t joyful for me; it wasn’t fun to always be dealing with people who were really trying to cut costs, so overtly trying to pay less and making mistakes, and didn’t have a conversation for, didn’t seem to value the alternate scenario, the opportunity cost of making those mistakes.

[00:06:11] Let’s say the scenario A, scenario B-ness of it. So, scenario A is the world that they were living in, not incurring advisory fees, and scenario B is the world where they had an ideal financial life, right? So, I just stopped. I just don’t offer that anymore. And that said, if it’s truly like, “I’m 22 years old and I inherited a quarter million dollars, and I’m just going to set it and forget it. I just need to know what to do with this money.” And there’s like some complexity. I’m like, “I’m settling the estate, and can I get a little help with that?” Yeah. Maybe you could justify a one-time plan in that case. However, a quarter million dollars is going to turn into half a million dollars pretty soon, and so you want to have your eye on the prize, like what’s your long-term plan?

[00:06:58] Okay. So, what do I think of as a relatively simple financial life? No credit card debt. Maximizing your 401(k) contributions. You either rent or you own a home, probably just with one mortgage, and like no cash out on that mortgage. So, in that case, your tax return is fairly simple. Your cash flows are fairly simple. And then, like I said, things are going to start to compound after that. But legitimately, I think of that life–as long as there’s no ecosystem of investment accounts, you’ve got one 401(k), right?–fairly simple. That said, the investment selection you’re going to find inside a company 401(k) plan is generally high cost, low performing. And so, that is a simple explanation of why we often recommend people roll over to an IRA once you leave that first employer. So, again, things are getting complex pretty fast.

[00:07:46] Now, let’s talk about the other form of complexity. Well, you start out single and unencumbered, don’t you? And then most of us go along in life, and we pick up responsibilities. And those responsibilities can be business investments. They can be husbands or wives. They can be children, they can be other people’s children, right, if you marry someone who already has children. Complexity can start to occur if your income gets high and you are now able and needing to save more money in taxable accounts because you’ve maxed out your 401(k) contribution, and you realize that every time you sell something in that taxable account, Congress and the IRS lop off, depending on what state you live in, 20% to 40% of your growth in the form of capital gains taxes.

[00:08:36] And that alone can equal a couple of years of advisory fees, if not more, especially if you’re earning equity compensation. Most tech companies give a lot of equity compensation now, so you’re kind of getting into this mushrooming complexity. Now, you need to make decisions about how to prioritize multiple goals because in your financial life, that’s a zero-sum game. You’ve often heard me talk about how wealth and money on the planet is not a zero-sum game, but your financial ecosystem, my financial ecosystem, it’s a zero-sum game. I got the money that I got. And if I don’t have enough money to achieve my education goals, my retirement goals, my new car goals, my vacation goals, I have to decide how to prioritize, and I have to do that smartly.

[00:09:16] And now you have constrained resources because you have kids and a spouse, and maybe you’re taking care of parents, and you want to create generational wealth. And noncritical things tend to get backburnered, and I’ll tell you, financial planning never seems urgent. So, at this point, let’s talk about paying an advisor to essentially manage your financial life that has big value. So, what my team and I offer, and I can’t speak to other financial advisors. Every independent financial advisor gets to determine their own service level offering. So, you are left to do that portion of the research on your own. Big Wall Street advisors will say that they offer comprehensive financial planning. Most of them have zero education in financial planning. That would be the CERTIFIED FINANCIAL PLANNER^® designation.

[00:10:04] Sorry to talk down on my competition, but I do think it’s important for you to understand how to think about these things. I mean, these Wall Street guys, they have big marketing dollars, branding dollars behind them, and, you know, to say, “I work with Morgan Stanley or Merrill Lynch,” it might sound cool, but in my opinion, you’re going to get more from an independent advisor. We don’t work for banks, brokerages, or financial institutions, like we work for you. And that just is incentive structure right there. I will tell you, I hear people say, “Well, I can do that on my own,” in terms of managing my own finances. And given the caveat of a simple financial life versus a complex financial life, I often laugh–to myself–and I think, “Okay, come work for me for a month. Like, you won’t even make it four weeks. I promise you.”

[00:10:54] It takes about seven years of work experience plus a two-year credential to be qualified at the senior advisor level in my firm. There’s a reason for that. That’s not just nonsense, right? There’s a lot we do. We put thousands of hours into doing what we do. And the value of that isn’t necessarily the book knowledge, like if you can ChatGPT the answer to a question, you don’t need to pay for that. I mean, if you don’t believe it when it comes up on ChatGPT, you might need to pay for someone you actually trust. But the point is, we have wisdom. We’ve been through market cycles. We’ve seen various outcomes, we’ve settled estates, we’ve helped people pay off tax penalties.

[00:11:37] We’ve helped people reduce their tax penalties. We’ve seen what happens when people try to avoid X, Y, or Z bad outcome, right? We’ve seen it all, and that wisdom to you is occasionally priceless. Priceless. Like it won’t be on a daily basis, but I really can’t think of a client that we have worked for, for say, five years or more for whom we haven’t stepped in and made a massive, massive difference in how they were thinking through something or going about something or helping them avoid a mistake or, you know, like that. And so, again, we’re talking about the scenario A versus scenario B-ness of it. Yes, cutting costs is a valid financial strategy. It is. But financial advisors like myself exist for a reason.

[00:12:25] We have annual fees for a reason, because it costs that much to get the attention of someone who’s credible, smart, educated, wise, thinking on your behalf, right? So, there is real value in building a relationship and trust with an advisor before you need one. There’s a Vanguard study out there that says the combined value of a financial advisor on an annualized basis can be over 3%. So, if we charge 1% of the account balance that we manage, we’re providing a net 2% return. That’s an independent study by Vanguard. You can go check that out. We can link to it in the show notes for today’s episode.

[00:13:02] Let’s talk about the big mistakes I see. I’ve seen windfall recipients of all types, mostly people who inherit money, try to figure out who to trust when the money is already there, right? Someone you love dies, and you get $1 million, $2 million. I’ve seen $4, $5, $6 million, right? Now, you’re figuring out who to trust. The money is there. The decision feels very weighty, and the internet and your friends tell you to trust no one. I mean, you’re getting different financial advice from everyone, but you don’t know any professional that you’ve taken the time to build trust with. That’s a problem. That’s hard, right?

[00:13:46] And so, taking the time to build a relationship with, or at least dip your toes in the industry and figure out what the heck, I mean, at this point I know what kind of doctors I want to hire. Why? Because I’m 48 years old and I’ve spent 28 years or more figuring it out. And sometimes I did it wrong, but I did it when I had my health and I had energy. I still have those things just a little bit less, and I’ve figured out who I want to see and how I want that relationship to feel, and the things I won’t put up with, right? And a relationship with a financial person is kind of the same. There really is so much that we help clients manage and organize and make sustainable in terms of your financial life. And, there’s things that we know because we work in the industry, and because all I do is organize people’s financial lives so that they don’t run out of money.

[00:14:42] Simple. It requires math and it requires planning, but it is so nuanced in terms of all the things we have to keep firing on all cylinders and all the mindsets we have to attain and all the mindsets we have to avoid, right? And so, a relationship with me and my team is really a shortcut to success. On top of that, we provide analysis of current market conditions. So, you’re not taking advice from your coworkers or your armchair financial advisor. I’ve talked about that guy on this show before. You’re not taking advice from the mass media. I mean, you need someone who’s giving you cohesive, consistent advice.

[00:15:20] If you go look for prescription medicine and ask ChatGPT, “What supplements also solve this problem?”, you’re going to get answers. They just don’t come from the same body of knowledge, and that’s patchworking your health. And if you’re doing the same in your money, you’re patchworking your wealth, right? So, there’s value in having kind of sage advice that comes from the same intentionality. We do help coordinate with people’s tax preparers, and we review tax returns. So, sometimes you’re going to find in life that you get different advice from an insurance salesman, from the tax guy, from the mortgage lender, right? And if you don’t have an advisor in the mix, you’re left to decide whose advice to take.

[00:16:04] We organize people’s portfolios and we keep them balanced. And we do tax loss harvesting at appropriate times for clients. We consult with clients before their companies either sell, so they sell a private business, or they have an IPO. We work with recent divorcées to understand all the legal documents they’re getting and how to parse the assets from the divorced marital ecosystem, gather their separated assets, and then plan their brand-new single lives. I don’t know that there can be a bigger shift in financial life because you’re taking money that was supporting two people, and you’re separating it, and now each person has their own independent life.

[00:16:43] I mean, just the cost of where you live is probably going to skyrocket, which meaningfully changes your cash flows. We make sure big bank failures don’t affect you. We help make sure you have plenty of insurance and that it’s there when you have a loss. And sometimes, most importantly, we tell people what not to do. And I know this is hard to imagine, but some financial decisions can’t easily be undone. In some cases, they can’t be undone, right? Because they represent losses. And so, to me, and this sounds sort of reprimand-y Catholic school ruler on the back of the hand kind of a thing, and that’s not how I mean it, but even I, in my twenties, before I was in this career, I mean, I paid for an options trading class.

[00:17:28] Like, if I had had someone I trusted who said, “Don’t do that,” I would’ve saved myself $2,500 and today I’d be like $15,000 richer because that money would’ve compounded. That was a stupid thing to do. Someone should have said to me, “Don’t do that,” and sometimes the most important thing your financial advisor can say to you is, “Don’t do that.” And how do I get the opportunity to be in your ear? Is you are paying me a fee to advise you. And in order to justify that fee, because you have leaned into our relationship, when you have an opportunity to do something financial or an investment, you’re going to email me and my team, and you’re going to say, “This is the opportunity. Should I do this?”

[00:18:04] And if it’s a yes, we’re going to say yes. And if it’s a no, we’re going to say no. And that’s going to save you from either a bad financial experience or like a lot of lost money, and that justifies our fee over time, right? And I’ve sort of made this point in a few different ways in my response to this question, but I think people don’t appropriately weigh that eventuality in their lives when they consider not having a financial advisor on their team is that you have to really think about this alternate scenario where you’re living in, “I’ve made a major mistake. I’ve invested in something that went belly up. I’ve purchased an insurance contract that turns out to be expensive and low-performing and I can’t get out of it. Like, what’s that going to be like for me? How do I feel about that? And not only that, how much less resources do I have as a result of having made that decision?”

[00:18:57] And almost every client who has hired us, especially late in life, and the thing we don’t like to think about is like, eventually, we start to not think as sharply as we do today, right? And we do have those clients, and it’s never fun to talk about, but it’s important to have someone who is your fiduciary present for you in your financial life so that you don’t become victim to financial crimes or manipulated or catfished, right? So, again, these are just a smattering of the scenarios that we run into, and I would say almost every client we have has one of these scenarios. And at some point, the financial stakes just become too big to not be willing to invest in a relationship with someone who is going to maximize the chances that you achieve everything that’s important to you.

[OUTRO]

[00:19:45] Hilary Hendershott: Thanks for listening to this Ask Hilary episode of Love, your Money^®. If you’re ready to get intentional with your finances, I recommend you start with the framework we use with our clients and in our own lives every day, The 7 Steps to Wealth. You can download the free guide at HendershottWealth.com/7Steps. That’s the number 7 steps. And don’t forget, you can send your own Ask Hilary questions to hello@hendershottwealth.com or just go to HendershottWealth.com/AskHilary. Until next time, keep loving your money so it can love you back.

[END]