Second Opinion On AUM Financial Advisor with Daniel Wrenne

Full Episode Transcript:

 Daniel: What’s up, guys? Hope you’re having a great day. I had a couple of questions that have been coming in pretty recently and wanted to talk through those. Um, we get a lot of these questions with, um, our, our families that we work with. We work with a bunch of physician families one on one and get to dig into their finances and we see all kinds of questions come up in that regard.

But what I wanted to talk about today was some of the most common questions we get from potential clients or new clients because I think those are probably More in line with a lot of you guys the questions you’re having Especially if you’re not working with somebody or if you’re early in your career And so I’m going to talk through, um, one particular question today and we’ll do a couple of these type Q and a, um, shows here in a row.

So the question comes up a lot is maybe somebody is reaching out to us and they’re already working with an advisor, a financial advisor, and they’ve heard that maybe it’s not the best approach. And so. So this particular type of advisor, I’m going to call them the AUM advisor. What that means is assets under management.

It’s basically like the, uh, wealth manager, uh, type advisor. And so these people are working with an, a wealth management type advisor, and they’ve heard that maybe that’s not the best approach and they want to get like a second opinion on that. So, um, that’s a common question that comes up. It could be a, it could be a problem.

It could be, it could not be a problem. So I’m going to talk through what that actually means and you know how it can be a problem and how it can potentially not be a problem. So an AUM advisor, that type of advisor is typically going to charge a percentage of the assets that are literally managed, like the assets that they’re Completely responsible for on your behalf.

They’re typically charging like a percentage on average. It’s like 1%. So they’re typically charging 1 percent of the balance of the investments that they’re managing on your behalf. And so. That’s how they make money. That’s, that’s an important starting point is like where follow the money understand where the incentives are and how they’re paid and you know, you can typically get a lot of good info from that.

So, um, as I mentioned, they’re typically charging 1 percent of assets. So that doesn’t, I mean, if we do the math, that’s not too bad. If you have like 10, 000, um, let’s say you got a couple Roth IRAs with 5, 000 each 10, 000, that’s like 100 a year. 1 percent or even a hundred thousand. Like if you’re up to a hundred thousand, that’s not too bad either.

I mean. 1, 000 a year, um, to have like an, an, an advisor looking out for you. Maybe that doesn’t sound like too bad of a deal and it, and it might not be. Um, but as you start to get to larger balances, you know, say it’s 1 million, you know, you start to talk about 10, 000 a year, or even if you have 10 million, that’s a hundred thousand a year, 1 percent of that.

So it can, it can get to be big numbers. But I think for starters, it’s just a simple thing is like understanding. What that actually translates to a lot of people don’t take the time to do the math on like what is 1 percent of my? Balance, what are they actually managing for me? And what are they not managing for me?

So it’s typically a 1 percent type fee on the accounts that are managed Investment services are typically the focal point as a I mean, it’s like anything you typically see the services Really focus around like what’s actually being charged for. So like they’re charging a percentage of the balance of the assets.

So they’re going to, that type of advisor is going to be much more focused.

Um, or spending time, and this is not always the case, but a lot of them are also spending time, you know, working to go get new assets, like selling essentially, like trying to get more assets, um, you know, because they got, uh, the more assets, the better revenue. So, as I mentioned, some are better than others.

This can work. Like, I don’t think this is the worst possible. Um, Set up for an advisor. Um, it can work, but I think you need to be aware of some of the conflict conflicts of interest and problems that can occur. Um, and I think I’ll throw this out there to number one thing is like the person and the fit there and the character there.

Like, do you trust the person that’s far away? Most important above and beyond all this stuff. So I mean, I kind of I sometimes think that’s an assumption, but it’s probably worth stating. That’s definitely the most important thing. Aside from that, though, some of the big problems, so I’ve already kind of hit, hit on some of those.

Um, but having, so if an advisor like that has no minimum account size, so say you have 10, 000 and they’re charging you 100 a year, Um, that, that tends to lead to, uh, very little attention. Like you’re not going to get, you have to kind of look at it. Like you get what you pay for. And that is true. You know, most of the time, it’s not always true, but, um, if you’re only paying a hundred dollars a year, they’re going to have to have a whole bunch of clients.

I mean, you can do the math on it. They’re going to have to have like thousands of clients. to, uh, make a living at that level. And there’s no way to give a lot of attention to thousands of clients. Like, I mean, maybe a tiny bit of attention, like, but you’re, you should not expect much attention at all. And that’s just kind of a nature of how, you know, it works.

Now, maybe you get in a relationship with someone that. you know, gives you extra attention because you have a good relationship. So there’s, there’s some exceptions, but, um, when they have those low number balances, like you’re going to see typically little attention. Um, another thing sometimes you run into with this type of advisor is just having a minimum account size.

So they’ll say, you know, we can’t work with you unless you have at least 500, 000. of assets. And that translates, I mean, it kind of solves the problem of what I was just talking about. They realized that like, they can’t give much attention to small accounts. And so they just say, okay, we can only work with you.

Um, a common number is like 500, 000 or some of them have a million dollar asset minimum. So they’re like, well, we, we either going to charge you 5, 000 years a minimum, or you have to have 500, 000 assets with us. Um, another big thing, which I’ve kind of already hit on is when you start to have bigger balances.

So like the average physician is going to have. You know, start in practice, low balances, but balances grow really fast. And then mid to late career, you have really big balances, like above average, you know, should be at least multiple millions of dollars. And so with this type of an advisor, um, it’s low cost on the front end, like sometimes really low costs.

Um, and then that goes up and on the back end, it’s super high costs. So those big, when you, when your balances get big, it can get really out of hand in terms of like what you’re actually paying. Um, you know, I did the math like a million dollars, 10, 000 a year, but you know, it’s up from there. So, you know 10 million you’re paying a hundred thousand a year.

That’s that’s pretty Insane if they’re just managing your investments. That’s a That’s a nutty high balance. Um, another thing I’ve kind of hit on is when you’re just paying for investment management, which is technically what that typically is set up as, you’re going to see, um, very little service tied to anything else.

So I wouldn’t expect much, especially like proactive attention. Like there’s going to be little proactive attention focused on things like. Student loans or, you know, debt or, you know, planning ahead. Um, now planning ahead, sometimes there is attention on that because it’s known that that’s necessary to, to increase the amount of assets that are managed.

Um, but they’re typically, the attention is typically going to be focused around those investments and. There’s rarely going to be attention in other areas that are a lot of times more important, uh, than the investments themselves. The other thing too, this, this is the last big thing I’ll throw out for today.

It’s just the conflict of interest. And so, you know, everybody has, there are always conflicts of interest. Um, this is just kind of the conflicts you would, you would want to consider in this sort of situation. So, um, there’s, there’s very little, really. Um, there, there’s no incentive, I guess, uh, they’re, they’re disincentivized to ever recommend removing balances.

So if you have. or even advising, uh, against saving more into your investments. So let’s say you have student loans. There’s an incentive to always say like, well, you need to invest first before you pay off student loans or say you have a big balance and you know, you have a debt that you might be better off paying off.

There’s a disincentive for them to tell you to do that. There’s also a disincentive for charitable giving. Um, you know, a lot of times If you give charitably, that’s money that goes out of the account. And so there’s, there’s going to be a disincentive for them to, um, to tell you or advise you to remove, uh, money from those accounts.

Another big thing, um, there’s, there’s, there’s a disincentive to, and this kind of ties into the services, there’s a disincentive to do, deal with things like backdoor Roth IRAs, um, or solo 401ks. Those are just like kind of extra above and beyond value adds. Uh, that, you know, typically, you know, an asset based advisor is gonna be like, well, you know, just have an IRA roll over your 401k to an IRA and the backdoor Roth IRA is not that big of a deal.

Um, but that’s, you know, the incentive for them is to not have to deal with that because they don’t really, that doesn’t change how much money they get paid. So, not to say, like I said, like the, I think the big takeaway is understanding, being aware of these things. I’m not trying to say that they’re all bad.

Um, I’ve operated in this model before, um, I, I switched out of it cause I didn’t think it was the right model or the best model for, uh, dealing with, with clients, but it can work. Um, and it’s, the more important thing is that you’re aware of it and that’s, that’s my goal for sharing this. All right, well, we’ll, we’ll get into some other Q and A type conversations in the next show and we’ll look forward to seeing you then.