1% Matters
How much do you pay your financial advisor?
The most common answers I hear are;
“I don’t know.”
“They do better when I do better.”
or,“Around 1%.”
Never a dollar amount.
This is intentional— Think about it, when is the last time you looked at the dollar amount you paid in fees for financial services? What about the fees for your money to be invested in a particular mutual fund, ETF, or other investment vehicle? An annuity? Whole Life insurance plan?
What’s the best way to make a large amount of money seem unremarkable? How about if we talk about it as a small percentage of a larger pool of money? Seems to do the trick.
The industry standard fee for a financial advisor is 1% of AUM — assets under management— annually. This means a financial advisor earns 1% of a client’s life-savings every single year. If they have 100 clients they are effectively earning 100% of someone’s life-savings every single year.
Even still, 1% is a small price to pay for your money to be invested wisely and help you grow your wealth. Right?
I’m sure you’ve guessed there’s more to the story.
Let’s take a deeper dive into what that 1% gets you.
It gets you a financial advisor. But what does that actually mean? Most financial advisors don’t pick what you’re invested in. Their job is to get to know you, build a relationship, understand your goals, and—ultimately— plug you into an “investment profile” to allocate your funds into. They determine things like, risk tolerance, income, years until retirement, and plug you into a portfolio of mutual funds / investments that a third party provides to them for ‘people like you.’ Which is all fine, except, by the way, most of them under-perform the S&P 500.
According to S&P Dow Jones Indices, 91% of U.S. large-cap funds underperformed the S&P 500 over the 20 years ending June 30, 2025.
Many advisors make commissions selling insurance products, annuities, etc. Some of them are also broker-dealers and make commissions when they buy and sell your equities. That’s right— those products that your fiduciary recommends because they are putting your interest ahead of their own… also happen to pay for their family vacation. Maybe the expensive Whole-Life insurance plan is good for you, or maybe not— but it’s definitely good for whoever sells it to you. So what are you paying for? Peace of mind I suppose— although you might lose some of that if you dig into the numbers a little bit.
Let’s take a look at what a 1% under-performance costs you.
Let’s keep the math simple— I’m going to round up and down slightly to make the point clear without using too many decimals.
If you have: $250,000 invested for 25 years
A 10% annual return is : $2.7-million.
A 9% annual return is : $2.2-million $500,000 less.
Now consider most money managers underperform the S&P 500 by over 2%. That’s a $1-million difference over 25 years for every $250,000 in your nest egg.
Peace of mind?
If you’re like me, you’re left with more questions than answers at this point. This is an important part of the process though— getting enough information to ask big questions— we can’t expect to make meaningful progress if we don’t understand the investment vehicles our money is in.
How can you claw back 1% at a time to increase your long-term returns?
Cut down on fees. This is like buying your groceries on sale— the best return might be a guaranteed one, and when you’re paying smaller fees you’re keeping more money invested. Reducing fees can occur at the investment product level (insurance, annuity, mutual fund, ETF, index fund, etc), or at the advisor / broker level— uncapped AUM fees, hedge fund style 2/20 fees, commissions, etc. Did you know it doesn’t cost anything to own an individual stock? Meaning you can make your own “fund” of stocks to replicate an index or ETF and not pay the index / ETF fees.
Eliminating fees is one of the first places to look to improve your returns over time — this is essentially the Vanguard Index Fund model— and it’s hard to beat it!Tax strategy! Tax efficiency is often not considered by the retail investor, but has massive implications to your long-term returns. There are incredible— and legal— tax strategies that can allow you to pay long-term capital gains tax instead of income tax on your returns. This could mean paying 15% instead of 30% in taxes. Tax strategies are an important consideration and one your financial advisor should help you understand.
Increase your returns.
Our previous article on challenging the index introduces the idea of cutting the fat from a portfolio to improve the performance by removing the perennial under-performers. This is one example— but there are many tools worth considering based upon your specific time horizon, goals, and threshold for risk. Some of these strategies are as simple as increasing your allocation of stocks versus bonds in a long-term portfolio— others involve more active management, thematic investing, individual stock picks, and stock option strategies that can shelter you from downside as well as improve long-term returns. Be sure to check out the article covering the two stock-options I recommend considering— and the high-risk options trades I warn you to avoid.
This article is for educational purposes only, it does not guarantee a return or eliminate risk, but purposes to express the opinion of the author.
