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Jeff, 50, is a specialized surgeon. His wife Susan, 48, is a stay-at-home mom. Even though Jeff earns an enviable $665,000 a year, the couple — married 19 years — are still struggling to pay the bills.
Finance expert Ramit Sethi points out that people can feel money anxiety and develop poor spending habits, whether they make $50,000 or $500,000 a year.
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“If you feel bad about money at $50,000, you’re probably going to feel that way when you make 10 times your income,” he said during an episode of his podcast, “I Will Teach You To Be Rich,” (1) where he spoke with the couple.
Jeff’s salary is high (his take-home pay, after taxes, is $426,000 a year), but he only started earning that much around the age of 40. As his income grew, the family’s discretionary spending ballooned.
Commission fee
Sethi points to some of the psychological issues at play. For example, Susan grew up without a lot of money, and while she often deprives herself of small expenditures like pedicures, she also has a hard time saying no to her kids when it comes to big-ticket items.
But, according to Sethi, one of their biggest problems has to do with their financial advisor. Sethi regularly recommends that people avoid working with an advisor who charges a percentage of assets under management (AUM) as this means the more assets you have, the more you will pay. Some advisors will instead charge a flat or hourly fee.
Jeff has two brokerage accounts managed by an advisor who charges a fee of 1.24%, in addition to a whole life policy and an annuity.
“I generally feel as though most people are good and they’re not trying to rip us off,” Susan said.
But when she asked their financial advisor about his fee, “he told me, ‘oh, it’s roughly around 1%.’ I’ll never forget, he made this face like, oh, it’s not that much.”
Sethi says he knows that face.
“Most advisors make their money when your portfolio grows, which is why they love older people and wealthy people who specifically do not understand commission structures,” he said.
Traditional advisors typically charge fees between 0.5% to 2% AUM, or $1,000 to $3,000 plus for comprehensive advising plans. This is where Range differs — they’re an all-in-one wealth management platform for high-earning professionals making $250,000 per year or households making over $300,000. Even better, they use a flat fee structure with 0% AUM fees.
Range offers a smart, streamlined way to manage your full financial life. With 24/7 expert advice and personalized strategies, Range’s platform includes wealth management tools for tax situations, equity compensation, estate planning and more. The best part is you can book a free online demo with Range from the comfort of your home.
Read more: Warren Buffett used 8 simple money rules to turn $9,800 into a stunning $150B — start using them today to get rich (and then stay rich)
Understanding the math behind AUM
Jeff and Susan have $460,000 in two brokerage accounts. If they live to age 85 — for another 35 years — without making any further contributions to these accounts, and assuming a conservative 5% return, that 1.24% fee adds up to a whopping $863,170, according to Sethi.
That’s because AUM fees grow with your portfolio.
Right now, the couple pays roughly $6,000 a year in fees — about $500 a month. But fast-forward 35 years — 420 months — and they’ll be paying 1.24% on a much larger portfolio, averaging around $2,054 a month, according to Sethi.
Instead of putting their money toward paying high fees, Jeff and Susan could put that money to work by investing in a low-cost ETF or index fund and get a similar return — but without having to cough up nearly as much money in fees, says Sethi.
This is where robo-advisors can take some of the pressure off, especially ones that can be tailored to your risk tolerance.
One of the easiest ways to invest is to open a self-directed trade account with SoFi. This DIY approach allows you to invest with no commission fees, plus for a limited time you can get up to $1,000 in stock when you fund a new account.
SoFi is designed to help you learn investing as you go, with real-time investing news, curated content and the data you need to make smart decisions about the stocks that matter most to you.
Jeff and Susan may also want to invest in alternative assets, such as real estate, to build out a diversified, risk-resistant portfolio. Commercial real estate, in particular, can offer a number of tax advantages for investors.
But, historically, direct access to the $22.5 trillion commercial real estate sector has long been limited to a select group of elite investors — until now.
First National Realty Partners (FNRP) allows accredited investors to diversify their portfolio through grocery-anchored commercial properties, without taking on the responsibilities of being a landlord.
With a minimum investment of $50,000, investors can own a share of properties leased by national brands like Whole Foods, Kroger and Walmart, which provide essential goods to their communities. Thanks to triple net leases, accredited investors are able to invest in these properties without worrying about tenant costs cutting into their potential returns.
Simply answer a few questions — including how much you would like to invest — to start browsing FNRP’s full list of available properties.
Mogul is a real estate investment platform offering fractional ownership in blue-chip rental properties, which gives investors monthly rental income, real-time appreciation and tax benefits — without the need for a hefty down payment or 3 A.M. tenant calls.
Founded by former Goldman Sachs real estate investors, the team hand-picks the top 1% of single-family rental homes nationwide for you. Simply put, you can invest in institutional quality offerings for a fraction of the usual cost.
Each property undergoes a vetting process, requiring a minimum 12% return even in downside scenarios. Across the board, the platform features an average annual IRR of 18.8%. Their cash-on-cash yields, meanwhile, average between 10 to 12% annually. Offerings often sell out in under three hours, with investments typically ranging between $15,000 and $40,000 per property.
Every investment is secured by real assets, not dependent on the platform’s viability. Each property is held in a standalone Propco LLC, so investors own the property — not the platform. Blockchain-based fractionalization adds a layer of safety, ensuring a permanent, verifiable record of each stake.
Getting started is a quick and easy process. You can sign up for an account and then browse available properties. Once you verify your information with their team, you can invest like a mogul in just a few clicks..
Another alternative asset Jeff and Susan could consider adding to their portfolio? Art.
Similar to commercial real estate, investing in art was once only accessible for those with connections to an exclusive club of curators, galleries and brokers. But now Masterworks is changing the game for investors with capital on hand, but without strong connections to the art world.
Masterworks gives you the ability to invest in shares of contemporary art, including paintings by well-known artists like Banksy, Picasso and Basquiat.
As an investor using Masterworks, you can select the fine art you want to invest in — with every piece of artwork thoroughly vetted by their team of industry experts. Less than 3% of all artwork passes the vetting process, making each investable asset a potentially prime candidate for future appreciation.
While every piece of artwork sold performs differently, out of 23 exits Masterworks has delivered representative annualized returns like 17.6%, 17.8% and 21.5% among assets held longer than a year.
See important Regulation A disclosures at Masterworks.com/cd.
The good news: You can still get out
So what can you do if you’re working with a financial advisor who charges you a percentage of assets and you want out?
The fees Jeff and Susan have paid up until now are a sunk cost. But the biggest step in this process is realizing you need to make a switch, says Sethi. The rest are just details — though it could make for an uncomfortable conversation, especially if you’ve been working with the same financial advisor for many years.
Sethi recommends explaining to your financial advisor — preferably over email — that you’ve decided to move your brokerage account because the fees you’re paying are not part of your financial goals. By transferring your brokerage account in-kind and moving assets as-is from one account to another, you can avoid “selling them and triggering a taxable event,” he said.
However, if you do want to keep working with an advisor, Sethi said, “you want to pay a flat fee, never a percentage.”
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I Will Teach You To Be Rich(1)
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