Don't fall for false financial adviser claims

Dear Pete:Im confused. Ive heard both a radio and a television commercial for fee-based financial advisers that claim they only benefit when I benefit. What does that mean? Dont I have to pay them whether I make money or not? Matt, Newark

You just hit on my biggest pet peeve in investment management marketing. If you dont pay attention closely, the ads will have you believethat when you lose money,your adviser doesnt make any money at all.

Nothing could be further from the truth.

Matt, lets give you a hypothetical portfolio worth $500,000, which is being managed by your investment adviser “Beverly.” Since Beverly is a fee-based adviser, you are to pay her 1%of your total portfolio value each and every year. One percent is a rather standard fee in the wealth management industry, and typically, you pay the fee on a quarterly basis, which complicates the math a bit, but dont worry. Ill do it for you.

If your portfolio value is $500,000 at the end of the first quarter, then your fee would be $1,250. Now, you can either pay the fee out of thataccount, or you can pay the fee out of your own pocket. Before we move on, it makes a difference as to how you pay your fee each and every quarter. If you pay out of the account, it will stifle your growth. If you pay out of pocket,it certainly reduces your discretionary cash flow, butallows your portfolio money to grow without taking a tiny step backward each quarter.

Lets say your account value increases by 2.5%per quarter this year. Your $500,000 grows to $512,500 by the end of the first quarter. And because your adviser “only makes more money when you make more money, Beverlys fee increases to $1,281.25.

If this same pace were to continue for four quarters and you paid the fees out of pocket, your end-of-the-year balance would be $551,906.45. You made $51,906.45 and for that, you paid her $5,320.41 for the year, which is a fee increase of$320.41 vs.the previous year.

Not tooshabby. Id make that trade. Under this positive scenario, no one would complain.

Everything is sunny when its sunny. Yet, sometimes its not sunny.

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As witnessed by, well, reality, the market isnt always going to end “up” for the year. Sometimes the market ends down, as does your portfolio.

Yes, your adviser’s job is to smooth out the bumps, and at times, generate positive returns when the market is otherwise falling, but that doesnt always go as planned. So instead of your $500,000 gaining you 2.5%per quarter for one year, lets assume it goes the other direction and loses 2.5%per quarter for one year.

Your new account value at the end of the first quarter is $487,500. And your out-of-pocket fee at the end of the year is only $1,218.75. Accounting for the whole year of losses and fees at that pace, you will have lost $48,156.05 and it would have cost you $4,695.22 in fees to do so.

You know that emoji thats gritting its teeth? It seems appropriate here.


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Dont get me wrong, Beverly did her job. Thats a tough pill to swallow when youre writing the quarterly checks totaling $4,695.22, but she did perform a year worth of services. And to be fair, it wasnt necessarily her fault that you lost money. Maybe the market lost 6%per quarter, and she limited your losses to 2.5%per quarter. If that were the case, then maybe you send a dozen cookies with the check for the quarterly management fee.

Year two comes and goes, and your portfolio ends the year up 2.5%per quarter. If you chose to pay Beverlys fees out of the account, which I generally frown upon, then your balance at the beginning of year two would be $447,342. The 2.5%quarterly account increase by the end of the year would result in an ending account balance of $488,862.99, and of course your fee would increase, too.

If you paid your fee out of the account balance again, after two years, you will have paid $9,419.91 in fees and your portfolio will have lost $11,137.01 of value. The we only make more money when you make more money assertion feels pretty darn empty. Primarily because advisers make money when you lose money, too.

Im not suggesting an adviser shouldnt get paid what theyre paid. Im simply suggesting the we only make more money when you make more money rationale is insincere at best and misleading at worst. The right adviser can bring tremendous value to you and your finances, but the integrity of the relationship can be immediately compromised based on the language an adviser uses to try to get you to walk through the door.

Peter Dunn is an author, speaker and radio host, and he has a free podcast: “Million Dollar Plan.” Have a question about money for Pete the Planner? Email him at The views and opinions expressed in this column are the authors and do not necessarily reflect those of USA TODAY.

Peter Dunn, aka Pete the Planner, writes a weekly financial-planning column for The Indianapolis Star and Fox59. (Photo: Provided)