This surgeon and his wife were unaware that their financial advisor may have been charging them high fees until Ramit Sethi put things right.

Jeff, 50 years old, is a specialist surgeon. His wife Susan (48) is a housewife. Jeff earns an enviable annual salary of $665,000, but his couple, who have been married for 19 years, still struggle to pay their bills.

Financial expert Ramit Sethi says whether people make $50,000 or $500,000 a year, they can have money worries and bad spending habits.

“If you feel bad about money at $50,000, you’ll probably feel the same way when your income increases 10 times,” he said on an episode of the podcast “I Will Teach You To Be Rich.”

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Although Jeff’s salary is high (he takes home $426,000 a year after taxes), he didn’t start earning that much until around age 40. As his income increased, his family’s discretionary spending ballooned.

Sethi points out that psychological issues are involved. For example, Susan grew up without much money, and while she often takes care of small expenses like pedicures, she also has a hard time telling her children no to big-ticket items.

But Sethi says one of the biggest issues has to do with financial advisors. He regularly advises people to avoid working with advisors who charge a percentage of their assets or assets under management (AUM). In other words, the more assets you entrust to your financial advisor, the more you will be charged (other advisors charge flat fees or hourly fees).

In addition to a whole life insurance policy and an annuity, Jeff has two brokerage accounts managed by an advisor that charge 1.24% commission.

“Generally, I feel like most people are good people and aren’t trying to scam us,” Susan said.

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But when she asked her financial advisor about the fee, “he said, oh, it’s roughly 1%. I’ll never forget him looking at me like, oh, that’s no big deal. Yo”

Sethi says he knows that face.

“Most advisors make money when their portfolios grow. That’s why they especially like older people and wealthy people who don’t understand how fees work,” he said.

read more: Richer in Retirement — Why people who work with a financial advisor earn an extra $1.3 million in retirement

Understand the mathematics behind AUM

Jeff and Susan have $460,000 in two brokerage accounts. If you live to age 85 (another 35 years) without making any further contributions to these accounts, that 1.24% fee would total $863,170, assuming a conservative 5% return, according to Sethi. It is said to be a huge amount of dollars.

This is because as your portfolio grows, so do your fees.

Currently, the couple pays about $6,000 a year, or about $500 a month. But fast forward 35 years, or 420 months, and they’re not just paying $500 a month. Instead, you’ll pay 1.24% on a much larger portfolio, which averages about $2,054 a month, Sethi said.

“This is what happens when you have a 1.24% fee on a modest $460,000 portfolio that hasn’t even been added to,” Sethi says. “His 1.24% fee seems modest at this early stage, but it is backloaded.”

Instead, Jeff and Susan could invest their money in low-cost ETFs or index funds and get similar returns, but with $800,000 left in their pockets to use for retirement, Sethi said. .

Good news: You can still go out.

So what if you work with a financial advisor who charges a percentage of your assets and you want to leave?

The fees that Jeff and Susan have been paying are sunk costs. But Sethi says the biggest step in the process is realizing you need to make the switch. The rest are just details, but they can be an uncomfortable conversation, especially if you’ve been working with the same financial advisor for years.

Sethi recommends explaining to your financial advisor, preferably by email, that you’ve decided to move your brokerage account because the fees you’re paying are not part of your financial goals. An in-kind transfer of a brokerage account, or simply moving a brokerage account from one account to another, “does not create a taxable situation where the brokerage account is sold,” he said.

However, you can continue to use your financial advisor. If they do, “I want to pay a flat fee, not a percentage,” he says.

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