Taxes and Fees: Why You Should Use a Financial Advisor for Asset Management
Topics: Tax planning, Investment fees, 1% Limit, Fee-Only Advisor, Fiduciary
If you don’t care about taxes and fees, you should. Besides spending too much money and maintaining a low savings rate, I believe the amount of fees you pay for your investments and the taxes you fail to plan for are two of the most detrimental aspects to building wealth long-term.
So, for this post I thought I’d write a second edition of an earlier post, but really zero in on some things that bother me: fees and taxes. My writing today is basically a reiteration of my initial post (Why Should I Use a Financial Advisor for Asset Management?) with a focus on those two specific topics. After all, taking the right steps now can set you on your path to Financial Freedom!
I recently posted on Facebook my issue with investment fees and the fact that no one is checking what their fee situation is besides you. My goal for clients is that my professional fees PLUS the underlying asset fees of my recommendations are less than 1% of assets, a common fee level in the industry.
Taxes are of interest given the time of year and what I wrote about last time out (What Should I Do with My Tax Refund?). And if you stopped reading at, “Taxes are of interest…”, then I’m sorry, but this is important. If you aren’t taking an interest in your tax preparation, researching how you can save money on taxes, or better yet allowing a professional to help, I’m certain you’re giving away money.
Before we get into the details:
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On a personal note
I realize not everyone shares my interest in money or numbers, and while I wouldn’t dare try to steal my CPA’s thunder, I do believe in staying informed, reading about changes to tax laws (mostly because they affect the stock market and/or real estate market), tracking carefully all expenses related to my business and to my real estate. I have no interest in sorting through the details and putting numbers in the right places on all the forms and schedules, but I know what expenses go with which projects and what to look for to make sure my information is captured correctly. And I ask questions!
As it relates to fees paid for advice (investment or otherwise), I would pay someone to fix my car or my air conditioner because I know I’ll never have those skills. I’m a proponent of outsourcing tasks that are not within your skillset or quite honestly aren’t a good use of your time. If you don’t want to take the time to learn about optimizing your finances, you should rely on a professional because I don’t think this is an area of your life where you should aim for “good enough.”
“When it comes to taxes, there are two kinds of people: consumers and investors. One group avoids planning for taxes, and the other plans for avoiding taxes.” Gary Keller of Keller Williams fame said it well.
While not a CPA, I often talk with clients about how to limit their taxes – reducing capital gains, tax loss harvesting, implementing and using retirement plans to reduce taxable income, among other things. I brainstorm with and rely on CPAs for ideas as well. As much time as I spend thinking about taxes, I was surprised to read a Kiplinger’s (Personal Finance magazine) survey that said just over half of all respondents did NOT hire someone to prepare their taxes.
So maybe they’re getting all the inputs to Turbotax right, as long as the bank or their employer is sending them the right forms, but what about the myriad of other things they aren’t thinking about? I get it - Turbotax is like hitting the easy button, and maybe that’s all someone needs. If you have no house (no interest or property tax deductions) and don’t give to charity then you probably aren’t itemizing deductions and the easy button works. The aforementioned survey again surprised me when I saw that only about 1 out of 6 itemized deductions (before the recent tax changes it was 55%!).
So I’m definitely not a tax expert, but doing the math if you own a home in Texas (where I live) that you bought for about $350,000 (20% down payment or $280,000 mortgage and 4.5% interest rate for 30 years), your property tax and interest deductions combined would be above or at least near the $24,400 standard deduction for a married couple filing jointly. Not to mention other things you might be overlooking just because someone didn’t send you a form.
My point is that if you’re not spending significant hours researching your tax and financial situation, you are probably leaving money on the table. And as your lifestyle has improved and your investment portfolio has grown, it’s more important that you utilize professionals for tax advice.
I got into this business because I thought consumers paid too much for financial advice. And here I am asking you to pay for financial advice. But hear me out. As you may have read on my website, I’m a fee-only advisor, meaning I do not get paid on commissions. Not for trading I do for your account. Not for products I sell (because I don’t sell products). I’m up front about my fees as well, charging a % of assets under management, or a fixed fee (flat one-time or monthly depending on services). As I alluded to, I employ a fee structure and investment philosophy that keeps the combined fees for my services and the underlying assets less than 1%. You could be paying an advisory fee of 1% or a mutual fund fee of around 1% - or both!
Additionally, I have a fiduciary duty, so advice I give is in your best interest. I’ll just say it is not in your best interest to pay more than 1% of your assets annually, so if you don’t know what you’re paying, and you don’t know how or where to look, no one else is checking and you’re probably paying too much.
But wait there’s more – your 401K is potentially full of bad investments. Not always. Some have a handful of low-cost options. But others are often mutual funds – some with fees in excess of 1%. In transferring client funds to my custodian, I’ve noticed some legacy holdings have fees of all kinds. Some mutual funds that charge an upfront fee (or a load fee). I was shocked that’s still happening! It’s already been well-established that most funds fall short of the long-term benchmark anyway, AND they charge you a fee before they do anything? Paying up front doesn’t mean you don’t pay anything more going forward though either.
So my advice is to pay for advice. But good advice. Pay someone that has a personal interest in you. Don’t pay for high-priced mutual funds. Pay a person for advice specific to your needs.
Consider paying for professional help when it comes to your investments. Not just for tax assistance and knowledge of fees, but also for the security of having a Financial Plan and process for strategic allocation (and re-allocation) of your portfolio using assets that are basically the benchmark and therefore have minimal underlying cost to you.
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If you or someone you know has any financial-related questions, I would love to have a conversation, so please feel free to reach out: firstname.lastname@example.org.
And stay tuned for additional blog posts on retirement savings and other topics.
Best wishes on your financial path!
This post was created by Matt Beeby, the Founder of MHB Advisory Services. Matt has been working in Financial Services and investing in real estate since 2005, though his investment experience spans nearly two decades. He is a Christ follower, active in both his church and his neighborhood association. Matt enjoys sports and family time. Read more about Matt on his website bio.
- Information contained in this document is for informational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any product or security.
- This information is believed to be accurate and should not be considered tax or legal advice.
- Please consult tax or legal professionals for such advice and be sure to consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed.
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