Susan, a stay-at-home mom, and Jeff, a surgeon, have worked hard for decades and are now worth over a million dollars. They have been married for 19 years and have two kids. As responsible parents, they signed up for long-term insurance policies, ensured their children had what they needed, and even partnered with a financial advisor when things got complex.
Now, they are $914,000 deep in debt despite an annual income of $665,000. In a podcast with millionaire author and the host of Netflix's "How To Get Rich," Ramit Sethi, the couple realized that 70% of their annual income was fixed costs and they are on track to lose over $800,000 in financial advisor fees over the next three decades.
What Went Wrong?
Sethi had mentioned that people earning over $150,000 annually stop tracking finances diligently. The same happened with the couple.
Too Many Insurance Policies and No Budgeting
Jeff, 50, was lured into buying a whole life insurance policy and similar products for himself and his family as an intern over a decade ago. He has too many policies today, costing him $1,687 per month.
Sethi explained that people selling policies often approach residency doctors working 18-hour shifts and earning $40,000 annually, as doctors are usually guaranteed high pay. Jeff also took on additional disability coverage in case he could not operate.
Regarding budgeting, the couple spends over $13,000 monthly on gifts, dining out, kids, groceries, pets, and movies. Susan said they cannot establish boundaries when their kids ask for something. While she tries to keep her expenses down, sticking to a monthly budget with help from Jeff has been a cumbersome task.
Jeff started earning a high salary at the age of 40. "We made $380,000 a year but were still scrambling...I wasn't rolling around in money...if anything, I was more scared because I was wasting it," Susan said.
Not Vetting Financial Advisors
The couple started looking for financial advisors when they moved houses, and things got complicated. They needed new bank accounts, a mortgage, and a way to sell the old house.
A real estate agent referred them to a bank, which referred them to its wealth management division. Jeff rolled his retirement savings into new brokerage accounts managed by advisors, who charged him a fee of 1.24% of assets under management (AUM).
Sethi showed that Jeff's $460,000 in a single brokerage account managed by advisors will incur an astonishing $863,170.21 fee over 35 years at annual returns of 5%. That is $6,000 annually or $500 in monthly fees. He stressed that the amount will eventually turn into $600, then $800, and so on as the portfolio grows. Hence, avoid commission-based financial advisors that charge a percentage of your assets as fees. Instead, go for a flat-fee financial advisor who follows fiduciary standards, Sethi added.
Annuity and Loans
While Jeff also enrolled in an annuity, he needed to clear an old credit card debt of $10,000. That made him take out a loan from the whole life insurance policy, which now has an outstanding balance of $40,000. This policy has been the couple's most considerable recurring disagreement.
Susan said it was a "waste of money, and we were fooled by it." She later learned that whole life insurance policies are not investments; most money is gone as commissions. Jeff continued paying the premiums since it was only $272 monthly, and he wasn't apparently worried about the loan.
According to Sethi, Bloomberg reported that "a client would have foregone on average an estimated $54,000 in profit per $100,000 invested" in an annuity.
Avoiding The Money Talk
Sethi understood it was hard for Jeff to acknowledge his poor financial decisions. Jeff grew up in Philadelphia, watching his dad make bad money moves. He lost big amounts after seeking advice from his brother-in-law.
Meanwhile, Susan grew up with a single mom and only a little money. Although she was the only one in her family to attend college, she could never dream big. Naturally, talking about money often led to disagreements between them.
New research from Empower revealed that 62% of the 2,000 U.S. adults surveyed didn't discuss money. Around 32% would discuss death more than finances.
Susan wanted to understand all the numbers, but they didn't have a long-term plan and never really talked about how they pictured themselves in the next five years as they battled existing bills and debt. This is the story of most households: They want to improve their financial lives but need the right tools or access to advice.
Sethi Explains The Fiduciary Standard
Sethi said the medical industry is compartmentalized, where doctors don't engage in billing. However, the finance industry works differently. If you go to a mortgage broker, an insurance salesperson, or a financial advisor, they may overlook your interests.
Non-fiduciary advisors are not legally required to prioritize your goals. Hence, they can recommend investment products that are more profitable for them. Meanwhile, fiduciary advisors are legally required to recommend products that are best for you.
Sethi noted that Wall Street opposed the fiduciary standard and has consistently tried to "water it down and abolish it." Fund managers, along with Republicans, damaged the fiduciary system during the Trump Administration in 2018. Soon after, the sale of fixed-income annuities surged by 40%. Money is political, according to him.
How To Find A Financial Advisor?
Before scouting for advisors, it is vital to know how they can help. First, they can help navigate the new normal of volatility and high living costs. They can also chalk out a detailed roadmap, adapt to new trends, and help keep emotions at bay.
While a certified financial planner (CFA) can oversee your overall finances and retirement planning, you can find advisors who specialize in fields related to your needs. Consulting with a wealth manager can be helpful if you have high-value assets. For help with taxes and estate planning, you can look for a registered public accountant.
Susan and Jeff's story teaches us that people can become worried, anxious, or fearful about money regardless of their earnings. According to an intelliflo survey, 52% of Americans turn to family and close ones for advice, while 41% turn to digital sources like podcasts. However, 59% seek financial advice but need help knowing where to get it.
Starting with accessible online databases like the Financial Planning Association and the National Association of Personal Financial Advisors can be a good starting point. You can filter searches based on credentials, specialization, and fees before verifying them with the Financial Industry Regulatory Authority (FINRA) and the U.S. Securities and Exchange Commission (SEC)
According to an Advisory HQ 2023 report, financial advisors typically charge a fixed-rate fee between $7,500 and $55,000 or a percentage-based rate of 1.02% of AUM for a $1 million portfolio.
What is Susan and Jeff Planning For The Future?
After witnessing the money they were about to waste on fees, Jeff appeared he might consider switching advisors even though he shares a good relationship with the current one. Sethi said the best way to switch advisors is to maintain email-only communications. If you get panicked phone calls from the advisor, be transparent about the fees and let them know it's nothing personal.
Susan and Jeff plan to scrap the whole life insurance policy and schedule family meetings with the kids on home finances. Sethi urged them to foster a healthy relationship with the kids, like discussing how they spend money, setting priorities, and explaining guilt-free spending.
He also emphasized that they shouldn't pay $800,000 in fees when they could avoid most of it with low-cost ETFs or index funds. As robo-advisors with automated investing and rebalancing features at minimal costs continue to gain market traction, their abilities are limited to the datasets they operate on. Robo-advisors can suit small and medium-sized portfolios but are yet to match the experience and intuition of fiduciary financial advisors managing bigger portfolios.
