Ramit Sethi Says Paying an Advisor 1.5% Would Be ‘Insane.’ I’m a CPA — Here’s the Math, and What He Left Out

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Ramit Sethi, host of the “I Will Teach You to Be Rich” podcast, has a car-repair analogy for anyone who pays a financial advisor a percentage of the money they manage.

“If you walked into a mechanic and they said, sure, we can fix your brakes, it’s going to cost 1.5% of whatever’s in your investment account. Would you pay that? Of course not. It would be insane,” he said on an Oct. 6 episode. (1)

“And yet that is what so many people do when they pay a percentage based financial advisor.” (1)

One thing worth knowing: Sethi said this in a sponsored segment for Facet, a flat-fee financial planning firm. He disclosed that he has “an ongoing fee based contract for cash compensation based on this endorsement.” (1)

I’ve been a CPA since 1981, and on the math, I think Sethi is mostly right. The SEC’s own numbers show why.

In an investor bulletin, the agency shows a $100,000 investment growing 4% a year for 20 years. With a 0.25% annual fee, it ends up worth about $208,000. With a 1% fee, it’s about $179,000. (2)

That’s roughly $29,000 lost to the extra fee on a $100,000 account over 20 years. As the SEC’s Investor.gov puts it, “These fees may seem small, but over time they can have a major impact on your investment portfolio.” (3)

But there’s more to this decision than one number, especially if you’re retired. Here’s the math, and what Sethi left out.

1. Turn the percentage into dollars

Percentages hide the real cost. Dollars don’t.

On a $1 million retirement account, a 1% fee is $10,000 a year. At Sethi’s 1.5%, it’s $15,000. You pay that percentage every year, whether your account goes up or down.

Do the multiplication on your own balance before your next advisor meeting. If the dollar figure makes you wince, that’s useful information.

2. Remember that fees compound, too

The SEC example above is for $100,000. Scale it up to $1 million with the same assumptions, and the gap between a 0.25% fee and a 1% fee grows to roughly $290,000 over 20 years. (2)

That’s my multiplication of the SEC’s example, not a forecast. But it shows how a fee that sounds tiny can grow into six figures.

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3. A flat fee isn’t automatically a better deal

Here’s where I part ways with Sethi a bit. A flat fee is cheaper only if the dollars are lower and you get the same help.

For someone with $150,000, a 1% fee is $1,500 a year. A flat annual fee could cost that much or more. Compare the dollar figures side by side, not the labels.

And remember who was paying for that segment. Sethi’s advice may be sound, but he’s paid to endorse a flat-fee firm, so do your own comparison. (1)

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4. For retirees, the value is in the tax work

Sethi’s analogy treats an advisor like a mechanic doing one repair. For retirees, a good one is closer to a mechanic who keeps the car running for 30 years.

As a CPA, I’d argue the most expensive retirement mistakes are often tax mistakes: claiming Social Security at the wrong time, taking withdrawals from the wrong accounts in the wrong order, or missing a chance to convert to a Roth in a low-income year.

An advisor who gets those right can be worth the fee, however it’s charged. One who just picks funds probably isn’t.

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See Also:

11 Essential Money Moves to Make Before You Die

5. Ask for the relationship summary

You don’t have to take anyone’s word on fees.

The SEC says advisers and brokers “are required to deliver a relationship summary to you” when you start working with them, called Form CRS. (4) You can look up any firm’s summary with a free search tool on Investor.gov. (4)

Read it before you sign anything. Then ask the advisor to walk you through exactly what you’ll pay in a year.

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My take

Sethi’s right that it pays to do the math on what you pay for advice. Do it this week.

But the goal isn’t the lowest fee. It’s the best result after fees. A good advisor who saves you from one big tax mistake can earn years of fees in a single afternoon. A mediocre one costs you every year, forever.

Know what you pay, in dollars. Know what you get for it. If you can’t answer the second question, it’s time to find someone who can.

Sources: 1. I Will Teach You to Be Rich (episode 281); 2. Investor.gov (SEC investor bulletin); 3. Investor.gov (Understanding Fees); 4. Investor.gov (Form CRS)