Mr. Smith is 30 years old and has $10,000 that he is going to invest for his retirement. Ms. Brown (also 30 years old) is an investment advisor with a decent track record of constantly getting a 10% annual return on her portfolio. She does charge a 2% commission on assets under management as calculated at the end of the year. Mr. Smith thinks that a rough 8% return is still pretty good and feels it fair to Ms. Brown to pay her the commission. Ms. Brown's commission is going to her retirement, so all of the funds are going back into her account where she will earn the full 10% annual return. No taxes on either account.
Who has more money in their account at the end of year 35 when they are both 65?
Think about it for a minute...
Clearly if Mr. Smith comes out way ahead, this wouldn't be much of a puzzle, would it?
The answer?
After 35 years, Mr. Smith has $138,565.98, and Ms. Brown has $142,458.38. The lesson? Percentage-based financial planners benefit themselves more than their clients. You can do this yourself without paying someone else 2% of your money every year to do it. And if you do need a financial planner, there are plenty of flat-fee based planners out there who will work with you without slowly siphoning away all your profits.
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