How John Saved $1,034,997 in Fees: A Real-Life Case Study

John stared at the papers scattered across his dining table. Retirement was supposed to be a time of relaxation and enjoyment, but here he was, knee-deep in the complexities of financial planning. As an engineer, John had always been meticulous with his savings, and his hard work had paid off—his investment accounts held a substantial $2,500,000. However, the world of retirement planning was a different beast, filled with potential pitfalls he knew he had to navigate carefully.

John was well-versed in numbers and had tackled complex problems during his engineering career, but integrating a Social Security filing strategy, considering Roth conversions, and figuring out the optimal order to withdraw from his accounts was an entirely different challenge. Each decision he made could have significant long-term impacts, potentially spilling over into other areas of his financial plan. The stakes were high—one wrong move could cost him dearly in taxes or deplete his savings prematurely.

To complicate matters further, tax laws were scheduled to change in the future, adding another layer of uncertainty. John wasn’t sure his current planning had accurately accounted for these impending changes. He knew that failing to adapt his strategy to new tax regulations could undermine his retirement security. The prospect of navigating these complexities alone was daunting, and John felt the weight of his responsibility more than ever.

"How am I supposed to keep track of all this?" John muttered to himself, feeling the weight of his responsibility. He knew that making the wrong move could cost him dearly, and he wanted to ensure that his hard-earned savings would not only last through his retirement years but also be managed in a way that minimized taxes.

John decided to consult a few financial advisors, hoping to find one who could help him see his blind spots and guide him through this new phase of life. He scheduled meetings and sat through numerous presentations, each advisor explaining their process and fee structures. It stood out to John that nearly all of them charged a percentage of his account balances for their services, which he quickly calculated to be $25,000 per year.

"That’s outrageous!" John exclaimed to his wife, Karen, after one of the meetings. "If we live for another 25 years, that fee will add up to nearly a million dollars! That's money we could use to travel more, buy a house at the beach, or jut make sure we have plenty left to take care of us when we're old!"

Determined to find a better way, John started researching alternatives. He discovered a growing trend among financial advisors who charged flat fees instead of a percentage of assets. One firm he found listed an annual fee of $10,000 with a 3% annual increase. It certainly seemed more reasonable, but John wanted to be thorough.

"Let’s run the numbers," he told Karen, pulling out his laptop. He initially planned to build a quick spreadsheet, but with a quick Google search, he found a free calculator online that allowed him to input his specific assumptions and compare different fee structures. The assumptions he used were:

• A 25-year period for retirement.
• A 7% average annual return.
• A 4% annual distribution with a 2% annual cost of living adjustment (COLA).
• A comparison of a 1% advisory fee with no increases versus a flat fee of $10,000 with a 3% annual increase.

John entered the data into the calculator and the results were startling. Over the 25-year period, he would pay:

• $386,796 to the flat fee advisory firm.
• $816,773 to the percentage of assets advisory firm.

"That’s a difference of $429,976," John muttered, shaking his head in disbelief. "And that’s just the raw fees. What about the investment growth from the money saved on fees?"

He added the saved fees back into the calculations and saw the number that made him gasp. Using a flat-fee financial advisor would raise his ending account balance by $1,034,997.

"This is incredible, Karen," John said, excitement in his voice. "By paying less in fees, our savings would grow so much more. We wouldn’t be giving away money that we might need later."

John’s curiosity was piqued. He decided to compare a few other scenarios using different account values. 

For a $500,000 account, the percentage fee model cost significantly less than the flat fee. John realized that at this level, the flat fee wasn't advantageous. The annual advisory fee would be $5,000, whereas the flat fee was $10,000, increasing by 3% annually. This discrepancy meant that someone with a smaller portfolio would end up paying more under the flat fee model, making it less attractive.

However, as the account values increased, the advantages of a flat fee became clear. John ran the numbers for a $1,000,000 portfolio. In this scenario, the percentage fee model cost slightly less than the flat fee, but the difference was much narrower. The percentage-based fee came to $10,000 per year, while the flat fee started at $10,000 with a modest increase over time. While the percentage fee still had a slight edge in raw cost, John noticed that this margin was shrinking.

When John examined portfolios above $1.5 million, the flat fee model consistently resulted in substantially lower fees and higher ending balances. For a $1.5 million portfolio, the percentage fee would be $15,000 per year, compared to the flat fee starting at $10,000. Over a 25-year period, this difference compounded significantly. John calculated that with a $1.5 million portfolio, the raw fee difference favored the flat fee model by $114,533. Moreover, the ending account balance for the flat fee arrangement was $302,634 higher than that of the percentage-based model.

John's analysis didn't stop there. He continued to evaluate even higher account values:

• For a $3,000,000 portfolio, the percentage-based fee amounted to $30,000 per year, compared to the flat fee's initial $10,000. Over time, the total fees paid were $593,331 less with the flat fee model, and the ending account balance was $1,413,680 higher.
• A $4,000,000 portfolio revealed even starker contrasts. The total fees paid under the flat fee model were $920,040 less than the percentage-based fees, resulting in an additional $2,171,045 in the ending account balance.

John was fascinated by these findings and decided to test a different fee structure. He considered advisors who reduced their percentage fee for higher balances, settling on a 0.75% fee for portfolios above $5 million. Even then, the flat fee model proved advantageous:

• For a $5,000,000 portfolio, the percentage-based fee cost $37,500 per year. Over 25 years, the flat fee arrangement saved $910,769 in total fees and resulted in an ending balance $2,097,055 higher.
• For a $6,000,000 portfolio, the difference in total fees paid was $1,168,029 in favor of the flat fee, and the ending account balance was $2,683,149 higher.
• The trend continued with $7,000,000, $8,000,000, $9,000,000, and $10,000,000 portfolios, each showing substantial savings in fees and higher ending balances with the flat fee model.

He leaned back in his chair, satisfied with his research. "We need to talk to a flat fee financial advisor," he concluded. "It’s the best way to make sure we’re not overpaying and to keep more of our money working for us."

If John's story sounds anything like your own, it’s time to take a hard look at the fees your financial advisor charges. You can use the same Flat Fee Financial Advisor Calculator that John did to see how the fees compare for your account values and make an informed decision for your financial future.