Dan,
Good question, and in a way, you've caught me on the math. My previous posts were off the cuff and round numbers. Here's the real formula:
The future value (FV) of your portfolio is the present value (PV) times the quantity 1 plus the growth rate (r), raised to the power of the number of years (t). In other words--FV=PV(1+r)^t. The financial planner who charges 1% reduces r by .01.
So let's say a person who has $100,000 to invest expects to earn 6% per year. At the end of 20 years, he will have 100,000*1.06^20=$320,714. If that person hires a planner who charges 1%, at the end of 20 years he will have 100,000*1.05^20=265,330.
In this example, he's paid his planner $55,384. I leave it to each reader
to adjust the numbers for his own situation and to decide if a planner is worth the money. With an initial portfolio of $200,000, for example, planning fees would total $110,768.
A couple of important notes. First, the good news--these numbers are pretax, and you'll get a tax break on the planner's fees. Second, the bad news--the planner's fees are not the only fees to worry about. If the planner puts you into a high cost actively managed portfolio, you might be paying an additional 0.5-1% in fees on top of the planner's 1%, compared to a low cost index fund approach.
I do not write this to be critical of planners or to advise people on whether they should use one. I just hope folks will take advantage of free advice before deciding on whether they should hire a planner. Caveat emptor.
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