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How Do Christian Financial Advisors Get Paid?

Christian Man getting ready for this appointment

For what advisors do, the value can far exceed the cost. So that is a good thing. Now, advisors are more affordable than ever. With so many ways to engage an advisor, you can pick a price range and fee schedule that fits your budget. A.B. Ridgeway encourages every one to do their due diligence because even a quarter of a percent can erode some of the gains in a portfolio over the long term. Tune in to learn more.



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About Financial Advisors Say The Darndest Things Podcast:


As Christians, we were taught to be good stewards over our tithing and giving to the less fortunate. But when it came to our personal finances and investing we were left clueless on what the Bible says. What does the Bible say about managing debt, leaving a legacy, investing, and planning for your retirement? Mr. Christian Finance answers these and many other questions because we want to teach you how to become rich and righteous!


Meet A.B. Ridgeway:


A.B. Ridgeway with his hands up

A.B. Ridgeway, MBA (info@abrwealthmanagement.com) is the owner and Christian Financial Advisor with A.B. Ridgeway Wealth Management. With a decade in the finance industry, his goal is to give believers clarity around the most confusing topic in the Bible, money, and tithing. A.B. Ridgeway helps tithing Christians become cheerful givers but unlocking their money-making potential, so they can prosper and be the great stewards of the wealth God has entrusted them with.

Full Transcript (Not reviewed for accuracy)


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Welcome to Financial Advisors Say the Darnedest Things.

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I am your host, A.B.

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Ridgway, and owner of A.B.

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Ridgway Wealth Management.

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If you are looking for faith-based financial advice that you can actually understand, you

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have come to the right place.

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On this show, we demystify all the financial jargon that you may hear from your financial

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advisor.

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We leverage proven financial strategies, but use faith-based principles for guidance.

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And during this process, we pray for discernment so we can understand the things that work

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for you.

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This program is for the beginner.

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Those who want to learn about finances but don't have the time or willingness to go

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get a Masters of Business Administration in Finance or sit through an 8-hour online course

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to figure out what a bond is.

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So if you are like the other millions of investors that wish they knew what their advisor was

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talking about, be prepared to be prepared.

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So sit back and relax, not if you are driving, as we get this show started.

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A.B.

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Cue the music.

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Let's make this happen.

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Welcome back.

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This is the third episode of a four-part series called How to Choose a Financial Advisor.

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The first part was called Types of Financial Advisors.

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The second was What Do Financial Advisors Actually Do?

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Where we broke down the difference between services and how advisors get paid.

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If you didn't listen to that show, you may want to go back and do so, because today we'll

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be talking about Can You Afford to Have a Financial Advisor?

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But first, let's start off as always with the scripture of the day.

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In Corinthians 9, verse 6-7, the point is this, whoever sows sparingly will also reap

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sparingly, and whoever sows bountifully will also reap bountifully.

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Each one must give as he has decided in his heart, not reluctantly or under compulsion,

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for God loves a cheerful giver.

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I love this scripture because it speaks of you reaping what you sow.

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If you cut corners and try to negotiate very low prices, you may get very low quality as

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well.

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Those who are strong in their faith give freely from their heart because they know it is the

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right thing to do for the work someone is providing.

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This is also why we pray for discernment, because everyone doesn't abide by these same

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rules.

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We pray God looks over us and helps us identify what is a good deal and what is a ripoff.

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That is why it is imperative to be good stewards over your money so you can develop what we

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call financial intuition.

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The more time you spend around money, the better you can pick up on the things that

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may seem out of place and address them before they become bigger issues.

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This leads us to our word of the day, assets under management or better known as AUM.

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So let's jump right into it.

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Can you afford a financial advisor?

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If you consider all of the services that an advisor provides, you may think that is out

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of your price range.

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But there is a difference between what they are worth and how much they cost.

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An advisor's main job is to bring value and not just bill for their service.

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On our last episode, we discussed how advisors are compensated by fee based and fee only.

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Do you remember those words?

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Fee based, meaning paid for commission based on the products they sell and fee only, where

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they get paid only from the client and for the services they perform.

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Once again, if you didn't listen to those episodes, go back, take a quick listen and

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come back to this episode here.

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But if you have, congratulations and let's keep going.

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Now there is another way that advisors can be paid and it's called AUM or assets under

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management.

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Now, according to Investopedia, assets under management or AUM is the total market value

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of the investment that a person or entity manages on behalf of the client.

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Assets under management, definitions and formulas vary by company.

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In this calculation of AUM, some financial institutions include bank deposits, mutual

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funds and cash in the calculations.

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Others limited to funds under discretionary management where the investor assigns authority

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to the company to trade on its behalf.

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For our podcast and for our purposes, we will say that AUM is the market value of your investments.

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So if you have, let's say $250,000 in an IRA, you have another half a million in a brokerage

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and 670,000 or so in a joint account, you are said to have roughly $1.4 million of assets

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under management.

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As an advisor who was a fiduciary acting in your best interest, it is their job to make

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sure those assets are invested properly.

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A fee only advisor would typically charge you an AUM fee, which is a percentage of the

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assets that you hold.

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This fee can be directly taken from your account or paid to the advisor.

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The most common way is to take the fees out of the account.

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Nobody really wants to be writing a check every month.

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It's just repetitive and it can just cause a lot more issues than it solves.

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One of the benefits of having an AUM fee is that the advisor has the incentive to increase

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the account balance because the higher the account goes, the more he gets paid.

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For example, if there is a 1% management fee and you have $100, then the advisor will receive,

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drum roll please, $1.

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But let's say that you double the money through his advice and services and the AUM goes up

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to $200.

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Then the advisor will make how much?

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$2.

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And depending on the fee structure, as your AUM goes through what they call break points,

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you may even see your management fee go down.

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Just keep in mind, 1% of $200 is $2, 1% of $100 is $1.

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So do you see how by growing the account by an additional $100 improves their pay?

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So let's take that same example.

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Let's say that you have a 1% management fee at $100, but when your account goes up to

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$200 by market growth or contributions, your management fee drops to 0.5%.

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Therefore, you still only pay how much?

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$1 to your advisor because that management fee reached a break point.

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This is just an example and doesn't represent any portfolio or fee schedule that our firm

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has or I am representing.

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I am just using whole numbers for better comprehension over a podcast because a lot of us don't

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have our calculators out.

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I really want the show to be easy and not complicate you with too many numbers.

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But the key takeaway is that the more you invest, typically the lower the management

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fee.

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It is important that I also point out if that same $100 account was to drop to $50 with

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a 1% management fee, does the advisor still make that $1?

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No, the advisor doesn't get that $1.

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They would only get $0.50.

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That is the benefit of this type of fee structure.

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Unlike the fee based where most of the commission is paid upfront, whether you profit or not,

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they get the same amount.

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Basically this fee schedule, you and the advisor has a mutual benefit to keep that account

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as high as possible.

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Now no fee schedule is perfect, only perfect for the client.

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We must take this fee schedule with a grain of salt because the advisor is being paid

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for the AUM of the account.

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If you want to take out $10,000 for a vacation, $100,000 for a car, maybe $200,000 for a home,

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there may be a slight conflict of interest because if you take it out, you also take

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out the percentage that the advisor gets.

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So that's why we talk about being neutral.

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Even though I own a fee only advisor firm, I want you to know your options because I

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want you to come to me and our firm and say, you know what?

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They gave it to me straight.

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They told me what to look out for.

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So be aware of this.

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We express to our clients that this is their money and they have 100% autonomy over it.

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Our job is not to tell you what to do with your money, but to give you the pros and cons

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of the decisions that you make.

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And our percentage of payment should never be a part of that conversation or decision.

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I hope you're still with me.

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I said a word back there that I want to make sure our listeners understand.

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It was breakpoint.

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What is a breakpoint?

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I'm glad you asked.

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A breakpoint is the dollar amount for the purchase of an investment that qualifies the

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investor for a reduced management fee.

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Management fees allow for reduced fees for large purchases, which often benefit institutional

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investors, meaning larger investors.

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So if you're investing $1,000, your management fee may be higher than someone who is investing,

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let's say $1 million.

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For example, you may start at 2% at $1,000, but as your account grows to a million, you

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may be paying as low as 0.9%.

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Every dollar amount that drops your fee is considered a breakpoint and they are usually

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determined by the firm.

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It isn't something universal.

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So I wouldn't take the management fee of one firm, run to the other and say, you're ripping

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me off because they charge 0.25 less.

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You never know what that AUM fee technically covers.

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It can cover expertise, competency.

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It can cover features, assets to technology that maybe the other firms don't have, maybe

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to research and analysis that other firms may not have.

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So just because something is lower doesn't mean that is better.

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And we'll learn that as we go forward.

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And just because something's more expensive doesn't make it better either.

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I mean, you could have some very unintelligent individuals who charge a very high amount.

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Maybe their ego is bigger than their competency, but that's a whole other issue.

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But regardless, these AUM fees for firms need to be consistent.

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The firm should have a copy of their fee structure in their form ADV, which can be found on their

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website or available upon request.

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So if you are a new investor, you really don't know the ins and outs, request their form

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ADV.

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You can read it.

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It's usually a long document.

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So a lot of people don't really want to read the ADV, but it does have all the information

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there.

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So if you feel like the financial advisor is talking over your head, you really can't

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get a grasp of what he's talking about.

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That's his ADV and boom, you have all the information that you really need or that he's

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trying to explain to you.

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And then when you go to the next meeting, you'll know exactly what he's talking about.

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Usually the SEC will have that on file as well.

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So if you look at the firm, they should have their ADV available for public viewing.

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Now keep in mind, some firms have verbiage that state that these fees are negotiable.

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So if you were recommended by a friend and they say they pay under 1% and you're charged

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2%.

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That client may be a legacy client and under a different fee schedule than the general

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public.

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Now remember, just because your friend has the benefit of a loyalty breakpoint, doesn't

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mean you're getting ripped off.

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It just means that you haven't had that relationship built or maybe they have assets in places

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they don't feel comfortable discussing with you.

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Some clients say, well, I know I have more money than them.

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Why do they get charged less?

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Well, you don't know that.

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You don't know what their net worth may be.

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They may be hiding an account from you and they may be speaking in general terms.

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So they may say, I have around 1%, but maybe they have one and a half, who knows?

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But I'm sure as you continue to do business, your fees will be reduced as well as you reach

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certain breakpoints and things that are outlined in their ADV, which cause management fees

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to drop.

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So especially if you start referring other people to the firm, that really helps.

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Now back to the main question.

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Can you afford a financial advisor?

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Now if you're a new investor with limited resources, you can afford an advisor, but

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which advisor can you afford is really the question.

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If your resources and investable assets are low, you may want to start with the robo advisor.

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As we spoke about in our first episode of this series, they can be a low cost, efficient

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way to get into the market and get some exposure without breaking the bank.

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For the sake of simplicity, I want to go into the details of payment.

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But usually AUM fee is lower.

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You may want to look around at reputable companies that offer robo advising services.

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Remember, in this case, a name brand is worth paying for.

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With the internet and low barriers of entry, some of these companies don't have the financial

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history to take on such a task.

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So make sure you look for name brands here.

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If it costs you an extra 0.25%, it may be worth it.

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Sometimes you may find one that charges an annual fee, and this may be easier to understand,

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but I would also make the calculations between the flat annual fee and AUM fee, which is

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the percentage of the balances that you carry, and see which one makes the most sense.

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For online and traditional advisors, the expenses go up because now you're talking about holistic

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planning.

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As you approach the pre-retirement age, your debts may be paid off, or approaching being

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paid off.

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You may have built up a good retirement account, and kids may have grown up and out of the

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house.

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However, there are more investable assets available.

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With these new assets, and need to set up a plan to transfer wealth between generations,

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the extra fee may be worth it, especially to do it efficiently, and in the most cost-effective

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way.

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Also, the benefit is that your heirs have someone that they can talk with if something

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should happen to you too soon, God forbid.

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But advisors can't save the world.

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So once again, if you have low investable assets, you may not meet the advisor's minimum

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asset requirement.

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Most are polite enough not to say that you don't have enough money, but will simply state

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that it may cost you too much to work with them, because the cost of their services would

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eat too much into your assets.

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And literally, that is the truth.

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They wouldn't be working in your best interest.

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They wouldn't be a true fiduciary.

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If their fee is $200 a month, and you only have $1,000 to your name, after five months,

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you won't have any money, and you didn't really gain anything.

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So don't feel disrespected.

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The best alternative is to ask for an affordable advisor that they recommend.

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One benefit of fee-only advisors, if you have just a small project like mortgage analysis,

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trying to figure out if it's a good time to refinance or not, or need to review your employee

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benefits, you may be able to hire them for a project.

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This way, you can pay for services and not have to worry about ongoing fees.

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If you feel yourself with more than one project, or the project takes a lot of hours, you may

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consider alternatives.

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This is a conversation you can have with your advisor to see which payment program is best

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for you.

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We will discuss different ways to pay your advisor in another podcast.

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So stay tuned, listen in, cheat plug, sorry.

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But as we wrap up, I want to say this.

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You want to make sure you talk about compensation before you engage a financial advisor.

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If you just go with the flow, you may find a bill in your mailbox after weeks of seemingly

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free advice.

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Defining the scope of the engagement is very important for both parties.

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This way, you eliminate confusion and frustration on both parties' part.

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I wish I could say that after listening to this podcast, you would be able to negotiate

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like a champ.

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But I can't.

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The best thing you could do is go around and get a feel for what people are saying.

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Some advisors are really good at hiding their fees, and others have a great pricing, but

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just can't articulate it in a way that clients understand.

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So if you have a good idea, you may be able to avoid the bad ones and understand the good

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ones even to know a good deal when you hear one.

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It is sad to say, but there are many financial advisors that don't really know their worth.

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Therefore, you may find a very, very good advisor for a discount.

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So last time, can you afford an advisor?

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I don't know.

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But I do know there are some things you should consider, because most people need one at

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some point in their life, just like a doctor.

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When you are young, you may have everything under control, but as you age, the more necessary

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it becomes.

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So let's review.

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Assets under management is the market value of your investments and sometimes your bank

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and account that a firm manages.

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And breakpoints are price in which discounts can be applied when reached.

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There is a difference between if you can afford an advisor and if you should pay for an advisor.

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Just because you have the money doesn't mean you need one.

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Be clear about the fees before saying okay.

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And figure it out.

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If you want your advisor to be involved in the fluctuations in your account as a fee

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only advisor, or are you comfortable with them getting paid for the sale, whether it's

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a winner or loser.

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As our scripture of the day speaks about 2 Corinthians 9 verse 6-7, the point is this,

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whoever sells sparingly will also reap sparingly, and whoever sells bountifully will reap bountifully.

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Each one must give as he has decided in his heart, not reluctantly or under compulsion,

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for God loves the cheerful giver.

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You will have to pay for something.

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Nothing in this world is free.

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And just know, the more you have and the more complex your situation, you may have to pay

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more.

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But that is okay, because you should get so much more in value.

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One thing I have learned in my career is if you pick an advisor because of his fee, you

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will leave that advisor for the next advisor with the lower fee.

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And that is a recipe for disaster.

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That is why I started this series, to let you know there is more to consider than who

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is cheaper or who is a name brand.

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You are looking for the relationship with the person and not so much the firm.

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I hope that you have been blessed.

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As always, this episode was created by A.B.

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Ridgway, owner of A.B.

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Ridgway Wealth Management, a virtual and in-person fee-only advisor that believes that financial

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advice should be custom made.

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If you need help figuring out your finances, feel free to reach out to us at 337-414-3686,

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the number again is 337-414-3686 or visit our website at www.abrwealthmanagement.com

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and schedule a free consultation.

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At our firm, we practice what we preach, so if you need information or a better explanation

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of what you heard today, give us a call and we would love to have a discussion on how

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we can serve you.

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I am A.B.

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Ridgway and I will see you on the other side of your blessing.

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A.B.

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Cue the music.

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These people got places to go and things to do.


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