Journal of Financial Planning: December 2018
A Question for Fiduciaries: Do You Use the 4 Percent Rule?
Regarding Ian Harvey’s column about being a fiduciary as opposed to a fee-only financial planner (“No Compensation Model Is Conflict Free,” in the October 2018 issue of the Journal), here’s a question to planners who hold themselves out as fiduciaries while charging AUM fees: do you use the 4 percent rule in your planning?
If so, I don’t see how you can hold yourself out as a fiduciary. Why? Because the 4 percent rule does not include taxes and fees. Thus, when fees, say 1 percent, are added along with taxes, the 4 percent rule actually becomes the 5.2 percent rule, and that’s assuming your client is in the 12 percent tax bracket.
Larger distributions from portfolios to pay AUM fees lead to higher taxable income, which leads to higher taxes—never mind the potential increase in taxes on Social Security, increase in Medicare premiums, or even moving a
0 percent taxable asset, capital gains, and dividends into the 15 percent range.
When a “fee-only/fiduciary” adviser is charging 1 percent a year on AUM, how does that increase in account distributions affect the client’s safe withdrawal rate? If you’re not bringing that up with your client, then how do you hold yourself out as a fiduciary?
Ultimately, the industry, in my opinion, will never be seen as legitimate until we stop charging for AUM. The idea that only a small, small portion of the American public can hire us is offensive from the outset. Yet, we continue to want to look to the other professions—attorneys and CPAs—as our model. Last time I looked, anyone with a specific need could go and hire an attorney and CPA regardless of their net worth.
Josh Scandlen, CFP®
Principal, Heritage Wealth Planning
Alpharetta, Georgia