Case study
Paying an advisor 1%: the real cost of leaving vs staying
You pay an advisor 1% a year. You've started to wonder whether you could manage it yourself with a few index funds. But your account is full of gains, and leaving looks like it would trigger a big tax bill. How does staying actually compare with leaving?
One thing up front: this isn't an argument that advisors are bad. Some earn their fee many times over, through planning, tax management, or simply keeping clients from selling in a panic. The point is to know what you're paying, so you can judge whether you're getting it.
First: you may not need to sell anything
Most brokerages can move your existing holdings to a new account "in kind," without selling them. If your investments are reasonable and the main cost is the advisory fee, you can transfer everything, stop paying the 1%, and owe no tax at all.
In that case the math is simple. On $500,000, dropping a 1% fee while keeping the same funds leaves you roughly $4,000 ahead after one year, about $67,600 after 10, and about $242,000 after 20, all after tax.
It gets more interesting when you do have to sell, for example because the portfolio holds high-cost or proprietary funds you don't want to keep.
The setup
- $500,000 managed by an advisor charging 1% a year
- The funds inside the account average a 0.50% expense ratio
- You'd sell everything and buy index funds averaging 0.05%
- The account's cost basis is $350,000, a $150,000 long-term gain
- 20% all-in tax on that gain
- Both portfolios earn 7% a year before costs: 5.50% net with the advisor, 6.95% on your own
In dollars, the advisor setup costs about $7,500 a year. The DIY version costs about $250.
The math
Selling triggers $30,000 of tax, which hurts. But as with any switch where you'd eventually sell anyway, that tax is mostly early, not extra: the gain gets taxed on the keep path too, just later. Against a cost gap of nearly 1.5 points a year, it doesn't take long to earn back.
| Years after leaving | You're ahead by |
|---|---|
| 1 | +$4,132 |
| 3 | +$14,274 |
| 5 | +$27,344 |
| 10 | +$76,942 |
| 20 | +$298,360 |
Over 20 years, the hurdle is 5.72%. Your DIY portfolio only needs to beat the advisor's net return by about 0.22 points a year to come out even, and the cost difference alone gives it about 1.45.
After 20 years and all taxes: about $1,535,000 on your own versus $1,237,000 with the advisor. Even if the account would pass to heirs untaxed, leaving pulls ahead within about five years in this example.
So what is the advisor worth?
That's the real question, and the math reframes it. In this example, staying costs about $300,000 over 20 years. If your advisor helps you avoid one panic sale in a crash, plans withdrawals in retirement, coordinates taxes and estate planning, and handles things you'd otherwise get wrong, that could be worth it. If the relationship is mostly a quarterly report and a rebalance, it's a lot to pay.
A middle path many people use: switch to a flat-fee or hourly advisor for planning, and manage the investments themselves.
Before you move
- Ask whether the account can transfer in kind, and which holdings, if any, would have to be sold.
- Check for account-closing fees, surrender charges on annuities, or funds that can only be held at that firm.
- If you have to sell, look at each lot. Some may carry small gains or even losses, which changes the tax bill a lot.
Try it with your numbers
Subtract the advisory fee and fund expenses from the same expected return to get each path's return after costs.
Run this example in the calculator
Figures assume a single lot, flat tax rates, the same gross return for both portfolios, all costs taken from returns, and both paths fully sold at the end of the period except where noted. The in-kind figures assume the same holdings and cost basis with only the advisory fee removed. These are illustrations of the arithmetic, not a recommendation about any advisor or investment.