Our only compensation is from the clients we serve. This means we are Fee-Only fiduciaries. Our fees are based on the amount of investable assets we manage for our clients. At the Collaborative and Comprehensive service levels our fees are 1.0% of the first million and then follow a fee schedule that provides discounted rates for additional assets. Fees are deducted from client assets quarterly in advance, based on their value at the end of the previous quarter after all the transactions have settled. For the full fee schedule, you can see the Our Fees page.

When it comes to billing, regulation allows us to bill investment assets using any combination of these three methods:

1. We can deduct the fee prorated to each account. Under this option, fees attributable to a retirement account deducted directly from that retirement account do not count as taxable distributions.
2. We can withdraw any or all account fees from a taxable brokerage account instead.
3. We can invoice the client and ask them to pay with outside assets.

We advocate for billing traditional IRAs to themselves but billing Roth IRAs to a taxable brokerage account. Here is the math of why.

Imagine a $3 million portfolio evenly divided between the three different account types of Roth IRA, traditional IRA, and regular taxable brokerage account. Imagine all of the accounts return 7% (perhaps 2% inflation and 5% real return). For simplicity, we will assume they are billed a flat 1%. They also have a 30% income tax on required minimum distributions (RMDs) which start at age 72 and are deposited into the taxable account. We will also assume they are faced with a 20% qualified tax rate on their 2.2% annual dividend yield in the taxable account.

Nominally after one year of tax and billing, the three scenarios have the same value of $3,161,477. This is $3M grown by 7% after having removed a bill of $30,000 and taxes of $15,349 (from dividends and RMDs). However, the three scenarios have different after-tax net worth.

If you bill your Roth IRA for the $10,000, then the account is worth $1,059,300 instead of $1,070,000. In this example, the after-tax advantage of not billing the Roth IRA is $10,700.

If you bill your traditional IRA for the $10,000, then the account is worth $1,020,249 instead of $1,030,949. Because of the 30% income tax, your traditional IRA is only worth 70% in after-tax value. This is $714,174 or $721,664 of after-tax value for these two scenarios respectively. In this example, the after-tax advantage of not billing the traditional IRA is $7,490.

If you bill your taxable account it might be worth $1,081,928 after if it only pays its own share, $1,071,228 after if it pays its share and one IRA, and $1,060,528 after if it pays the full bill. Because unrealized gains are taxed at a 20% qualified rate, this is an after-tax value of $1,060,472, $1,049,912, or $1,039,352 respectively. In this example, the after-tax difference between paying only its own share and paying for another IRA is $10,560 and the after-tax difference between paying for one IRA and paying for both IRAs is another $10,560.

By letting the taxable account pay for your Roth IRA, you save $10,700 while sacrificing $10,560 for a total after-tax savings of $140.

Meanwhile, if you bill your traditional IRA to your taxable account, you save $7,490 while sacrificing $10,560. This would be an after-tax cost of -$3,070.

In this simple example, you can see how billing your traditional IRA to itself while billing the Roth IRA to the taxable account may create after-tax value.

In later years, the value of this strategy changes from after-tax savings to nominal savings. Having less money in your taxable account means that you owe less annual taxation on dividends, enhancing your nominal net worth. Meanwhile, having less in your traditional IRA means having less money subjected to a 30% income tax, enhancing your after-tax net worth, and less RMD money being distributed only to be taxed again annually in your taxable account.

Rolling this scenario of annual bills, RMDs, and taxation forward, billing the traditional IRA and taxable account but not the Roth IRA may have a 5-year after-tax advantage of $11,817 ($602 nominal) and a 10-year after-tax advantage of $37,764 ($3,650 nominal) over billing each account for its own share.

There are many ways that we think we earn our fee, both quantifiable (like designing a customized investment plan, regularly rebalancing to get the bonus, and updating it with a dynamic tilt) and immeasurable (like knowing you have an advisor with your best interests at heart that you can call anytime).

Striving to bill you in a tax-advantaged way is just one obscure way we earn our fee.

Photo by Julia Filirovska from Pexels.