Chat GPT continues to amaze me. The depth of these answers surprised me. The Python code is correct and the answer there is also surprising. (though I wish it had executed the Python code and just gave you the answer; I know how to run Python code, not everyone does). Perhaps I should have prompted it to run the code for me too.

Me:

How can a financial advisor making a small fee like 1 or 2% end up taking so much of a person’s financial assets?

ChatGPT:

A financial advisor typically charges a fee based on a percentage of the assets they manage for their clients. While 1% or 2% might seem small, it can still accumulate to a significant amount over time, especially considering compounding effects and the size of the investment.

Here are a few reasons why a seemingly small fee percentage can result in a significant portion of a person’s financial assets:

**Compounding**: Over time, the fee percentage is applied not just to the initial investment but also to any returns earned. As the investment grows, so does the fee. This compounding effect can lead to a substantial portion of the investment being consumed by fees over the long term.**Long-term investing**: Many financial advisors aim to establish long-term relationships with their clients. If an investor stays with the same advisor for many years or decades, the cumulative effect of the fees can be substantial.**Lack of awareness**: Some investors may not fully understand the impact of fees on their investments, especially when expressed as a percentage. They might underestimate the significance of even a small percentage fee over time.**Total expenses**: Apart from the advisor’s fee, there may be other fees associated with investment products, such as mutual funds or exchange-traded funds (ETFs). These additional expenses can further erode investment returns.**Opportunity cost**: The fees paid to a financial advisor represent an opportunity cost—the potential returns that could have been earned if the fees were not deducted. Over time, this opportunity cost can be substantial.**Value provided by the advisor**: While fees are important to consider, it’s also essential to assess the value provided by the advisor. A skilled advisor might justify their fee by offering personalized financial planning, investment management, tax optimization, and other services that can enhance overall financial well-being and potentially offset the fee.

In summary, even though a fee of 1% or 2% may appear small, it can still represent a significant portion of an investor’s financial assets over time, especially when considering compounding effects and long-term investing. It’s crucial for investors to be aware of all fees associated with their investments and to carefully evaluate the value provided by their financial advisor.

Me:

Give me an idea how much of a portfolio an advisor at a 2% fee could end up taking over a 20 year period.

ChatGPT:

To estimate how much of a portfolio an advisor charging a 2% fee could end up taking over a 20-year period, we need to consider the impact of compounding and the cumulative effect of fees over time. Let’s assume the following:

- Initial investment: $100,000
- Annual return before fees: 6% (for simplicity)
- Annual fee charged by the advisor: 2%

Using these assumptions, we can calculate the growth of the portfolio over 20 years and determine how much of it is consumed by fees. We’ll calculate the portfolio value each year, deduct the advisor’s fee, and track the remaining portfolio value.

Here’s how we can calculate it:

- Calculate the annual fee: Annual fee = Portfolio value * Advisor fee (2%)
- Calculate the portfolio growth before fees: Portfolio growth before fees = Portfolio value * Annual return rate (6%)
- Deduct the annual fee from the portfolio growth to find the net growth: Net growth = Portfolio growth before fees - Annual fee
- Update the portfolio value: Portfolio value = Previous year’s portfolio value + Net growth

We repeat steps 1-4 for each year over the 20-year period, starting from the initial investment.

Let’s use a Python script to calculate this:

pythonCopy code

```
initial_investment = 100000 annual_return_rate = 0.06advisor_fee_rate = 0.02 years = 20 portfolio_value = initial_investment total_fees_paid = 0 for year in range(1, years + 1): portfolio_growth_before_fees = portfolio_value * annual_return_rate annual_fee = portfolio_value * advisor_fee_rate net_growth = portfolio_growth_before_fees - annual_fee portfolio_value += net_growth total_fees_paid += annual_feeprint("Portfolio value after 20 years: $", round(portfolio_value, 2))print("Total fees paid over 20 years: $", round(total_fees_paid, 2))
```

Running this script will give us the portfolio value after 20 years and the total fees paid over that period. Note that actual results may vary based on the specific investment performance, fee structure, and other factors. However, this calculation should provide a rough estimate.

The results of running the code were:

Portfolio value after 20 years: $ 219,112.31

Total fees paid over 20 years: $ 59,556.16

The total fees paid were over 25% of the final portfolio value over a 20 year period.