Craig Wear argues break-even analyses for Roth conversions rest on three shaky assumptions: future tax rates, investment returns, and lifespan. A 0.75% advisory fee on a $2 million portfolio costs $15,000 yearly, creating incentive to recommend conversions regardless of whether they actually benefit the client.
When I'm scrolling through socials and I'm seeing people talk about breakeven analysis and kind of logical but really unfounded stuff, someone shows you a breakeven analysis. They talk to you about, you're going to break even way into your 90s. There's no reason that you should do that. And they're going to maintain that you're giving up growth by paying tax now. And it looks rigorous, but the math is incomplete. That number they give you is going to depend on 3 assumptions: your future tax rates, your future investment returns, and how long you live. Can you know any of those with any kind of real certainty? Change one and that number about breakeven moves by years. So it's not really a calculation, it's a forecast that's wearing a calculation's clothes. The number that actually holds up is something called tax-adjusted net worth, and it barely moves across a variety of scenarios. Now look, here's the part worth understanding. That analysis that they're going to give you is the bait, and it usually ends with an offer to manage your money. Now that I've developed a relationship and I've helped you, 3/4 3 quarters of a percent a year is common, and some major firms in the country charge twice that. But on $2 million, 3 quarters of 1% a year is $15,000 a year in fees every year for the rest of your life. And it grows as the account grows. The market goes up, they get paid. The market goes down, they still get paid. When you do worse, they still win. So there's nothing improper about that model. They could even call it being a fiduciary. Plenty of people are served well by it, and it's very expensive when you add the cumulative fees over your lifetime, but the recommendation and the compensation point the same direction, and you should know that before you weigh the recommendation.
