The holiday season is in full force. Christmas trees are decorated, lights are strung up around the city, and the stock market is roaring into new highs each day. For most of us, the value of our portfolio has shot up post-election and we can start to see great returns on our investments. How much of those returns are yours to keep though?
Do you currently have your portfolio managed by a financial advisor? Were you considering looking into one because you just don’t have the time to keep up with your investments? Be careful! An advisor can be the Grinch of your investments and take away money that is rightfully yours.
Here is the main question you have to ask when you are looking for an advisor:
“How much am I paying in fees?”
Fees over time
Ron and Tim both decide to invest with a financial advisor. Ron has an advisor that is charges 1% in fees while Tim has an advisor that charges 3% in fees. Both invest 100k into the funds and for the sake of this example let’s say they are getting an annualized return of 10%.
|10 Years Later||20 Years Later||30 Years Later|
|Ron @1% fees||$236,836||$560,441||$1,326,767|
|Tim @3% fees||$196,715||$386,968||$761,225|
As you can see there is over half a million dollars difference after 30 years! Fees add up guys! There is no reason you should be paying for these cost!
Advisors under President Trump have recently been vocal about rescinding a new fiduciary rule established earlier in the year by the Department of Labor. The rule was put in place to protect investors from getting charged high fees and requires the advisor to put the clients interest first. This means that the advisor MUST inform the client about any product fees or commissions that they would be paying and inhibits the advisor from churning funds in the clients account. The ruling was expected to shift client’s assets from high fee/underperforming actively managed funds, into low-cost index funds.
The rule was opposed by Republicans leading Congress and many Wall Street and insurance companies. They have said its increased compliance costs will make it too expensive for financial service companies to manage money for low-income people with smaller accounts. Basically, they are saying they wouldn’t be able to help out the “little guy” as much BUT with no fiduciary rule they could charge the little guy tons of fees every year without them even knowing!
In today’s sales environment, employers are encouraged more than ever to sell you new products that might not fit your needs. Just look at what happened with the Wells Fargo scandal recently! Employees had to meet minimum sales goals to keep their jobs, and began opening fraudulent accounts as a result.
Paying More Because You Have More
Even if the advisory fee is transparent to you, many firms have a flat advisory fee rate no matter the amount of assets you bring in. The leading model of advisor fees causes high net worth clients to pay more in fees simply because they have more money in their account. Think about it. An investor with $10 million will pay 100x as much in fees than an investor who has $100,000 at the same flat advisor fee rate. Does that seem fair if they are getting the same quality of service?
The Best Service You Get from having an Advisor
In my opinion, the most value you get from an advisor is them taking your emotion out of investing. Many would argue that most people choose to go with an advisor because they don’t have the time or drive to invest. While I agree with this statement, I personally put the most monetary value on the fact that taking emotion out of investors can save them thousands of dollars. The typical investor will cut winners short and let losers ride because they think (hope) they will come back. The advisor is able to take a non-biased view of the investment and determine what the best move would be in the situation. Millions are lost each year because people are too emotional about their investment and hold onto losers way too long.
What is the value of this advisor taking emotion out to you? Investors evaluating investment firms and financial planners should ALWAYS question the value of asset-based fees and calculate these fees as an average hourly rate. The advisor should be comfortable with you asking them questions about how much time they will be spending working with you and your portfolio each year.
- Always know how much you’re paying in fees (commissions/advisory fees/fund fees)
- In my opinion, you should not be paying more than 1% in advisory fees
- If you notice an unusually high amount of actively managed funds (mutual funds) in your account then make it a point to ask how much you are paying for those and what their performance has been like in recent years
- Build a basic understanding of investing so you know what questions to ask (You don’t have to be an expert!)
My blog is designed to teach others to invest but I know we all do not have the time to keep up with what’s going on in the markets to make better investment decisions. If you do decide to invest with an advisor, make sure everything they do is fully transparent. If not, you could see 40% of your returns going to the advisor each year.
Homework: If you currently have a financial advisor and haven’t spoken with them in a while, make an appointment and go over your portfolio with them. This will be the best investment of your time before we enter the new year. Have them address an fees and ask them to inform you how much you pay in fees each quarter. Don’t let the Grinch take out your investing returns!