Look at this image:
What jumps out at you there?
Hopefully, you can see the two numbers in the blue box. The one on the left is $1,070,000. The one on the right is $837,000.
In running a financial plan for a couple, Lanny and Maggie, I am showing them the TRUE cost of paying a 1% per year investment management fee on their $487,000 portfolio. NOTHING else in the plan changed, mind you. I simply clicked on 1 button and added a 1% management fee.
And, as you can see, the cost is $233,000. This is $233,000 they will NOT have in which to leave to their heirs, their church, or even better yet, to enjoy in their retirement together.
Ultimately, this is what the REAL cost of paying someone to manage your money comes to; YOU have less.
Now, some will argue you are actually receiving MORE of a benefit from the professional advice than the cost you’re paying. They’ll try to quantify this with such studies as from Vanguard, “Advisor’s Alpha.”
According to Vanguard, paying that 1% fee may be worth it if an advisor can help you by “focusing on behavioral coaching”. i.e., keeping your emotions in check during bear markets.
I ALWAYS chuckle at this idea that the average investor is ready to throw in the towel at the first evidence of a bear market. I’m sure some are. But in my experience it’s the PROS, not the clients themselves, who are nervous Nellies. See my video here on a recent example of this exact thing.
Now, to Vanguard’s credit, they don’t make an argument that superior investment selection is something advisors can do in order to earn their 1% fee. The days of that even being debated are LONG gone thanks to folks like the founder of Vanguard himself, John Bogle, and others such as Burton Malkiel.
“A Random Walk Down Wall Street” by Malkiel remains a classic to this day.
Of course, I’d be remiss not to mention my all time classic favorite investment book from John Bogle, “Common Sense on Mutual Funds.”
So, if superior investment performance is not to be obtained by hiring a professional and you aren’t jumping off a bridge when the Dow drops 100 points, tell me again the reason for paying someone an annual investment management fee?
Oh, right, tax, estate planning, diversification and asset LOCATION. Those are ALSO benefits a professional advisor brings to the table for which he/she needs to be compensated for. Indeed, indeed.
Then why don’t they simply charge for those services as opposed to the 1% management fee which costs $233.000 in total? Seems a steep price to pay, no?
Of course it is! And EVERYONE knows this.
In fact, in late March a VERY prominent guy in my business posted on LinkedIN that he’d never seen as many advisors reach out to him to discuss pay-for-service fees instead of the typical 1%.
The 35% drop in assets were killing the advisors income stream! The advisors wanted to find a better way to bill clients to avoid such a dramatic hit.
Notice though, these purported “fiduciaries” weren’t reaching out to this guy when the money was flowing in. And they certainly weren’t asking how they could reduce the expense to their CLIENTS during these trying times….
NO! They were reaching out to inquire how they could bill a higher fee! (Side note: That’s why I could care less about a “fiduciary” standard. It’s a meaningless sales pitch.)
Ultimately, advisor’s compensation should be disclosed similar to when you go close on a home for a mortgage. You see very clearly your amortization schedule and thus the amount of interest you’ll pay over the course of that loan. YIKES!!!
I guarantee you, if advisors and had to say to the Lanny’s and Maggie’s of the world, “my services are going to cost you $233,000 over the course of our relationship”, there’d be a heck of a lot less fees paid out to advisors. And THAT, my friend, IS a fiduciary standard I could live with.