Tony Robbins has helped countless people get their lives in order. I have nothing but respect for the work he’s done in that regard.
However, when he talks about investment fees he is absolutely, 100% wrong. But not in the way you may think.
In this November, 2017 Marketwatch article he states:
The impact of excessive mutual-fund fees can be devastating… Fees erode returns.
This is a correct statement. It’s what he DOESN’T say though is where I have a problem.
Mr. Robbins is on the board of a directors for a firm, Creative Planning, which charges FEES for investment management. Yes, those fees are not in the investments themselves, like a mutual fund fee, but investors are certainly paying them.
(See my video here on how fees and taxes destroy investment returns.)
Let’s say there are two investment choices. In choice one, it’s a mutual fund that has a 1.25% fee. In choice two, your investment advisor charges a 1% management fee and puts you in mutual funds with an internal fee of.25%.
Is there any difference between the two to YOU, the investor??? Of course not. You are paying 1.25% either way!
Before the new Trump tax bill, you could potentially deduct a part of that 1% management fee which made investment management fees slightly less costly. But those deductions are gone now. So, in an “all-in” comparison of the two fee structures the cost to you is an identical 1.25%.
I pay 1% management fee and .25% mutual fund cost. You pay 1.25% mutual fund cost. It’s a wash.
But here’s what bothers me. Mr. Robbins’ firm, Creative Planning, doesn’t even state on their website how much they charge in fees, at least that I could find. You have to actually look at their SEC ADV Form to find out.
They do say “✓ Overall fees are less than that of an average mutual fund.” But that’s all I could find about their fee schedule on their website which tells me nothing.
On their ADV you find:
So, 1.20% on the first half million and 1% on the next $1.5 million. A $2 million portfolio pays $21,000 in management fees. Now, presumably they are using low-cost ETFs and index funds, so we can add another .25% on top and the all in fee is $26,000.
Same portfolio at Vanguard,on their advisory platform? About .50% or so.
What do you get with the Creative Planning fee however? Well, you get a lot of services that Vanguard doesn’t offer. Tax preparation, estate work and others. Does Vanguard do that? I truly don’t know. Are those services worth the extra $16,000 a year?
Maybe, maybe not. That’s for YOU to decide. But my problem is that Mr. Robbins doesn’t mention that his own firm has fees that also “erodes” returns
But while the market’s return topped 10% per year (on average), Dalbar found that the average investor made just 3.66% a year over those three decades.
Because of YOUR horrible behavior as an investor you NEED a professional to help you and you could gain:
3.75% of added value. That’s more than three times what a typical sophisticated adviser might charge — and doesn’t even include reducing taxes and more.
And here is my problem with Mr. Robbin’s whole point. He argues investment fees are bad and hurt returns. True. But he overlooks the fact his OWN firm charges similar “all-in” fees as the investment firms he belittles.
Even worse, THEN he uses a Vanguard study, which has raised eyebrows among many financial planners, to show the value in the fees HIS firm charges, the same fees he disparages others for!
It’s a nice argument actually. “Those guys over there charge too much. Come to our firm where we don’t charge nearly as much. In fact, there’s a decent chance that you could earn MORE than what our fees are with all the other services we offer!”
But they do charge roughly the same as most mutual funds. Also while there is some research, in its infancy, to suggest some clients might benefit from hiring an advisor, it’s not enough that one would want to stake a claim to it.
At the end of the day though, its up to you Mr. and Mrs. Investor. Do what you have to do. Paying commissions, paying fees, paying mutual fund costs, all professional advisors MUST get paid in some way. No one would argue that. Even Vanguard gets paid.
It’s just Vanguard has reached such an economy of scale that their fees are well below industry average. Yet, even at Vanguard, if you want professional services, you’re going pay 3 times what you would without their professional help.
Is that a bad thing? No! But at least you know what you’re getting. And I get tired of the industry pointing fingers at others in the industry saying they are doing wrong, all the while they’re doing similar things!
Not Jonathan Clements Too!
But it’s not just Tony Robbins. Here is Jonathan Clements.
Now YOU may not know who Mr. Clements is. But for years he was the personal finance write for the Wall St. Journal. He laid into the investment industry time and again for its excessive fees and underperformance. Rightly so, I might add.
In fact, the irony of all ironies is that he wrote an article titled “It’s Time To End Financial Advisers’ 1% Fees” just a few short years ago.
Yet, where is Mr. Clements today? You got it! The same place as Tony Robbins!
Time To End Financial Advisors 1% Fees, Really?
Again, I don’t fault these guys. But why was it “Time To End Financial Advisors 1% Fees” before and not now?
Does that make ANY sense? Not to me.
Fees are fees folks. You pay them or you don’t. You can call ANYTHING you want. You can say the fees you charge are different from the fees the other guys charge because your clients get XYZ whereas the other guys only get ABC. Yet, if you ask the other guys, they’ll also have a justification for their fees too.
Every one can justify their fees. To quote Upton Sinclair:
“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
In this case, it’s difficult to get a man not to see how HIS fee adds value when his salary depends on it.
(For more on the wonders of Jonathan Clements read “Jonathan Clements Strikes Again”.)
The $181,000 Piece of Bad Advice
Finally, we have Jane Bryan Quinn. Another provocateur against “bad” commission-based sales people. Here she says in a blog post:
Consumers forget that advisers who earn commissions are not their friend. Advisers are nice, they’re cheerful, they might even be your brother-in-law, but they have to sell high-commission or high-fee products to keep their jobs and send their kids to school. And who do they sell them to? You.
Ah, interesting. So commissions are bad. Instead of paying those she recommends:
Fee-only advice. This is my choice, always. These advisers give you a price list up front, for work by the hour, by the task or for ongoing management of your money. They don’t take sales commissions, so they’re not primed to push products. They sell only their planning and investment expertise.
Fee-only planners typically charge 1 percent on accounts up to $1 million or so, and less on larger amounts. But fees have been going up, says Tom Orecchio of Modera Wealth Management and former president of NAPFA. Some firms charge 1.5 percent or more for the first $500,000.
Commissions Vs. Investment Fees
So, let’s run the numbers shall we?
Say on February 1, 1998, you invested $250,000 in a diversified mutual fund with Company X that charged a 2.5% front end commission and a mutual fund fee of .65% a year thereafter.
On the same day, I invested that amount in the same fund except instead of paying that commission I was paying an investment fee of 1% with investment expenses of .30%. So I’m paying twice what you’re paying annually but I avoided the commission of 2.5% on the front end, because like everyone tells me, “advisors who earn commissions are not my friend.”
Now remember, these are the EXACT same portfolios, the only difference is the fee structure and commissions.
Both portfolios have 40% US Large Cap Stocks. 20% US Small Cap Stocks. 20% US Government Bonds and 20% US treasury bonds and are rebalanced annually.
According to Jane Bryan Quinn I should be WAY better off than you because I paid no commissions but you did.
Yet, when you run an analysis using the free tool at www.firecalc.com as of January 2018: my portfolio had an average value of $967,507:
Here is how your portfolio would have fared in each of the 49 cycles. The lowest and highest portfolio balance at the end of your retirement was $250,000 to $2,139,572, with an average at the end of $967,507. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)(emphasis mine)
You on the other hand:
Here is how your portfolio would have fared in each of the 49 cycles. The lowest and highest portfolio balance at the end of your retirement was $243,750 to $2,540,113, with an average at the end of $1,148,631. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)
You would have earned a whopping $181,000 MORE than I had EVEN though you paid a commission on the front end!
So, as you can see, to simply write off commission-based advisors is silly. Yet, professionals in my industry do this time and again, without even the slightest thought of the consequences.
Now, don’t forget, Ms. Quinn said she’d use a fee-only advisor EVERY TIME. Apparently, even the guy charging 1.5% would be more acceptable than a commission-based advisor.
Unfortunately, if you were to follow Ms. Quinn’s advice and chose a 1.5% fee-only advisor:
|FIRECalc looked at the 49 possible 30 year periods in the available data, starting with a portfolio of $250,000 and spending your specified amounts each year thereafter.Here is how your portfolio would have fared in each of the 49 cycles. The lowest and highest portfolio balance at the end of your retirement was $250,000 to $1,837,202, with an average at the end of $830,777. (Note: this is looking at all the possible periods; values are in terms of the dollars as of the beginning of the retirement period for each cycle.)|
You would have $318,000 LESS in your portfolio! That is 38% less than the portfolio from “not your friend” commissioned advisor.
Remember, it’s not like that $318,000 is missing. Oh no. It’s accounted for, allright. Just in your advisors pocket not yours!
My friends, $318,000 can buy a LOT of things in retirement, let me tell you.
So what does all this mean?
So, to wrap this all up. I have a BIG problem with people who point fingers accusingly all the while they are engaging in the exact same tactics. If you want to charge a fee for your advice, more power to you. But don’t make it seem as if others are doing something differently than what you are.
If you feel the advisor business is charging too much for its advice, more power to you. But to turn around and join that same business model seems disingenuous to me, at best.
If you feel it inappropriate for a person to sell a product and earn a commission, well what are you going to do when the clients of your fee-only firm is $300k less wealthy?
There is NO one-size fits all in this line of work, my friends. Remember though, EVERYONE gets paid somehow. Board of directors for investment firms get paid by the fees that investment firm charges. Some folks get incentivized to send referrals to an investment firm to grow that firms business. While that may not be a pure commission, can that referrer be truly objective?
Stop Sniping and Start Helping!
I just wish the pro’s on my side of the business would stop the finger-pointing, name-calling, and blatant hypocrisy. People NEED help! And when we cut our competition off at the knees we are hurting not just the competition but the profession as a whole.