This is a question that comes up often from investors in a bull market. They see their account balances rising, might have bought a stock or sector that is moving hard to the upside. All is good. Who needs advice/coaching?
They read a blog – like this one – that highlights the dangers of paying 1% too much in fees. Yet, at the same time, Financial Advisors working to the highest ethical standards often charge 1%. How can this be? 1% is bad on the one hand, yet is being charged on the other. This apparent conundrum can be explained by understanding that two closely related concepts are being confused: you are asking the wrong question. A flawed question.
First, overpaying for investment management services should be viewed as a sin. One that will eat up a ton of your retirement nest-egg. The actual size of the damage is related to how long you endure this bad practice. [Please see Dropping the Hammer (June 15 blog) for some illustrative numbers….] This stuff is non-debatable. It is math in action.
The second (and key) issue is why are you paying a Financial Advisor in the first place? The 1% charge should be for a variety of services/coaching around issues such as tax-minimization, goal setting, goal attainment, portfolio monitoring, appropriate re-balancing, etc. etc. (there is even a far more qualitative set of issues such as simplification through outsourcing.) These issues also have a tremendous impact on your long-run portfolio performance. Vanguard and Morningstar have each done extensive research to try to put a number on the value of these services. The bottom line is that investors – in general – with good coaching will outperform investors with no coaching. That is what you should be paying for; the ancillary services that complete the investment landscape.
Today, many refer to this basket of services as Comprehensive Wealth Management. This is what I do at Old Peak Finance. This is why you should be paying a Financial Advisor – not just to help you pick mutual funds or other investments – but to help you simplify and optimize your financial life. The positive impacts are enormous. Anytime you hear someone blabbing at a cocktail party about their investment acumen – and not needing any advice – please remember that this person is special. Like the disclaimers at the bottom of almost all financial marketing pieces state…….your results are likely to vary!