Here is an opinion piece from Paul Merriman that echos my thoughts. The basic lesson is that many investors, even those with relatively modest nest eggs, can save $1 million or more by managing their own investments (or by choosing to work with an advisor who charges a reasonable fee).
By Merriman’s calculation, an investor in 1970 starting with $500,000 would have given up about $1.37 million over 30 years by working with an advisor charging the typical 1% asset based fee. That equates to a 16.5% reduction in retirement income AND and 23.7% decrease in ending net wealth.
That 1% fee may sound reasonable for any given year and your advisor may say something like, “Hey, it’s only 1%!” But those fees add up year after year after year. And it’s not just the fees that add up. As those fees go out the door, you also lose the benefit of the future investment returns on those fee dollars. Every dollar you keep and don’t spend on fees, can grow significantly over a 30 year retirement.
Most financial advisors might read this article and say, “There’s no way I’m putting this in front of my clients,” but I’m perfectly comfortable doing so. Why? Because I believe that clients should be educated about the potential costs and benefits of their various courses of action. And for most people the typical 1% fee does not make sense.
Does this mean that I believe that ALL people should avoid working with financial advisors? No. In fact, my philosophy is simple, everyone should do what’s best for their unique situation. Some people do an excellent job managing their own money. But it’s hard work and life is busy. In today’s world, we have so many things competing for our attention that finding the space to focus on finances can get tricky. In many situations, engaging a financial advisor can help. They can save you loads of time and often point out things that you may have missed. Just like you outsource things like home repairs and lawn maintenance, engaging a financial advisor is simply another opportunity to delegate.
You may have noticed that Merriman mentions that he uses an advisor himself. My guess is he doesn’t pay anywhere near 1% for the services provided by his advisor, but he still recognizes the value that a trusted 3rd party can provide when it comes to handling money. We are all human after all, and we are all the mercy of various cognitive and emotional biases, which unchecked, can damage our decision making. An advisor can help mitigate that damage.
However, at the end of the day, a financial advisor does not cure all ills. Financial advisors can’t predict the future and they can’t beat the market. The best financial advisors have humility and accept that. They use low-cost, passive investment funds and focus on helping clients create a solid plan, manage emotions, and make sound decisions. Is a financial advisor worth 1% of your money every year? Only you can answer that for yourself, but for me the answer is no.
