We’ve all heard of the saying, “you get what you pay for.” Here are some situations where you don’t want to cut corners on cost and quality:
- Your neighbor Bob uses the low budget tree trimming service, and then the tree gets dropped on his house… (you get what you pay for).
- Your cousin Jimmy uses the discount plumber to fix a leak, and then a pipe bursts and floods his house… (you get what you pay for).
- Your nephew Billy decides to get a tattoo at the cheap studio across town, and that soaring bald eagle ends up looking like a chicken… (hey it only lasts for the rest of your life).
Does this apply to financial advice?
In some ways no, and some ways yes. It’s counterintuitive, but the price of financial advice doesn’t always correlate to the underlying quality of the advice. Many expensive investment managers often have the worst performance relative to their benchmarks simply because their fees are so high. And some of the most expensive financial advisors are happy to push high-priced investment products like whole life insurance or variable annuities, which add zero (or negative) value for the client.
In fact, I’ve encountered many clients who came to me with portfolios chock-full of A-class mutual fund shares (e.g. the ones with an upfront sales charge of 5% or more). Those clients could argue that their advisors were certainly expensive but also…. pretty horrible.
One the other hand, a competent financial advisor who knows what they’re doing is going to cost a certain amount. After all, you’re paying for a professional to handle a very important component of your life. I estimate that current hourly rates for a good financial advisor are in the range of $250 – 300. And the average client takes between 20 – 25 hours of work each year. Based on this, you can estimate an approximate cost of $5,000 – $7,500 per year for high quality financial advice. If your advisor is charging above that range (likely if you work with an advisor charging the typical 1%), then it’s possible you’re paying too much.
It’s hard to overstate the importance of paying a reasonable fee for financial advice. I’ve known clients who spend time clipping coupons to save $1 on a box of cereal. But when it comes to what they pay their financial advisor, they fail to do any proactive research.
As I’ve mentioned here and here, the costs of financial advice can really add up. Reducing your advisory fees even a little bit can be the difference between your financial success or failure. And the savings could pay for a lifetime supply of cereal! So next time you hear someone say, “you get what you pay for,” remember that when it comes to financial advice, it’s might be more accurate to say, “you get what you don’t pay for.”
