In my previous article, Investment Fees – The Hidden Cost, I discussed the sources of fees that clients unwittingly pay to advisors and brokerages. Not knowing you’re being charged for something is an issue, but so, too, is whether you know what you’re paying for.
Let’s start out by saying that fees in and of themselves aren’t necessarily bad, but you want to get value for your expenditure. This is especially true of your management fee; if it’s substantial, it’s worth investigating if you’re truly getting enough bang for your buck.
As a general rule, if you’re just investing with a firm, your management fee should be low—and you’re probably better off going with an index fund rather than paying someone to pick stocks for you. Conversely, if your management fee is high, you should be receiving comprehensive advice as well as the type of trusted advisor relationship you want.
Let’s say company A charges you a 1% management fee primarily to invest your portfolio. That’s good, but wouldn’t it be even better—of greater value—to work with company B, which provides the same thing company A does, plus additional services, for the same 1% fee? Those additional services can include receiving one statement that consolidates all your accounts, having access to a digital locker to store important documents, and even doing your taxes and wills (not something we espouse, but that’s for another blog).
You will probably want to work with a Certified Financial Planner (CFP) who can discuss your short-, medium- and long-term goals; set a plan to achieve them; and monitor it to ensure things are on track or modifications are needed. A CFP also can assist with the integration of your entire financial “life,” which includes your estate plan, tax plan, charitable giving needs and insurance needs.
Expertise from a CFP is valuable, i.e., fee-worthy, because making poor financial decisions and/or investing mistakes can have a huge impact on your future. We’ve seen it many times before: people are scared or greedy and they do stupid things, or they take advice from a bad source, perhaps someone with little or no investment training who has a hot tip or claims to be knowledgeable about the next big thing.
What about the benefit of having a relationship with a financial advisor you really trust? You can’t affix a numerical value to this intangible, but it can be worth its weight in gold. When the market plummeted in 2008, a lot of people were tempted to sell everything and bury the proceeds in their backyard; because good advisors know their clients, if any of them developed that desire, they’d be able to talk them out of making a short-sighted choice.
It’s hard to fathom, but many people entrust their financial future to someone they don’t really know—and more importantly, someone who doesn’t really know them. We recently asked a prospect how he chose his current broker, and he said it was the person his father had used. He admitted they never talk. We were dumbfounded; this advisor can’t know his goals and objectives, when he’s sending kids to college, how long he wants to work, etc.—and he’s probably charging a pretty penny for his “services.”
I hope you see that all fees are not the same. Unless you like overpaying, it behooves you to know what you’re paying for when you work with a fee-based advisor—or choose to work with a fee-only advisor, who will provide you with objective counsel for a totally transparent fee.
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