How are your Advisory Fees?
Updated: Nov 3, 2018
How are your Advisory Fees?
Each year I do a competitive analysis to see where my strengths lay against others in my profession. So, I started looking at my competitors to see what it is that I am doing differently in hopes that I might come to a revelation of sorts that could help me in gaining more business. I started my research by looking at the regulatory filings of other firms in the Lubbock area, and what I found was astonishing. Astonishing is the wrong word – what I found was appalling, at best.
I hate to speak ill of other’s business practices, but when it comes to being overcharged for services, I can’t help but speak out. Folks, too many of you are paying way too much for your advisory services. I am going to be as blunt as possible because beating around the bush just isn’t going to work here.
First of all, if you are working with a broker-dealer, you’re getting fleeced regardless of what you think you are paying or not paying – read some of my previous blog posts: The Price of Free; and Why Put Up with It?. The hidden fees in front-end loads, back-end loads, sales charges, commissions, kick-backs, etc. should make you sick. Conversely, If you’re working with a fee-only advisor and you’re paying more than 1.00% to them for managing your investments, then you may be getting fleeced too.
Here’s Why I Say This
The Investment research giant Morningstar found that investment managers help to add an extra 1.82% to client portfolio returns. They call this metric gamma (other metrics are labeled alpha, beta, etc. so they stuck with the Greek letter naming convention.) You may read more about the gamma metric in my past blog post: Still Wondering if I’m Worth It?.
While reading through the amount charged by my competitors for investment management I found that some are charging 1.50% and a great many are charging an outrageous fee of 2.00% of assets under management (AUM). Please excuse me while I throw-up a little in my mouth.
The following hypothetical chart shows what growth can look like given the various fee levels:
What’s truly noticeable here is that for those who are paying 2.00% of the value of their assets, are actually worse off than if they managed their own investments, all other things being equal beyond the management fee. In fact, those paying 2.00% actually end up losing out on a little more than 5% of the returns they would receive after 30 years of doing it themselves. On the other hand, by paying only a 1.00% fee, those individuals have the potential to see over 26% more value in their portfolio over a 30 year period than if they had done it themselves.
2% May Not Be That Bad
If your advisor is charging you 2% and they are also providing other services for that fee, then it may be justified. Some advisors may offer tax preparation or bookkeeping services while others offer what is known as a concierge service where they will handle your bills, negotiate car purchases or leases, and even help you to plan a vacation. In those cases a 2% fee may be justified because your time may be very valuable and these services allow you to earn more while outsourcing mundane tasks. But if all you are receiving is investment management and financial planning, then you’re getting hosed in the pocketbook, it’s as simple as that.
Read the Fine Print
Every year the Securities and Exchange Commission requires that investment advisors provide regulatory filings to their clients – they are known as the ADV parts 2A and 2B. Most clients rarely read through these filings because they are long, boring, and filled with jargon, but I encourage you to read through it this year and pay particularly close attention to the section labeled Item 5: Fees and Compensation. Then, if your advisor’s highest fee level is above 1.00%, give me a call and let’s get you into something better. After all, I could help your portfolio grow 26% larger!