The last bastion of gluttony in the investment industry is stubbornly high financial advisor fees. It’s as though technology has passed over this business and financial advisors are getting rich from increasing profit margins.
There are more than 10,000 advisors who charge fees based on the size of the portfolio under management. The average advisor fee is 0.90% per year according to the Advisor Benchmarking 2009 Annual Survey results, however, fees charged by individual advisors run the gamut from very low cost (0.25%) to irrationally high (3.0%). And that’s before mutual fund expenses and commission.
So, what do you get with an advisor who charges high fees versus an advisor who charges low fees? That’s the question asked by many people who are in the market for an advisor. I suppose the best way to answer this is to ask high cost advisors, a solution which appears to be what the folks at The Retire Early Home Page did. I borrowed the following list from the site and modified it a little.
Excuses Advisors Use to Justify Their High Fee
Excuse #1: Low-fee advisors simply sell their services based on the cost savings. High-fee advisors offer superior service, get to know you well and watch your money carefully.
Reality: Low-fee advisors provide the same superior service as a high fee advisor – just without complimentary tickets to sporting events, meals at expensive restaurants or free rounds of golf.
Excuse #2: A low-fee advisor might not understand investing. They are inferior advisors who charge low fees to attract business because they’re inexperienced and uneducated.
Reality: A fact check of low-fee advisors’ backgrounds show that most have many years of experience in the industry, advanced degrees and credible industry certifications such as CFA, CPA and CFP.
Excuse #3: A low-fee advisor might not properly assess your risk tolerance and asset allocation. They may not have the knowledge or resources to implement sophisticated strategies.
Reality: Advisors can only assess risk tolerance and suggest an asset allocation based on the information their client’s provide. The fee the advisor charges has no bearing on this assessment.
Excuse #4: A low-fee advisor might not form a “personal relationship” with you. They can’t afford to spend time meeting with you, talking with you or getting to know you.
Reality: Today’s advanced technology offers many efficient ways to communicate with an advisor that cuts down on cost without cutting down on service.
Excuse #5: A low-fee advisor might not use the best funds in each asset class. They don’t have the recourses to hire a deep research staff to select superior investments.
Reality: Most mutual funds underperform the markets, and most analysts who select mutual funds underperform the market. Experienced advisors know that low-cost index funds and ETFs are among the best investments for clients because they have the highest probability of meeting their financial goals.
Excuse #6: A low-fee advisor might not perform as well at tax-loss harvesting.
Reality: Almost all portfolio management software used by advisors today incorporates tax-loss harvesting in the programming. It doesn’t take a dozen staff people to do this anymore.
Excuse #7: A low-fee advisor might not provide proper performance reports.
Reality: Performance reporting is easy and precise using one of the basic portfolio management programs available today. As an aside, I can honestly say, the worst reports I’ve seen are produced by high-fee advisors. They’re designed to hide poor performance and hide fees.
Excuse #8: A low-fee advisor might not help you with your estate planning or taxes.
Reality: This is true. But do you want to pay 4 or 5 times the investment management fee just to have access to these infrequent services? No. It costs much less to pay cash for these services when needed.
There’s no excuse for paying high fees for an advisor. Advancements in technology and communications have brought tremendous productivity to the advisor industry, allowing advisors to manage more relationships and far more money with a fraction of the overhead. Unfortunately, the clients haven’t always benefited from these productivity gains. But it’s time you did.