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Are you paying too much for financial advice? A question of value

Would you pay a 10% fee to an adviser if net of that fee they beat the S&P 500 every single year?  This is a ridiculous and simplistic question but something like it is used by many advisers or investment managers when faced with complaints that investment fees are too high. I wish this was a rhetorical question but the reason the fee debate is so difficult is the answer to the question above is not always (and should not always be) yes.

With the introduction of  low cost advice alternatives and robo-advisers, investment management fees have become a key talking point among investment pundits. Too often this discussion focuses solely on the specific fee being charged and fails to tie this into the value that is being provided for that fee. The crux of the fee debate should not be are investment or advisory fees too high, it should be are investment advisors and financial planners providing enough value to justify their fees?  Looking at the industry as a whole, I am comfortable making the blanket statement that no they are not.  With that said, there are many advisors and investment managers that should be charging far more than they do.

Ill pause right here for a “Full Disclosure” moment.  I would like to remind all readers that I am a wealth advisor/ investment manager.  I get paid a fee to provide financial planning and investment advice. Alright, back to the topic at hand.

The problem is that there is a disconnect between the value an advisor is or should be providing their client and what the client thinks they are paying for.  Expectations of the relationship, clearly defined measures of success and a clear description of the value the advisor is going to provide often get lost in the rush to get assets in the door. The result is the client not understanding the value they are paying for and thus feeling like they are paying too much.

I think I am paying too much. If this is the case, it means one of two things. Either your advisor isn’t providing you with enough value to justify their fee or you don’t understand the value they are providing.  There is a simple solution to both of these problems. Ask your advisor to explain the fees you are paying and the value they are providing.  They should be able to easily articulate all the fees you are paying and then describe the various ways they are providing you with value.  If they can’t do either of these, then it is time to find a new advisor or investment manager. While these kind of fee discussions and this kind of transparency should be the standard when you start an advisory relationship, it is often missed, ignored or glazed over so don’t be afraid to revisit it if you feel uncomfortable about your fees.

What is the fee paying for? Failure to understand this simple question is one of the major reasons that this fee debate persists. Too often clients fail to ask this question and advisers fail to communicate the answer. The answer is going to vary depending on the type of relationship you are looking for in an advisor or money manager and the value proposition they aim to deliver. It will differ between professionals that are just investment managers and those that are full wealth planners. Here are a few of the values that your fee could be paying for. This is not an exhaustive list by any means:

  • Investment Performance: This is the most basic value that an investment manager or advisor is going to provide and quite often is the only measure of value that a client judges their advisor by. Unfortunately success or failure in this department is very arbitrary, poorly understood or not communicated properly. That said, for basic investment management services this can be a simple way to judge the value you are receiving as long as the measures of success are clearly outlined at the start of the relationship. (See my last post for a discussion on measuring investment success).
  • Planning Expertise: If you are hiring an advisor to do more than just manage your investment portfolio, they can provide a lot of additional value. Many people focus solely on investment results, but saving in taxes, having a disciplined plan to reach a specific goal and putting the right strategy in place to leave a lasting legacy can have a far greater impact than any simple investment strategy. We have seen an increase in recent years of advisors breaking this expertise out as a separate planning or retainer fee.  I think this is a good idea for certain situations.  The more the fee can be aligned to the service or value being provided, the better.
  • Time: This is the most commonly overlooked value that an advisor provides but is often never communicated to a client as a value. Many of the strategies that advisors utilize can be learned about with enough reading or individual education.  There are a plethora of online tools to help investors implement a plan and with the right kind of discipline and time commitment, most individuals could monitor and adjust their plan. However this all takes time.  By outsourcing these tasks to an advisor, an individual can save hours upon hours of time and for many busy people this time has a very high value to it, often far exceeding any fee they pay an advisor.
  • Decision Making: As I discussed in a previous post, investing and planning can and should be an emotional experience. However, this emotion should be removed when it comes time to make final investment decisions. A high value can be places on an advisors ability to manage a client’s emotions throughout the investment process.

Each advisor you speak with may have a different list or their value proposition may include other factors or variables that should be included. Understanding this list and being able to evaluate your adviser or investment manager on these is the key to understanding if you are paying too much.

Not everyone should hire an advisor or pay a money manager. That’s right, some people can accomplish all of their financial planning and investment needs without hiring an advisor.  If you feel the values outlined above are not as important to you or can be satisfied to your liking on your own or through an inexpensive online alternative then do not hire an advisor. The fees you will pay an advisor are too high and will never be justified in your mind. This will increase your stress and anxiety around your finances and the goal of hiring an advisor should be to reduce this stress, not add to it. And to be completely honest, as an advisor, we don’t want clients that don’t value the work that we do for them.

So let’s circle back to that first question: Would you pay a 10% fee to an adviser if net of that fee they beat the S&P 500 every single year? While beating the S&P 500 every year would be considered a pretty good track record, if beating the S&P 500 is not the value you are looking for, then no, the 10% fee is not justified. However, if your goal is to beat the S&P 500 every year then this 10% fee could, in theory, be justified. Now, I understand a 10% fee is ridiculous. The actual fee itself is not the issue though, it is the value that is being provided. For some people, a 0.1% fee is way too high.  For others, a 3% fee could probably be justified.  So when you discuss fees let’s try not to focus on the absolute fee, but let’s instead focus on the value needed to justify the fee. If that value isn’t being provided, then yes you are paying too much in fees.