- A hypothetical advisory fee of 1 percent of assets per year significantly reduces net returns over time.
- Net returns are further reduced by the loss of the opportunity to invest fees deducted by the adviser.
His post damns advisers with this faint praise: "I am not saying financial advisers are wicked people. Nor am I saying many advisers don't provide a deeply valuable service. However, if you do use a financial adviser or money manager, take a long, hard look ... and ask yourself, 'Am I getting my money's worth?'" These suggestions will help you do such an evaluation:
Review Vanguard's White Paper
In March, Vanguard released an extensive analysis (called "Putting a Value on Your Value") of the value alpha (a measure of an investment's performance compared to a benchmark) added by advisers. The conclusion: "Based on our analysis, advisers can potentially add 'about 3 percent' in net returns by using the Vanguard Advisor's Alpha framework." It reached this figure by placing a value, or range of values, on the following services:
- Moving to low-cost funds: 0.45 percent
- Annual rebalancing: up to 0.35 percent
- Behavioral coaching: 1 percent to 2 percent
- Tax efficiencies: zero percent to 0.75 percent
- Withdrawal order for spending: up to 0.70 percent
Study Higher Returns of Investors in Dimensional Funds
An analysis of investor success at capturing fund returns with and without passive advisers, "The Value of a Passive Advisor," published by Index Fund Advisors, yielded some surprising results. The analysis was performed over various periods. The data comes from a number of independent, reliable sources, including Morningstar and "The Little Book of Common Sense Investing," by John Bogle, founder of the Vanguard Group.
The ability of investors in Dimensional's funds to capture more than 100 percent of the returns of those funds can be explained by two factors. Unlike many investors without advisers, investors in Dimensional's funds receive coaching to keep them from panicking and selling when the markets tank. In addition, their advisers rebalance regularly, which can be counterintuitive. Often, investors without advisers are reluctant to sell stocks when they are going up and purchase them when they are going down.
Harvest Tax Losses
Low-cost advisers may not do tax-loss harvesting at all. If they do, they may do it infrequently. Capturing losses in a timely manner can have a significant impact on your returns.
Many advisers rebalance once a quarter, if that frequently. A competent adviser will have software that determines reasonable tolerance ranges and will rebalance whenever it is necessary to keep your risk profile at its intended level.
Minimize the Number of Mutual Funds
A hidden cost of poor advice is caused by too many funds in your portfolio. Having a large number of funds increases the cost of rebalancing, which reduces your net returns.
Many low-cost advisers offer only investment advice. A true wealth adviser will offer additional services and may not break out the cost of providing those services from the advisory fee charged to clients. These services may include:
- Providing a comprehensive review of insurance policies, including life insurance, long-term care, and property and casualty insurance.
- Integrating your investment plan with your estate plan.
- Providing Roth individual retirement account conversion advice.
- Giving advice on when you should start taking your Social Security payments.
- Providing advice on mortgage financing.
- Providing advice on investments held in your retirement accounts, even though those accounts are not managed by your adviser and your adviser receives no additional compensation for doing so.
I have long been a proponent of focusing on fees and costs when making investment decisions. However, you should not view an adviser's fees in a vacuum. There can be a significant difference in both the quality of advice and the breath of services offered by different advisers. You should consider all of these factors and not just fees alone.
Dan Solin is the director of investor advocacy for the BAM Alliance and a wealth adviser with Buckingham. His latest book is "The Smartest Sales Book You'll Ever Read."