What Value Does A Fee-Only Investment Advisor Add?

I’ve written scores of columns about the importance frugality plays in accumulating wealth. In almost every case where someone accumulates wealth it’s not because of the income they earned or the investments they made, but by simply learning to live on less than they earned. This is a truth that is lost on most Americans. It’s not about the income, it’s all about the spending.

One of our many jobs as financial planners is to help our clients invest their hard-saved income. There are a plethora of people standing ready to help those that have money to invest. Most of them commission-based salespeople, where the fees are conveniently siphoned from your funds leaving you without a clear understanding of how much you really paid for their services.

Most fee-only investment advisors charge 0.5% to 1.5% of assets under management. It isn’t unusual to see the fees, expenses, and commissions paid to mutual fund and annuity companies range from 2.0% to 7.0%, annually. Even so, while writing a check to a fee-only advisor may be less expensive than what you are charged in hidden fees and commissions, it is certainly more painful simply because you clearly see how much the investment advice costs

While in our experience what you pay a fee-only advisor is less than a commissioned salesperson, you may still wonder how does a fee-only financial advisor add value to what they charge for their services? Here are five ways an investment manager might bring value to a portfolio.

1. Objective Advice

While we don’t sell anything, we give our opinion on about everything. Clients are continuously asking our opinion about a plethora of investment options they run into on a regular basis . We have thousands of hours of research and 40 years of experience in analyzing scores of various investments. When we suggest an investment may not be appropriate for you or that is simply a bad idea, we might have just earned our fee for life. It just takes one really bad or fraudulent investment to wipe our a lifetime of savings. Had any of those that invested all their savings with Bernie Madoff asked our advice first, they would still have their money!

2. Lower Mutual Fund Fees

Our average portfolio expense ratio is about 0.55%. That means the person who’s invested $1,000,000 pays about $5,500 to their various portfolio managers. It’s not uncommon for an average portfolio of “load” mutual funds to have fees that run closer to 1.10%, or $11,000 a year on a $1,000,000 investment. An extra 0.55% over 20 years adds up to an additional $116,000 in your portfolio. Often a financial planner can save higher net worth clients their entire fee by this strategy alone!

When you consider that a financial planner does far more than give just investment advice, this equates to be a great value. That means the financial planning services are basically free. And ask any financial planner, providing financial planning advice is far more time consuming and costly than investment advice. This benefit can often be worth the entire cost of hiring a fee-only financial planner.

3. Asset class diversification

We manage money similar to an institutional money manager. What that means is that we don’t try to time markets but instead follow the best empirical research on investment best practices. This research suggests that asset class allocation will impact your overall returns more than the specific mutual fund you select or your attempt to time the markets. A static allocation of a large number of asset classes will produce the highest returns with the least risk or volatility.

We typically use 8 to 10 asset classes in every portfolio. US stocks make up a small fraction of most our portfolios. We also include international and emerging market stocks, along with investments in global bonds, TIPs, commodities, real estate, managed futures, and a number of investment strategies designed to offset the rise and fall of equity markets. A broad diversification in many asset classes helps reduce the volatility of a portfolio while maintaining a reasonable return.

4. Periodic rebalancing

Rebalancing means selling or buying shares of a holding to bring it back to the target allocation. This is an automated “sell high” and “buy low” strategy can reduce risk and boost returns. Research indicates rebalancing adds 0.3% to 1.60% over a long period of time. The research further shows that the more frequent the rebalancing, the higher the return. While the industry standards are quarterly rebalancing, our sophisticated rebalancing software allows us to rebalance daily. This feature alone may be worth every penny of your fee!

5. Not Making The BIG Mistake

You can destroy even the most brilliant investment strategy by making one irreversible and devastating mistake, abandoning your strategy during a frightening economic reversal. Taking I’ll advised actions to minimize fear-based emotions caused by untrue beliefs about investing can wreck years of wise investing. A seasoned investment advisor can help you process difficult emotions and confront delusional investment beliefs.

Research shows the more frequently you look at your portfolio the more likely you are to become overwhelmed with fear and make changes to alleviate your suffering. Every study shows that selling stocks (rather than buying) at the height of public panic actually causes greater than average losses.

A review of our investors who sold equities near the bottom of the 2008-2009 market crash showed they decreased their 5 year annualized return by 2.0% for every 10% shift made in their stock allocation. That means if an investor who had a 70/30 portfolio decreased their stock allocation to 60/40 they reduced their 5- year annualized return from around 2.0% to 0%. If they decreased it to 30/70 they reduced their return to a minus 6.0% annually. Sadly, the investor who went all to cash received a whopping minus 12% annual return over the past five years.

An advisor who rebalanced periodically and kept a client from making any downward shift in equity allocation easily saved their client at least 3x’s to 9x’s their annual fee! On $1 million that is $30,000 to $90,000 a year!

6. Adding It All Up

Some benefits of an advisor are hard to quantify, like objective advice and asset class diversification. If you add up the savings of lower expense ratios (0.55% a year), periodic rebalancing (0.3% to 1.6% a year) an investment advisor can save you 0.85% to 2.15% annually, which is at least one to five times the average fee.

If you want to add in the benefit of maintaining a static asset allocation in times of market panics, helping you not to make the BIG mistake (2% to 14% annually) an advisor’s services can almost become priceless!

Learn more about our Fee-Only Financial Planning services

Related Reading:

Bob Verees Article on Meaning of Fee-Only Financial Planning

Is There Any Real Difference in Fee-Only or Fee-Based Financial Planners?

Financial Planning Fees You See and Those You Don’t

New York Times on Fiduciary Financial Advisors

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