Are Advisors Worth the Fee?
Submitted by Larry Frank Sr. on Tue, 01/07/2014 - 3:00pm
If you pay your financial advisor to constantly get you returns that always
go up, you throw money away. You must work alongside your
investments, and here’s how.
You may believe your investments – instead of you saving more – do all
the heavy lifting of personal finance. The goal of good returns instead of
saving may work for those younger than 45. After 45, saving more
becomes the goal and replaces reaching for returns (and exposing
yourself to more risk).
In accumulating personal wealth, your early contributions outweigh
returns because compounding, your strongest tool for building wealth,
happens at the end of your saving and investing.
By waiting to add money, you shift both the beginning and the end of the
accumulation period to older ages and don’t get the same compounding at
the end. Why? Because you retire at the end of your accumulation period
and start spending your savings.
For example, saving from ages 25 to 65 means you save and compound
your savings for 40 years. Waiting until you’re 45 means you only get
the first 20 years of saving and compounding – and not the last 20, when
compounding really kicks in.
What does this have to do with your advisor’s fees? Plenty: The advisor
fee is not the same as the investment fees you pay to mutual fund
management so they can do all things related to investing. You pay the
advisor to keep you from making emotional investment decisions at the
Your emotions sabotage your best-laid plans. A good plan walks you
through emergency simulations so you make rational decisions ahead of
time – often the difference between financial success or failure.
Trying to time the market by thinking yourself ahead of the market,
believing you know exactly when to get out and when to get back in,
torpedoes plans because of emotions. You pay an advisor to help create
a plan with well-understood decisions made during good times precisely
for when the poor times inevitably come.
As Jason Zweig says in his Wall Street Journal June 2013 article, “The
Intelligent Investor: Saving Investors From Themselves”: “Good advice
rarely changes, while markets change constantly.” If you pay advisors for
investing alone, you miss out on what good advice looks like.
Good advisers earn their fees beyond returns. Morningstar research
agrees: “The potential benefits from ‘good’ financial planning decisions
are often difficult to quantify,” write Morningstar retirement executives
David Blanchett and Paul Kaplan in “Alpha, Beta, and Now … Gamma,”
a paper examining “myriad” financial planning decisions critical to an
investor’s long-term success.
Good advisors, they argue, go beyond returns’ bottom line to provide
“other valuable services that enable a client to achieve … goals.”
Advisors’ “value cannot be defined in such simple returns … since the
objective of the individual investor is typically to achieve a goal,” the
authors add, “and that goal is most likely to achieve a successful
You should pay for advice that rests on enhancing the long-term success
of your plan by sticking to financial fundamentals and your own
emotional fortitude. If you can put a price on providing fortitude to you,
the investing client, gladly pay it.
Follow AdviceIQ on Twitter at @adviceiq.
Larry R. Frank Sr., CFP, is a Registered Investment Adviser (California)
in Roseville, Calif. He is the author of the book, Wealth Odyssey. He has
an MBA with a finance concentration and B.S. cum laude in physics with
which he views the world of money dynamically. He has peer-reviewed
research published in the Journal of Financial Planning.
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