Is a Financial Advisor Worth Your Money?

Dear Rich Lifer,

In an article last week, I gave you a bunch of no-brainer financial resolutions to consider for 2020 and one of them was avoiding unnecessary fees and frictional costs.

Now, I’ll be the first to admit that I typically err on the side of “cheapskate.” Sometimes I might even end up worse off by trying to save a couple bucks instead of simply ponying up for expert advice or services.

I also have plenty of friends who work in the financial services industry, many of whom earn their livings from fees and frictional costs.

So the last thing I’m trying to suggest is that DIY is always the best choice – including when it comes to managing a portfolio.

At the same time, just listen to the following story I heard from a friend in the industry over a holiday lunch…

Story Time  

Basically, my financial advisor buddy has a client who has suddenly discovered a newfound passion for options trading.

The client insists on having my friend take his orders over the phone and enter them into the company’s brokerage platform.

In doing so, the client pays massive commissions on the trades he does – an upfront charge, plus additional per-contract fees – that add up to a couple of hundred dollars per transaction in some cases!

This is instead of simply entering the order himself through the online platform, where he would pay somewhere between nothing and a few dollars.

Mind you, I am not talking about million-dollar positions.

Who in their right mind would just toss a couple hundred dollars into the trash on a regular basis?

But this kind of stuff happens all the time. People are either too lazy or too uninformed to save themselves many thousands of dollars in unnecessary expenses. 

Many brokerages are now moving to commission-free trading platforms so there is no reason to spend $20, $40, or $100 on a simple buy or sell transaction.

Moreover, as I’ve pointed out before… 

Money Managers Are Expensive

The average financial advisor charges 1% a year to manage your money.

That means the typical investor who uses a professional advisor could be handing over $1,000 a year on a $100,000 portfolio before one single penny is earned from the lump sum.

Put another way, it means that same investor has to BEAT a benchmark’s return by one percentage point a year JUST TO BREAK EVEN.

Do some advisors provide great information for their fees? Absolutely. Some are worth far MORE than 1% a year. But a lot of others aren’t.

Meanwhile, the typical actively-managed mutual fund carries an annual expense ratio of 1.1%.

So whether or not you use an advisor, you could be losing more of your money just to pay a mutual fund’s marketing materials, managers, and other operating costs.

On top of an annual expense ratio, many mutual funds also slap on plenty of other fees — for getting in or out. They may even level additional fees for every year you stay IN.

Obviously, a lot of investors are getting wise to this and switching to low-cost index funds and ETFs.

However, there are still billions in unnecessary, unjustified fund management fees going into Wall Street’s coffers every single year.

Plus, most actively-managed funds are consistent UNDERPERFORMERS.

Why Would You Pay Someone to do Nothing?

It would be one thing to pay for performance. In fact, you will often hear Wall Street describe its compensation structure this way.

But the reality is that the majority of actively-managed funds — whether you’re talking about mutual funds or hedge funds — fail to beat their benchmarks.

The number varies year to year but it usually sits right around 80%.

It’s the same thing with hedge funds, too.

And remember, you still have to factor in their typical management fees — 2% of assets and 20% of any profits earned!

No wonder the California Public Employees’ Retirement System (CALPERS) decided to pull out all of the money it had invested in hedge funds ($4 billion).

That was after they paid $135 million in fees during 2013 and received only 7.1% in returns from their hedge fund investments.

As a point of comparison, the S&P 500 index rose 29.6% that year.

So, yes, pay for performance. But don’t pay more than you have to.

To a richer life,

Nilus Mattive

Nilus Mattive

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As an investor and entrepreneur, I never rest on my laurels. Just like an athlete, I'm always in training. If I don't keep training, when it comes time to take the playing field, I stand a significant chance of getting injured or getting beat. Before it’s too late, start training now. If the Fed raises rates too fast, or not at all, we could see a major collapse.

Nilus Mattive

Nilus is the editor for the daily e-letter The Rich Life Roadmap and a Paradigm Press analyst.

Nilus began his professional career at Jono Steinberg’s Individual Investor Group, where he published his original research through a regular investment column. Later, he worked for a private equity business and spent five years editing Standard and Poor’s...

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