A recent article by David Hanson on Motley Fool took dead aim at the "invisible and brutal cost" of using a financial adviser. His premise can be summarized as follows:
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:
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.
%VIRTUAL-article-sponsoredlinks%It found that investors in funds managed by Dimensional Fund Advisors (available only from designated investment advisers) captured 109 percent of the returns of those funds. In contrast, investors in index funds without passive advisers captured only 78 to 88 percent of the returns of those funds. (I am affiliated with Buckingham, which uses Dimensional's funds in portfolios.)
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.
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 Solinis the director of investor advocacy for the BAM Allianceand a wealth adviser withBuckingham. His latest book is "The Smartest Sales Book You'll Ever Read."
A Great Financial Adviser Is Worth Every Penny
On one level, this is absolutely true. Real wealth, when not inherited, typically comes from starting your own business, but that is difficult when you have nothing. But too many people assume that they can't make things happen unless they're well-financed. "Most of the millionaires or billionaires I've interviewed over the years have bootstrapped it," Siebold said. "Most start with close to nothing. Of the self-made rich, most started off poor or middle class. They've put it on credit cards or borrowed it from family. It takes ambition, and it takes belief that it can be done. It really starts with the self-belief that it's possible. Most people are taught that it's not really possible for them unless they're blue blood or they went to Harvard or Yale. The mythology doesn't match the facts."
"The implication is that money is not made easily and it doesn't come for nothing, which is true technically," Siebold said. "This belief sets people up to believe money is scarce and difficult to earn, instead of seeing money as abundant and earning it is as easy as solving a problem through persistent, creative thought. Figuratively speaking, money does grow on trees; and the trees are ideas." Put those ideas into practice, and you might be surprised how much money the idea tree can grow.
Siebold called it the "It's the old 'trading time for money' [idea] that we're taught." "The average person believes the only way to make more money is to work more hours." But if you limit making money to selling your time, you're limited to what you can make, because there are only so many hours in a day, week, month or year. "I consult with big corporations," he said. "These are some of the big companies in the world. When I ask audiences, 'What's the best way you can think of in your role to make more money,' they'll say, get an MBA. Even at that level, they're trained to trade time for money. College professors don't have money. Even the ones that teach finance don't have any money. This creates the belief that making money is a linear process directly connected to time. Big money requires thinking about it in non-linear terms."
"The real saying is actually 'the love' of money is the root of all evil, but has been misquoted for centuries that most people believe money itself is the root of all evil," Siebold said. "That's where the church comes in to disempower people to make money. It creates a disempowerment cycle that makes people more reliant ... on institutions. Decide to be proud of your ambition and ignore people who tell you that wanting to be rich is wrong."
"Get your piggy bank out and save your pennies," said Siebold. "This is a very dangerous belief as it put a major emphasis on saving. Saving in itself is not bad, but the masses are so focused on clipping coupons and living frugally that they miss major opportunities. People must reject this nickel and dime thinking and focus their mental energy where it belongs: on the big money." In other words, why save pennies when you could be making dollars?
This is another saying that is true in one sense but misleading in a more important way, according to Siebold. "You don't get rich to get happier; you get rich for the freedom in brings." If you're unhappy with money, being rich won't of itself change that. But you could have "more freedom, more options, more choices." And, as he pointed out, most people have no idea what it's like to live without financial worry. Being less unhappy is certainly a step in the right direction.
"This is usually a harmless phrase when people just want to know what's on your mind, but be careful," Siebold warned. "If overused and it penetrates the subconscious, you'll start giving away your intellectual property for practically nothing. Your IP and unique perspective can potentially be worth millions if packaged properly." Look at the number of famous 20th century musicians who sold their music rights for a figurative song and were left destitute even as music publishers made millions. Compare that to Paul McCartney and John Lennon, who kept their rights and built multi-million-dollar fortunes.
"[There's an] idea that there's some kind of nobleness is being poor," Siebold said. A rich man isn't going to go to heaven. I'm not a good person because I'm not ambitious. I don't want to make money so I can be good. It sets [people] up to fail. The masses are programmed from an early age to put the needs of others before their own. There's a reason on a plane to say put your oxygen mask on first. In order to make a lot of money, there is a period of time in the beginning of the wealth building process where you must focus on yourself and your business in order to make it at an uncommon level. Once you acquire wealth, then you can volunteer or give back to charity."