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 wrong time. 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 retirement.” 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. http://blog.betterfinancialeducation.com/. AdviceIQ delivers quality personal finance articles by both financial advisors and AdviceIQ editors. It ranks advisors in your area by specialty, including small businesses, doctors and clients of modest means, for example. Those with the biggest number of clients in a given specialty rank the highest. AdviceIQ also vets ranked advisors so only those with pristine regulatory histories can participate. AdviceIQ was launched Jan. 9, 2012, by veteran Wall Street executives, editors and technologists. Right now, investors may see many advisor rankings, although in some areas only a few are ranked. Check back often as thousands of advisors are undergoing AdviceIQ screening. New advisors appear in rankings daily.

Topic: Dealing with Financial Advisors How to Pick Them The Different Types of Advisors