You get what you pay for!

feesIf you think you are paying your adviser to always get you returns that always go up (against the currents of markets, the economy, or both), then you are probably throwing money away and should seek the lowest cost alternatives. You see, from this perspective, these people believe that their investments need to do all the heavy lifting instead of saving more.

Getting good returns as the goal, instead of saving more, may work for those under age 45. But, to reach a goal after age 45 it means saving more as the goal instead of reaching for returns (more risk). <Article link that discusses this> This is because the compounding happens at the END of the period … so by waiting to add money, you shift both the beginning AND the end of the period to older ages, which means you don’t get the compounding effect at the end. Why? Because that’s when you are supposed to retire and start spending the money you’ve saved. For example, saving from 25 to 65 means you have 40 years of saving AND compounding. Waiting until you’re 45 means you only get the first 20 years of saving and compounding … but not the last 20 years when the big compounding really begins to kick in. Here’s a link to my earlier post on this difference between contributions and returns  … arrives at a similar conclusion using a different methodology.

What has this to do with paying your adviser? Plenty!

The adviser fee is NOT the same as the investment fees. Investment fees are paid to the mutual fund management so they can do all things investing related. No. The adviser fee is payment for the adviser keeping you from doing emotional things at the wrong time. I believe advisors should be charging their fee for: providing fortitude for their clients. From Merriam-Webster’s Dictionary — Fortitude: strength of mind that enables a person to meet danger or bear pain or adversity with courage. I believe most investors need the support of a professional advisor who can help coach them through periods of fear or uncertainty.

You see, your emotions sabotage the best laid plans. A good plan walks you through the emergency simulator so you have made decisions ahead of time that are rational and actually may make a difference between success or failure. Trying to time the market by thinking your are smarter than the market (know when to get out and when to get back in) torpedoes good plans because of emotions*. Pilots and flight crews work on emergency procedures in the simulator in order to develop rational habits and decision making and learn to ignore fear and emotions.

A good plan, with well understood decisions made during good times precisely for when the poor times do inevitably come, is what you pay an adviser for. As Jason Zweig says in his Wall Street Journal Jun 28, 2013 The Intelligent Investor: Saving Investors From Themselves article, “That’s because good advice rarely changes, while markets change constantly.” If you are paying them for investing alone, your missing out on what good advice looks like. I believe you should be paying for advice that is based on enhancing the potential Long-Term Success of your plan which = Fundamentals + Fortitude.

Are good advisers worth their fees. I believe they are and Morningstar research suggests the same.

*The Cycle of Market Emotions. How do the markets have you feel the opposite of what you should do.

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3 Responses to You get what you pay for!

  1. Larry Frank, Sr. November 28, 2013 at 6:28 am #

    The WSJ Market Watch link in this blog (http://blog.betterfinancialeducation.com/behavior-corner/are-advisers-worth-fees/) explains that the most important component that provides the heaviest weighting for benefit is a “dynamic withdrawal strategy” … in other words, annually reviewing what the prudent income may be from the portfolio. This is in contrast to what most people and conventional wisdom thought … that portfolio construction is the most important factor.

  2. Larry Frank, Sr. February 2, 2015 at 11:32 am #

    And a great short article about selecting an adviser, not on how nice they are (superficial characteristics), but on the competence. Now that’s unique! Not quite what you see marketed is it!?

    http://adviceiq.com/content/advisors-and-superficialities

  3. Larry Frank, Sr. July 21, 2015 at 10:23 pm #

    Are advisers worth fees? Morningstar calls the benefit “Gamma” and Vanguard chose to call it “Adviser Alpha” in their study … summary here:

    http://retirementresearcher.com/the-value-of-financial-advice/

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