A heart to heart talk about the cost of receiving investment advice
March 9, 2017
For decades, the true cost of advice has been a “dirty little secret”.
Many investors were not aware of what they were paying for financial advice. In my opinion, that was by design.
For those of you who have read previous columns, my views are clear.
Industry participants including investment advisors, mutual fund companies, and industry regulators have done a poor job at providing fee transparency.
Finally, some small changes have occurred that will at least start providing some of the costs of investing.
Now it is time to start considering other costs of financial advice. These are the invisible costs of receiving bad advice.
If you interviewed two financial advisors which one would you choose?
One advisor has an investment management fee of one percent, as opposed to the other one having an investment management fee of 1.25 percent.
Which one would you choose?
The real question is which one will be most beneficial?
This requires you to make a consumer decision as to the value received, for the amount paid.
From an initial cost perspective, the advisor with the lower fee would seem to be the best choice. Maybe that is not the case.
If the more expensive advisor could offer you additional benefits including better long-term investment performance, tax savings, and other tangible benefits, would that advisor be a better choice?
Let’s consider the same question when it comes to buying a car.
One car is 20 percent more expensive than a similar car. Which car would you purchase? The easy answer is the less expensive vehicle.
However, a car owner has to consider other costs, including gas mileage efficiency. You would easily pay slightly more for a fuel-efficient car if it more than compensated you for the higher cost.
The very basis of our capitalistic system is that consumers make judgement calls as to what is in their best interest.
Determining what is in your best interest includes the cost and the benefit of decisions you make.
For some reason that logic has escaped many individuals when they are purchasing financial advice. Those days should end.
Understand the full cost of what you pay for financial advice, and weigh that against the full benefit.