Value for Money?

Dan Danford

WHAT’S THE BIGGEST challenge facing investors? Forget politics, low interest rates or high stock market valuations. I would argue there’s an even bigger challenge: How do you find financial advisors who are worth their fee?

On offer are brokerage firms, insurance companies, banks, mutual funds, accountants and independent advisory firms, all of them employing charming people who would love to help you. Problem is, there isn’t a lot of uniformity in the products and services they offer, and their fee schemes range from reasonable to outrageous.

Depending on who you ask for help, you might face layers of sales commissions, transaction fees and product expenses. Indeed, the same investment product can be offered with different pricing schemes. Often, smaller purchases trigger higher costs, while larger buyers can enjoy substantial discounts.

What do you get in return for those costs? A 2017 study by Russell Investments pegged the value of a top-notch advisor at some four percentage points a year. The study looked at five areas where advisors can add value. The potential value added is shown in parentheses:

  • Selecting investments (0.33%)
  • Financial planning (0.75%)
  • Tax planning (0.8%)
  • Portfolio rebalancing (0.2%)
  • Helping clients avoid behavioral mistakes (2%)

As the above numbers suggest, many clients and advisors wrongly focus on good investment choices as the sole measure of value, and yet softer skills are more important. Identifying special needs or making smart tax choices can help the bottom line far more than choosing a good mutual fund—and that good mutual fund isn’t much help if the next market dip scares you out of the stock market.

Four percent is a substantial annual reward for hiring quality help. But will you get that much value from your advisor? The Russell study focuses on advisors who are held to a fiduciary standard—with good reason. Fiduciary rules discourage advisors from accepting sales commissions and require they provide ongoing attention to clients.

Among providers, you’re most likely to find a fiduciary advisor in a bank’s trust department or at a so-called RIA, or registered investment advisor. Fiduciary advisors typically charge fees for specific services or an annual percentage of a portfolio’s assets, often around 1%.

Non-fiduciary advisors can also add value in the five areas identified by Russell. But will they? Portfolio rebalancing and monitoring client behavior depend on ongoing contact. But a commission-charging broker or insurance agent may not monitor a client’s portfolio or stay in touch during turbulent times.

Similarly, custom financial and tax planning advice requires deep client knowledge, expertise and considerable time. But the necessary time may not be productive for a commissioned advisor. Spending hours studying tax returns and trade confirmations doesn’t put food on their table.

An additional issue with non-fiduciary advisors: Some offer “proprietary” investments or mutual funds—products “manufactured” by the financial firm that employs them. Sometimes, those products impose high costs. If the costs are too high, they may more than offset the value of the advice you receive. On top of that, with any proprietary product, you have to ask, “Is this really the best product for me to buy—or is it the best product for the advisor to sell?”

Dan Danford is a Certified Financial Planner with the Family Investment Center in Kansas City, Mo. He learned early on about money from his late father, Thad Danford, who charged rent on the family lawn mower when Dan cut neighborhood lawns. Dan is the author of Stuck in the Middle: The Mistakes That Jeopardize Your Financial Success and How to Fix Them. His previous article was Fake News.

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