This post is the outcome of several things that happened over the last two weeks. The first of which is that I've been immersed in the latest issue of the Financial Analysts Journal, which, being published by the CFA Institute, is normally full of mind-numbing formulas, etc. However, this issue is focused on the retirement challenge. A topic near and dear to our hearts at Artifex, since retirement planning is a key priority for most of our clients, even our corporate ones (we provide advisory services to 401(k) plans as well). Several of the articles really hit home to our mission here, but three were really impactful: "It's time to Retire Ruin (Probabilities)" by Moshe Milevsky; Deactivating Active Share" by Andrea Frazzini, Jacques Friedman and Lukasz Pomorski; and "Fees Eat Diversification's Lunch" by William W. Jennings, CFA and Brian C. Payne. I'll talk more about these in future posts, but the bottom line in all of them is that what the public is lead (or mislead) to believe is many times not true, and can actually damage your financial health. And, fees are often hidden and can be excessive relative to the supposed benefit of investing in a particular fund, hedge fund, or asset class.
As intimidating as those article titles sound, they are actually very interesting for someone like me to read.
Secondly, I ran across an interesting article while putting together my weekly custom content for our readers through our Vestorly site. The title is "What Investors Know About Fees: Next to Nothing". In this article, the writer sites the following:
"That’s the maddening finding from a new survey of more than 5,000 households by the financial research firmHearts & Wallets. “It was dismaying to me how few people are aware of what they are paying,” said Laura Varas, founder and CEO of Hearts & Wallets.
The dispiriting specifics:
- 37 percent said they didn’t know what they pay to use the services of their financial firm
- 30 percent think they pay “nothing” to the financial firm
- 72 percent of those who said they paid “nothing” to the financial firm also thought they paid “nothing” for the financial products they own
Varas told me she was “flabbergasted” by that 72 percent finding."
And lastly, one of our new clients showed us his investment statements from one of the large investment brokers (pick one - Morgan Stanley, Merrill Lynch, UBS, etc.). And then described how her past broker explained that this unique mutual fund wrap program that he was providing the client gave the client access to funds that normally would require a $1 million or higher investment, but due to the fact that his firm had this terrific program, our client will had access to these funds. The advisor then said that he had negotiated the advisory fee down to 1.50% from 2.50%. This is BEFORE fund management expenses.
This was merely positioning, and most clients will accept this kind of information at face value and move forward with the recommendation. And maybe most advisors at wirehouse firms, banks and insurance companies actually believe this nonsense. Here's the truth:
- Today, an independent fee-only advisor has access to virtually every fund, ETF, bond and equity share in the universe through one of the higher quality institutional custodians like TD Ameritrade, Schwab or Fidelity. The management fees on the no-load or institutional mutual funds are typically the lowest in the industry, and out-of-reach of wirehouse brokers.
- Advisory fees of 1.50-2.50% are atrocious. Add that to the typical inflation assumption of 3-4% and and you have to gain 4.5-6.5% per year just to break even!
- Many fee-only planning firms such as ours will offer various fee schedules to clients, and help them choose the best one for the services they need. We don't charge more than 1.25% for money management services ever, and in many cases, our flat fee alternative is much less than that for people who desire full financial planning services.
I'd be the first to admit that fees aren't everything, and to a degree, you get what you pay for. But in the world of investment-only advice, fees are very important. That brings me back to the Financial Analysts Journal articles, which I'll address in coming blog posts.
Until then, stay vigiliant my friends.
--Doug Kinsey, CFP®, AIFA®, CIMA®
Partner and CIO
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