Investment Fees, Advisor compensation and Added Value

I’ve written lots about the importance of knowing how much you pay in fees when it comes to investing.  My research shows that fees matter because there is a strong correlation between below average fees and above average performance.

There is also lots of other compelling research that suggests passive investing with low cost index based investments tends to out perform higher fee, actively managed investments.

Can everyone invest passively on their own?

Despite the strong argument about the advantages of lower fees, I think most people are not wired to be do it yourself investors.  There is no doubt some can do it but more people can’t, won’t and don’t want to do it themselves.

If you are not wired to do it yourself, they you need to find help from investment and financial advisors who can help you make better investing decisions.

If you hire an advisor to help you, then you are likely to pay higher fees to compensate your advisor for that advice / help / service.

Imbedded fees are a problem

One of the biggest problems in the investment industry and especially the mutual fund industry is the management fees are imbedded and never seen.  If an investor has a return of 5%, that means they would have gotten 7.5% (assuming a 2.5% fee) but they never paid the 2.5% fee directly.  If they did, it might be a completely different story.

I still run into people regularly who have no idea how much they are paying in fees on their mutual funds.  Some people don’t even know if they are paying fees at all.  If investors had to write the cheque directly for the 2.5% fee, I bet more people would be aware of investment fees.

That being said, sometimes paying lower lees directly is not easy

Advisors, fees and value

I recently had a financial advisor ask me why I am so anti-advisor after reading one of my articles on the importance of low fees.  The truth is I am not anti-advisor at all.  In fact, I believe most people need financial advisors.  I believe that most people do not have the time, passion, expertise to do it themselves.  Just because I want to bring awareness to fees, does not mean I am anti-financial advice.

Whether you use an advisor or not, you should know what fees you are paying and why you are paying those fees. What I do think is that financial advisors need to do a better job disclosing fees and articulating their value.

Good and bad advisors

Just like there are good investments and bad ones, there are good advisors and bad ones.  Good advisors don’t just disclose fees, they make sure they explain fees and how they work.  The good ones are the ones that provide value for the fees and their compensation.  They provide advice beyond products and investing.  They add value by delivering good financial plans or retirement plans.

Not all financial advisors are created equal so every investor has a responsibility of asking questions about fees, compensation and what they are going to get for those fees.

Do you have any thoughts on fees, advice and value?

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace. For more information you can follow him on Twitter @JimYih or visit his other websites Group Benefits Online and Advisor Think Box.

4 Responses to Investment Fees, Advisor compensation and Added Value

  1. another fine article, Jim.

    My take is that the fees tend to put the needs of the advisor at odds with the needs of the client.

    I am at the moment helping a friend disengage from her advisor and move her assets to Vanguard. It has been shocking to see the instruments this advisor had selected and the frequency with which they were traded.

    His need for commissions clearly trumped his responsibility to her.

    My opinion of advisors, I’m afraid, is not as generous as yours.

    • You bring up a great point about the conflict of interest that can exist when it comes to advisor compensation. That’s why the discussion about value and what you are getting for compensation needs to happen.

      Your friend is fortunate to have your help which highlights my point that most people need help and have to rely on advisors when they don’t have friends like you.

      Thanks for the comment!
      Jim

  2. Thank you for the post Blance Junkie. My problem with hiring investing advisers is that so often they want to sell financial products rather than financial solutions or opportunities. I prefer mentorship and a lot of reading.

    Thank you for the heads up about fees as well.

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