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 outperform higher fees, 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 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, 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.
Embedded 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 the 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?