Over the past decade or more, there have been numerous articles about how investment fees are going to eat your retirement. The message is,
- paying fees will cost you big,
- paying fees is bad,
- pay no fees.
There is no balancing analysis of what will happen if you don’t pay fees.
Paying advisors is the worst possible investment choice, except for all the others.
Advice is expensive. The numerical analysis is definitely right. I did a quick calculation. If I invest $1,000 on the first day of every year for 40 years, earn about the S&P 500 long term average of 10% and pay fund fees of 2.5%, I will end up with a little over 50% as much money as I would have had with no fees. Lose half my money. Am I a fool?
So I buy an index fund and pay much less. Maybe .25%. Now my loss is less than 7% of the total. All good. I’m done here.
Or am I?
Beware of things that are too cheap unless you know what you took away to get the lower price. Index funds are too cheap.
I hear why?
Index funds only address yield. Arithmetic does not create any wealth for retirement. Wealth is a function of yield, capital employed and time exposed to the yield. The question you must ask yourself is this, “If I accept less net yield by having an advisor, do I get more capital employed, more exposure to yield, or both?”
You have no good way to answer that and the thousands of articles about why advisors cost too much did not answer it either. The simple question is a little different. It asks, “Do I want the highest net yield or more money?”
The answer is obvious. Only the money is any good to you. You can’t invest, spend or leave percentages.
You need to come to grips with a strangely obscure point. Advisors have value. Your mission is to decide how much value. Given that regulators all over the world are moving towards eliminating buried fees and commissions, you will be forced to decide before long. The answer will not be the same for everyone.
Go back a step and think about the lower yield, more money issue. How come people with advisors end up with more money?
There are many reasons and the collection of them shows why there will be different value to customers.
A single person is emotional. A second person familiar with their objectives can help them overcome the greed and fear that drive weak decisions.
People don’t understand risk. Variability is not risk, it is just noise, unless you fear paper losses or get excited about paper gains. If your time frame is very short, it likely matters. No one I know has a retirement plan that is 6 months long.
People don’t realize that investments pay for many factors. Money invested is just one of them. Risk of real loss, liquidity, taxation factors, and fashion are few of the others. You don’t seriously think people would overpay for limited partnership units in a new movie without the promise of tax advantages and a post production party, do you? There are many ways to be paid for your investment. You should fit your investable resources other than money to what is offered in the market.
Most people cannot see very far into the future. Neither can advisors, but they have seen other people change over time. They assume you will too. You might not see it soon enough and anticipation is a benefit.
You must stay invested to have money. The advisor that helps you put money in or prevents you from taking money out to buy a Jet-ski or an exotic vacation helps keep money exposed to yield. A conscience.
An advisor sees more than you will, because they do it all day, every day. They can help to educate you, bring you new ideas, help you notice things sooner, execute trades, keep records and keep things in context. How much is your time worth? How good is your knowledge?
Suppose you bought Google for $357 per share in early December 2007. A year later it’s barely over half of that. What happens next? Sell, hold or buy more? A more informed advisor would likely tell you it is the same company at $135 as it was at $357 and show you why. Mr Market is out of sorts. Let’s get some more at a bargain. It is now over $840.
Do it yourself is a trap.
It looks cheap, but you must factor in human nature and mistakes. Over a long time human nature is a problem and there is a price to minimize its cost. Mistakes are more random, but anyone who has ever done investing knows they happen. How you respond matters. People can learn from them. After a mistake, people need to refocus on their objectives and that is hard just then.
Good advisors are like a guide, maybe a guardrail.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. email@example.com 866-285-7772