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Tuesday, September 16, 2014

What are you getting for that 1%?

Call up 10 advisors, tell them you got $1.0 million, tell them you need help managing it.  You'll find they will be glad to manage it for you at a fee of 1% (or more).  That's $10,000/year  TO START WITH!

On average, the market has doubled every 9 years or so.  That's what an 8%, average annualized return will do for you.  Thus, the management fee your advisor extracts will average 50% above the starting fee or $15,000.  At the end of the 10 years, it will likely be north of $20,000/year.  That's assuming your advisor performs pretty much in line with the market.  You're probably wondering if he or she gets this raise even if he or she underperforms.  Of course!  This is Wall Street !

But that's not the total impact on you--because every dollar that stays in your nest egg versus drifting over to your advisor's pockets would be earning at a compound rate in the market.  Over decades, this adds up!

The evidence shows that 70 to 80% of investment advisors who time the market, pick stocks, and look for buy and sell signals on price charts actually under-perform the market indices.  And, in truth, it might not even be them.  They may be putting you into mutual funds that themselves take a goodly slice off the bottom line.  Your investment advisor, in other words, may be charging you for his or her "expertise" in picking mutual funds managed by others.

The good news is they won't be getting the fee mentioned above.  The bad news is that this is because their returns lag the market.

Wealthy people can afford to throw around $10,000 or multiples thereof.  After all, the bottom line is merely a reduction in the inheritance they leave.  More modest people on the path to retirement, though, can hardly afford this luxury.  The 1%, or greater, per year will eat up their nest egg and, after a couple of decades, will impact their standard of living in retirement.

The bottom line ends up being that the seemingly modest fee of 1%/year puts a serious dent in the ending portfolio value which, in turn, typically produces sub-par performance--performance that could be achieved at a much lower cost.

Thankfully, today these less expensive approaches (based on evidence showing the futility of seeking market-beating performance) are proliferating.

1 comment:

  1. This is something worth considering. I would like to start investing soon and feel like I know nothing. It seems intimidating at the moment. It's probably not as bad as I worry it is.