What Should You Be Paying for Investment Advice?

 

Spoiler alert: it depends on your income and portfolio and interest and time. Longer answer below.

 

Fees for investment advice are a somewhat nuanced thing. I am rarely satisfied with the way the issue of financial advisor fees gets discussed in print or on Twitter. My Bloomberg Opinion colleague Noah Smith has looked into the fee issue over the years (see this, this and this), and while I do agree with much of the broad strokes he paints, I see many more shades of grey than he does. Any who manages assets is aware of more nuance than the black and white discussions out there.

Let’s begin our fee discussion with a few obvious caveats: The first is lower fees are (duh!) better than higher fees. We have gone over this before, but over the course of your investing lifetime, higher fees are a drag on returns. Compound them over several decades, and it can add up to hundreds of thousands or even millions of dollars.

The next is that investing, despite what you have been told, can be simple: Stripped of all its complications and confusing intricacies from the Wall Street sals machinery, and it looks something like this: Own a broad set of low-cost, global indices in an asset allocation model (e.g., 60/40 stocks and bonds) that is suitable for your age; rebalance yearly, and voilà – you are done!

You can create that very inexpensively at places like Vanguard or Schwab or TD. Most people do not need anything more than this; all it takes is a little bit of time and effort — and a whole lot of discipline — and you can do it yourself.

The caveat I have addressed too many times to count: your discipline will trump all of the above. In the Hierarchy of Portfolio Success, low fees and compounded returns are meaningless if you panic-sell in 2009 and do not return to an invested posture.1

If you miss a few hundred percent in returns because of your lack of emotional controls, you create a behavioral disaster which is all but impossible to recover from in any given lifetime of investing.

Finally, all of us have different financial needs, skills, time, and interests. Some people want to roll up their sleeves and wade into the minutia of investing. The good news is there are options across an entire spectrum of set once and forget, to more complex, detailed financial planning issues.

Let’s consider several tiers of investing options in order of increasing complexity and cost:

The DIY Investor:  This person may be a diligent middle-aged saver, or perhaps a younger investor. They do not have a lot of moving parts in their financial life. A job and salary, perhaps 401k or an IRA. Their tax circumstances are simple, there is no estate issues to worry about.

If they have the time and interest, putting together a simple portfolio of a few ETFs (or mutual funds in a tax deferred account) covering United States, Developed Ex-U.S., Emerging Markets for equities and high quality corporate bonds, US Treasuries and Treasury Inflation-Protected Securities (TIPS) is the way to go. You can do it yourself; the websites of Blackrock and Vanguard can help you as well.

Needs A Little Help Investor: Similar financial circumstances to the DIY investor minus the interest in, well, DIY.

Two primary choices here: Hire an advisor on a one time hourly fee basis to assess your needs and create a portfolio for you; or alternatively, use a robo-advisor (e.g., web-based software created portfolios with a minimal human intervention).

Vanguard has the biggest robo, but you can also go to places like Betterment, Personal Capital, Schwab, Wealthfront, etc.  These typically run about 25-30 basis points.

Needs More Help Investor: For those who may need a little more assistance with their planning and portfolio creations, there is a low-cost alternative between a full fee advisor and a robo: call them as a “robo-plus.” Typically, these portfolios are assembled and managed by software, but there is certified financial planners (CFP) on staff who will speak to you via phone or computer to discuss your circumstances. These cost a little more (typically 40-60 basis points) but can get more granular than a robo alone.

Doesn’t Have Time or Interest: These investors have more money than time. They tend to be somewhat wealthier and have more complications than the average investor. Their tax circumstances are likely to be more complex. Sometimes there is an inheritance to manage.

They need a plan to manage all of these moving parts.

Bigger portfolios, profit sharing and other income streams also means their tax situation is no longer simple. Throw in stock options and/or private company holdings and you have a layer of complexity and asset concentration that needs to be addressed from within the portfolio. This group tends to pay 50 to 100 basis points for the combination of financial planning and asset management.

“It’s Complicated” Investor: The most complex of all. All of the above, plus generational wealth transfer to contend with, estate planning, philanthropic needs, perhaps the sale of a business or other intellectual property. The size of the portfolio means the cost drops to 30-60 basis points, on a much bigger dollar amount.

For people shopping for asset managers, the options have increased even as the costs have come down. The latest variations of all of these is a subscription model, rolled out recently by Charles Schwab.

I can empathize with Jason Zweig, who notesinvestment management is a commodity whose market price has dropped close to zero, whereas the advice and judgment of a good financial planner can do wonders for your net worth.” He is referring to what Vanguard has described as Advisor’s Alpha — which they approximate at 300 basis points. Even if its a fraction of that, a good advisor should pay for them selves in both smarter decision making and behavior management.

Regardless, there are as many price-points for financial advice investors as there are types of investments. The key is to figure out what your needs are and to buy only as much advice as is needed for your circumstances. It should not be that hard to find an appropriate advisory firm that suits your specific financial  needs.

 

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1. In our office, we add a behavioral component to fees: we reward clients with what some have called a radical approach of reducing client fees for good investing behavior.