Recently we spoke with an investor who found a prominent fee based advisor online.
This investor was expressing satisfaction that the fee based advisor had earned them a 7% return from 2010 until today.
Keep in mind, the “fee only advisor” was charging an asset fee of 1.25%.
On the surface that seems like the investor may be getting good advice.
But let’s take that a few steps further.
If the investor is paying 1.25 percent on his assets and earned 7 percent after fees, the gross return might have been 8.25. In this case, the investor is giving away 15 percent of his gains each year to take risks with his money, without any guarantees.
We then looked at the S&P 500 during this time period. The S&P 500 is a stock market index can be purchased in most 401k plans, and from many mutual fund companies. The fees on these are minuscule.
Alternative Scenario (No Fee Advice)
If the same investor above just put 60 percent of their savings in the S&P 500 during the same period from 2010 until today, and then put the rest in an account that earned zero, they would have approximately the same returns they are receiving from their fee based advisor, and quite possibly substantially less potential for financial losses.
There would also be no, 1.25 percent advisory fees chipping away at the money.
Here are some questions to consider…
What will “fee only” investment advice return to investors in a market that does not move substantially for a few years, or has losses?
Is is smart to give away 15 percent or more of your profits, or losses, before taxes, to a financial account where you can lose money?
If the predictions of market returns of 5-6 percent come true, then a 1.25 percent advisory fee is 20 percent of the gain. Is it smart to give away 20 percent of your earnings in fees, before taxes?
In the next financial crash, will that “fee based” advisor put money back into your account to make you whole again?