A $10,000 Glass of Wine: How Much Does Your Investment Advice Cost?
When it comes to investing, one of the quickest ways to increase returns is to reduce costs and keep them low. In an environment of low-interest rates and lowering expectations for returns, costs have become even more important. In addition, studies by Morningstar and others have shown that fees are the best indicator of expected performance (lower fees being better, of course). Paying more is a good way to earn less.
Many Investors are Overpaying for Investment-Related Services
As we talk to investors and prospective clients, sadly we find that most investors fail to understand how much they are paying for investment-related services. And generally, investment firms are not very forthcoming about how much money they really make off their clients. Combine this opacity with the complexity of investment products and services, and costs can mount up while your net returns erode away.
Just a few weeks ago, Personal Capital (an investment services firm) released a study on investment-related costs across 6,000 of their clients. It was trying to identify the expenses its clients incurred on investment advisory fees and underlying fund fees. The study found that clients using national firms such as Ameriprise, UBS, Morgan Stanley, and Wells Fargo (see the study for full list) were paying over 2% in “total” fees, with clients at the highest-cost firm paying over 3%. That is an outrageously high-cost hurdle to overcome, especially when a simple option is to buy low-cost index funds through a “robo-advisor,” which some of their clients did appear to be doing through Schwab and Vanguard. In fairness, it is not just about costs. You need to consider services received and investment returns as well. Yet, without knowledge of the total costs, it’s hard to put a value on those services. And, there may be more costs incurred than those captured in this report; such as commissions, spreads on trades, account charges, and lost securities-lending revenues, for example.
Fee-Related Questions to Ask Your Advisor
Fees are critical and fundamental to results. This begs the question. Do you know how much your total fees are? We encourage you to ask your adviser the following:
How much am I paying in management and advisory fees?
How much are my total underlying fund fees?
How much money do you or your firm make off commissions, spreads or markups, securities lending, management fees on proprietary funds, or any other transactions and/or products?
Then the big zinger… ask your adviser to put his/her answers in writing.
If the answer to ANY of these questions is, “I don’t know” or “I can’t do that,” you should run away as fast as you can. Do you really want an adviser who doesn’t know what your fees are? Or worse, won’t tell you what they are?
A $10,000 Glass of Wine
For one prospect we calculated the total fees he was paying for investment-related services. They were quite high, amounting to about $40,000 per year above what we thought were “market” rates. As we inquired about the services he was receiving, he explained that he and his adviser met quarterly to review his investments over a glass of wine. It was apparent that he was only receiving basic investment management services – no financial planning, tax management, philanthropic/tax guidance, estate planning, risk management, etc. All levels of service you would expect given those fees. What was he paying for each quarter? A $10,000 glass of wine! (In November 2017, one of the most expensive California wines you could buy was 2012 Screaming Eagle Cabernet Sauvignon at $3200 per bottle or $550 per glass.)
Don’t be afraid to ask about fees. It is your money. Make sure you know how much you are paying so you can truly value what you are paying for.
