Avoiding Big Money Mistakes

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By Michael Gold, Founder and CEO, Wealth Advisor

If you pay monthly for a smartphone, you probably know that the advertised price and the actual price for your monthly service are typically different.

For example, suppose you purchased a data plan advertised at $30 a month; it’s not unusual to pay upwards of 20% to 30% or more on a monthly basis once you factor in the activation fee, monthly taxes, insurance premiums, government-imposed fees and other miscellaneous administrative costs.

As a result, what felt like a good deal when you purchased your plan can feel very different once you receive your first monthly bill. And if you’re left wondering why the enthusiastic salesperson who sold you the plan didn’t walk you through those charges line-by-line, you may already know the answer. Why let fee transparency ruin a good sales pitch?

In the complex arena of wealth management and financial products, many investors may be left wondering what they are paying for, and many don’t even realize they are paying extra costs buried deep inside the financial products. As these are disclosed through a litany of investment prospectuses, layers of complexity and financial jargon can make the “hidden” fees difficult for many investors to understand or even find out what they are actually paying.

I am writing this letter to help you understand:

  • What you are paying for
  • The value a wealth manager should provide you
  • How that correlates to your investment performance
  • Some of the key questions you should ask your wealth manager before investing

Be wary of these “hidden fees” that are above and beyond the financial advisory fee:

  • Operating expenses
  • Expense ratios
  • Front-end sales load (sales commission)
  • Back-end lead (contingent deferred sales charge)
  • Redemption fees
  • Exchange fees
  • Account maintenance fees
  • Purchase fees
  • Management fees
  • Distribution 12b-1 fees
  • Other expenses

What about ETFs?

The common misconception investors have is thinking these index investments are free or really cheap.  Here is the deal – according to Bloomberg, the average expense ratios for non-leveraged ETFs is 50 basis points. For specialty ETFs, such as commodity funds, the expense ratio can be as high as 1.5%.

The lack of disclosure required around certain hidden investment costs represents a real conflict of interest. Many hidden costs are often the result of revenue sharing arrangements, while others are a result of brokerage representatives directing clients toward high-cost, low-return investments rather than recommending quality investments that may be a better fit for the client’s situations and objectives. The lower return investments have hidden fees that benefit the brokerage firm at the investor’s expense.

In 2015, the President’s Council of Economic Advisors estimated these conflicts of interest resulted in losses of about one percentage point for affected investors annually. This amounts to a loss of $2,500 per year, or 1% on a portfolio valued at $250,000.

So, what are appropriate costs and what should you expect in value and benefits for these costs?

First and foremost, all fees should be fully transparent, included in your advisory agreement and detailed on your quarterly account statement. The fees to work with a wealth manager or financial advisor should be three-fold:

  • Investment management and platform fees should range from 20-65 basis points depending on the style of professional management, as some investments are relatively simple and should be on the lower end of this range. Other investments are more involved and sophisticated and require a high skill set, which would place them on the higher end of the range. Generally speaking, a well-diversified portfolio will have a combination of these, and you should have a weighted average.
  • Financial advisory/planning fees should range from 0.35% to 1.15% depending on the complexity of your plan and the amount of assets the firm is managing on your behalf. In general, the more assets under management, the lower on the range you would land.
  • If you have a weighted average, your all-in fee range should typically range from 0.6% to 1.8% depending on the complexity of your financial plan, investment strategy and level of assets the firm is managing.

In my opinion, a good wealth manager/financial advisor should be worth 10 to 20 times this over your investing lifespan, and here is why:

According to a Vanguard Study, an advisor can potentially add value of ~3% per year by effectively mitigating expense rations, portfolio rebalancing, asset allocation and behavioral coaching, which I call helping people avoid The Big Mistake. That amount compounded year in and year out is huge, and we have not even scratched the surface on advanced planning, tax mitigation, wealth protection/risk management and much more.

So, what is this “Big Mistake” I talk about?

Ensuring that the families we serve never make The Big Mistake is one of the key values we provide to a multi-decade advisory relationship. This is the very essence of our value proposition: our willingness and ability to save you and all the families we serve from the costs of “The Big Mistake” investors can make.

Here is an example: Back in 2007, we worked with a family to design a plan that was quite robust (ranging from planning their retirement to determining how much money they would need to ensure they never ran out of money). We positioned protection around their wealth to insure against potential long-term care costs, designed their estate plan to help reduce estate taxes and avoid probate, and established the appropriate trusts to help protect their children’s future inheritance from potential creditors and/or future ex-spouses.

Reflecting on this now, I know we really helped this family design and coordinate a cohesive financial plan aligned with all their goals and objectives.

Then one day in mid-2007, during a meeting with this family in review of their broadly diversified and professionally managed investment strategy that aligned with their plan and goals, the following question was asked: “Why are we paying an advisor if our portfolio is not beating the S&P 500?”

After reiterating the great planning work we accomplished, it all fell flat and they just did not connect to this. They only saw financial planning advice in the vacuum of investment performance, and the only barometer of success was that they must beat or at least match the S&P 500. Unfortunately, this family made the decision to move their portfolio and financial plan from our stewardship and purchased an S&P 500 index fund and do it all on their own.

In mid 2010, my phone rang, and on the other end of the line were two very shaky and nervous voices – it was the aforementioned family. They said they think they made a big mistake and asked if I would be open to meet and see if we could help them. They were relieved that I agreed, and we got together. As it turns out, shortly after they fired us the financial crisis took the global economy and markets by storm.

This family had no guidance throughout this very challenging time, and after months of declining markets, this family couldn’t take it anymore and sold their S&P 500 fund and lost more than half of their wealth.  By the time we were speaking, they were still in cash and had missed the huge rebound the market had, and now they were asking, “Do you think you can fix this? Do you think we can still retire?”

One of the benefits of working with a wealth management team who are experts in their field is behavioral coaching to get you through the market storms.

But our inestimable value is in preventing the families we serve from The Big Mistake this family made.

Beyond planning and advanced sophisticated financial planning, our essential function is keeping your plan aligned with your goals and objectives, especially in times of great uncertainty and stress.

It is probable that my advice will either:

  • cause your lifetime return to rise more than 1% per year because of more appropriate investment allocation, rebalancing and tax-loss harvesting. 
  • save you the equivalent of more than 1% per year in time, worry and record-keeping.
  • save you 1% per year if not much more in the cost of mistakes I might help you avoid making.

Please contact us if you’d like to have a conversation about avoiding The Big Mistake.

 

 

 

 

 

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