Are financial advisor fees worth it?Posted on
Having a financial advisor can be an important part of investing, but are financial advisor fees worth it?
Having a financial advisor can be an important part of investing, but are financial advisor fees worth it? In the financial world it could be said that both the financial services industry and the financial media are perfectly aligned.
The financial services industry can promote using the media, a product or share a prediction of what’s going to happen in future markets (to promote their companies) and the financial media get to fill their pages or news full of noise and get paid advertising revenue for doing so.
The media is full of financial services companies all trying to vie for your money with well-designed advertisements promoting how good a particular fund is performing, or that they have a current high profile investment manager in their ranks. Therefore it is hardly surprising that readers who are being bombarded by this financial noise day in and day out, can only identify the financial industry as selling a product; and they are not wrong.
The ‘layers of cost’ in the financial services industry
For decades the Wealth management and Insurance companies have first and foremost (in my opinion) promoted themselves and their products for their own financial gain, before that of their investors. Why wouldn’t they, they are in business to make a profit. The reason they promote the product over the service is that layers of cost can be built into the product and hidden in pages of disclosure documentation, which very few investors read.
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Those employed by these companies are under obligation to get as much ‘funds under management’ as they can to justify their salaries and to secure their bonuses, regardless of investors’ outcomes.
Investors on the other hand have no interest in ‘Industry Product’. Investors care about their own financial security. Investors are less concerned about losing money short term in the stock markets, but are more worried about not living their desired lifestyle in later years, when it is too late to do anything about it. Investors are not interested in understanding volatility, but they are worried about being stuck with a reduced pension fund at the moment they want to retire.
So how does an investor without any financial training turn a complex, sophisticated and noisy world into a positive and successful investment experience?
They have two options. Option one is they listen to the media and make decisions based on the bestselling funds; deciding when to buy and sell and play the rollercoaster game of chance.
Personally, after over 30 years in this business, I do not call that investing. I call it gambling! Like all gambling, you will win on occasions but overall, unless you are lucky, you will lose. That is why gambling is a loser’s game.
I believe investors who leave their future financial security, future desired lifestyle and the size of their pension fund to chance, cannot complain when they get to later life and realise the financial services industry has not delivered on their expectations.
You cannot have an expected outcome if you do not plan and you leave such important matters to chance.
Option two is to make a financial plan. Use a specialist independent financial advisor you can work with on an annual basis to create your own financial blueprint and help you build a transparent and financially efficient investment strategy. Yes you are paying a fee for that, but all elite players at the top of their game employ coaches. Specialists that make that little difference between success and failure.
Let me give you an example:
Ten years ago I was introduced to an elderly lady, who said her husband had recently died and he had always looked after their money. She had called the Bank (they had been a client all their working lives) for an advisor to come and visit her (probably on the back of a black horse), but had been declined because the value of the portfolio had fallen below their minimum value for a personal home service. They were drawing an income from their savings to live, so this was not an unusual situation and the fund was expected to fall further.
She had been invited into a town branch to discuss her situation, however, being elderly and frail this was not an option. She was also invited to a telephone conversation with an online advisor, but not having a clue what she had, she felt vulnerable, so declined.
Therefore her decision was to do nothing and she became distressed not knowing what she had or how long she could draw an income for. Her husband had a pension and chose to take it on a single life, so on his death she had nothing except for this portfolio.
I played golf with one of her friends who recommended me so I went to talk with her. The amount of money is irrelevant. What is relevant is this lady was now a great grandmother and her family now lived in Australia.
When I was talking with the lady, I was not talking about the product. I was not talking about volatility. I was not saying this fund is better than that fund. I was asking what she wanted to do with the remaining years she had left on this planet and what might I do to make those years very happy ones.
She wanted to visit Australia and meet her great granddaughter and spend time with her. She felt she could not afford to do so, as this was all the money she had left. I asked her how she would feel if she did not meet her great granddaughter and her eyes welled up.
I took on her case and worked out her cash flow. I took her income and living expenses into consideration and then counselled her on what she could spend on monthly living (opposed to hats, gloves and handbags which seemed to be a passion of hers). This meant that she could make her money last her lifetime if she worked to my constraints.
However, this did not give her the money for Australia. I then worked out the fees that the bank portfolio was taking and the performance of the funds she was in.
I found the fees to be expensive for the lack of service she was receiving and the funds had performed poorly for the years I had reviewed.
We chose to transfer the portfolio and I invested the money into a transparent and financially efficient portfolio. I was able to reduce the financial service costs and charges by £1,100 per year (which included my fees) which gave the client her annual airfare. Because I diversified the clients funds, I was able to increase the fund performance (fund valuations can fall as well as rise) which has given the client a little bit extra for when that dreaded phone call comes in and I get asked “I have just seen a lovely bag which will go with my new dress… can I afford it”?
Occasionally I can now say yes.
So, are financial advisor fees worth it?
Does this lady think ‘Financial advisor fees are worth it’ … I will let you answer that one!