There are not many things that your advisor can actually control in regards to how your investments actually perform. Speaking as an advisor myself, we like to think we can achieve a certain rate of return by using purely are wits and intelligence but in reality we (all advisors) cannot control the outcomes of any specific investment. There are really only 3 things that any advisor can legitimately control as it pertains to your investments. The first is how much of your money is exposed to taxes (think using IRAs). The second is your overall exposure to risk (think stock to bond ratios here). Lastly is the fees that we charge for our services. For the purposes of this post we will focus on advisor fees.
First, what are your advisor fees and where can you find them? Advisor fees are how your advisor is compensated for their time and knowledge. I want to be clear here, having an advisor has absolutely been proven to be advantageous over long periods of time. You can easily find these fees by looking at your last 3 statements. Most advisors charge their fees on a quarterly basis while some charge on a monthly basis. Let’s assume a quarterly basis for this section. If your advisor is charging quarterly than most likely these fees will show up on your statement in either January, April, July or October. One you have located the advisor fees on your statement you multiply that number by 4 (as in four quarters in year) and divided that number by the amount of assets in your account. For example lets say in January you have an item on your statement showing an advisor fee of $250 and your overall account has $100,000. You would multiply $250 by 4 to get $1,000/year. Divided $1,000/year by $100,000 in account assets to arrive at 1% annual advisor fee. If you cannot locate an advisor fee on your statement these fee schedules are also required to be disclosed on the FINRA website.
Second, what is a normal fee? There is no such thing as a “normal” fee. Generally speaking competition has made it as such that 2% is now higher than average while just 20 years ago 2% would have been very average. More importantly is the type of service you are getting. For example we cannot compare Vanguard’s Digital Advisor to say a local advisor you have known for many years. They are offering two very different services. In our opinion if you are working in purely digital platform such as Veritas A.I.M. Digital or Vanguard Digital Advisor we would consider any fee structure over .30% on the high side. If you were working with an in-person advisor offering a full suite of guidance then we believe you should really be paying less than 1.25%. We believe anything over these fees would be considered “high” and we believe could have an adverse effect on your overall savings.
Third, why are the fees important? Fees are the one constant working against your savings. The higher the fees the better your investments have to perform to get a real gain. For example think of two clients both with $100,000. Client A is paying 1% in advisor fees, Client B is paying 2% in advisor fees. Client A only needs to gain $1,000 in investment returns before they start see a net positive return on their money. Client B would need to get $2,000 before they realized a net gain.
Finally, lets say you are shopping advisors for an in-person relationship. One advisor is charging 1% the other is charging 2.5% is it possible that the advisor charging 2.5% is simply a better advisor that will outperform the advisor charging 1%? Possible? Sure. Likely? No, not over a long period of time. Remember as much as advisors would like to believe they have a vast influence on your investments rate of return the reality they simply do not control returns. There have been very, very few instances were advisor have been able to outperform their peers year in and year out of a long timeframe, say 10 years. The advisor charging 1% was just an average advisor, the advisor charging 2.5% would have to outperform by more than 1.5% just to breakeven. Unless they are a specialized portfolio manager there is a very real chance both advisors are investing in similar funds and strategies which makes the difference in fees very difficult to overcome.
Not sure how what your fees are or would like to see a comparison, give us a shout for a side by side comparison.