The Invisible and Brutal Cost of Using a Financial Advisor

Sometimes the worst fees are the ones you don't see.

May 29, 2014 at 2:03PM


How much could you really save by being your own financial advisor?

Hidden fees are almost synonymous with the financial world, particularly financial advisors. Millions of ordinary investors feel the subtle sting of a mutual fund's egregious "sales load" or the painful pinch of the infamous 12B-1 fee.

But the cost I'm talking about is even more hidden. You probably have no idea you are paying it. You'll never see it in a prospectus.

In fact, it's invisible.

One of the most common fees financial advisors charge their clients is the 1% annual fee, based on assets of under management. Every quarter, 0.25% is deducted from the client's account and slipped in the pocket of the financial advisor's firm. Even though this katana-like fee structure should be overhauled, this is not the cost I'm talking about -- though it's related.

I'm talking about the future investment opportunity you lose every time that financial advisor deducts from your account each quarter.

Real-life example
Let's walk through that scenario but put some names and numbers to it.

Laura is a 34-year-old orthodontist. She recently finished paying off her student loans and is approached by a financial advisor who's graciously willing to manage her $500,000 investment account for a 1% fee per year. Laura paid over 5% interest on her student loans, "Only 1% per year?!" she says, "Sign me up!"

Over the next 10 years, let's assume the market (and Laura's portfolio) achieves an inflation-adjusted annualized return of 7% (or 1.71% per quarter).

After 10 years, the value of Laura's portfolio sits at $892,000.

Over that time period, Laura paid her advisor $68,290. Even an orthodontist would think that's a pretty-penny to charge for a service.

But at least Laura can clearly see that money being withdrawn from her account every quarter. However, as those quarterly payments flowed out of her account and to the advisor, she is sacrificing all future growth on that forgone money.

Laura's first quarterly payment to her advisor would have been around $1,271. Had she retained that money in her account for the 10 years, it would be worth $2,459 -- nearly double its original value. After 10 years of lost opportunity, that first quarterly fee was actually closer to 0.5% (or 2% annually).

Altogether, over the account's 10 year history, Laura would be giving up an extra $25,421 in missed returns. Coupled with the actual fees paid, Laura is out nearly $94,000 -- $89,000 more than had she put her $500,000 into a Vanguard S&P 500 index that charges 0.05% annually.


Assumed: 0.25% quarterly advisor-fee and 0.0125% Vanguard quarterly fee. Assumed: 1.71% quarterly returns. Assumed: $500,000 starting balance.

Let me make one thing clear. I am not saying financial advisors are wicked people nor am I saying many advisors don't provide a deeply valuable service. However, if you do use a financial advisor or money manager, take a long, hard look at the graphs above and ask yourself, "Am I getting my money's worth?"

If the answer is a clear "No," do something about it. Relatives, neighbors, and especially your financial advisor will tell you that "You're making a mistake" or "Investing is too complex for you to understand."

Start by putting your own numbers on the page, like Laura.

But don't delay because with every passing quarter, you're losing money whether you see it or not.

Start your portfolio today
Andy Cross, The Motley Fool's chief investment officer, has selected his best stock idea for the year ahead. Find out which stock it is in our free report, "The Motley Fool's Top Stock for 2014." Just click here

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information