"Where Are the Customers' Yachts?"

Over Christmas, a family friend asked me to take a look at her finances. She's in her 60s, worked hard her whole life, and accumulated a couple of million dollars to retire on.

She's had a financial adviser at one of the nation's largest banks for the past five years. I met him once; he's a nice guy. Smart, able, honest, and competent, he put my friend in a basket of investments -- mostly low-cost index funds, a few individual stocks, and a portfolio of bonds -- keeping her on track to enjoy a comfortable retirement.

She's happy with her adviser. For the most part, I was, too.

There's just one problem: He charges an incredible 1.5% of assets as his annual fee.

I tried to explain to my friend how high this was, but my comments were met with a shoulder shrug. One and a half percent didn't sound like much to her. 

But when we added up how much she was paying her adviser every year, it was literally the single largest line item on her budget. More than her mortgage, more than her food bill, more than she spent on travel, clothes, entertainment, gifts, medical care, cars, and tuition for her kids.

That got her attention. So did this: In the past five years, my friend has spoken to her financial adviser seven times. When you break down how much she's paid him, we figured each meeting cost her $21,000, or nearly $50,000 per hour.

Fifty thousand dollars per hour. To pick a group of index funds and mutual funds.

This is not a made-up figure. It is how traditional wealth advisers operate.

Six decades ago, Fred Schwed wrote a book called Where Are the Customers' Yachts? The title came from a story about a visitor in New York more than a century ago. After admiring yachts Wall Street bought with money earned giving financial advice to customers, he wondered where the customers' yachts were. Of course, there were none. There is far more money in providing financial advice than there is in receiving financial advice.

The title is as relevant today as it was back then. There are few industries that pay themselves so much for doing so little as financial services.

But the industry is changing. I believe that within the next five years, stories like my friend's will no longer exist. The Internet has lifted the veil financial advisers hid behind, and technology has allowed new ways to deliver financial advice more efficiently than ever before. Today, Americans have options to obtain top-notch financial planning and investing advice at a fraction of the cost charged by traditional Wall Street banks. More on that in a moment.

First, more on those fees.

Morgan Stanley's financial advisory division brought in $14 billion of revenue last year. Bank of America Merrill Lynch pulled in $17.7 billion. JPMorgan Chase took in $11.2 billion. If those three banks were their own company, the revenue generated by the stockbrokers and financial advisers alone would be the 53rd-largest company in the S&P 500, just behind Coca-Cola, and ahead of Disney. A lot of these advisers are competent and honest people. But do their services match the fees they charge? Hardly. And that's not even a controversial statement inside banks: According to a survey by the U.K.'s Chartered Institute of Personnel and Development, three-quarters of employees at financial firms think their colleagues are paid "excessively."

A financial adviser might be worth a generous fee if he or she were able to consistently outperform a benchmark. But most can't come within hailing distance of doing so. According to a study by consultants at IBM, global financial advisers overcharge their clients by $250 billion a year for services that fail to meet their stated benchmarks. That's more than the federal government will spend this year on interest payments for our $16 trillion national debt. 

And this doesn't even include additional fees charged on investment products recommended by your adviser. Say your financial adviser charges you 1.5% of assets, as my friend's did. Now say the adviser recommends a mutual fund that itself charges a 1% management fee. Add the two together, and suddenly you're paying 2.5% of your assets in fees. For context, over the past century, the stock market has generated an average annual return of 6.5% after inflation. In this fairly optimistic scenario, nearly 40% of the profit generated by your nest egg will go straight into the pockets of your advisers -- nearly half the upside for them, and all of the downside risk for you. During a sluggish period like the one during which stocks suffered from 2000 to 2010, virtually every dime of income that your assets generated was likely eaten up by fees. And remember that bonds and other fixed-income products typically yield less than 3% these days, causing advisory fees to eat up an even larger portion of returns.

Financial Adviser Annual Fee

1.5%

Mutual Fund Adviser Annual Fee

1%

Total Adviser Fees

2.5% 

Fees as a Percentage of 7% Annual Returns

36%

Fees as a Percentage of 5% Annual Returns

50%

Potential Fees Paid on $2 Million Account over 10 Years, Assuming 7% Annual Returns*

$879,000

*Includes opportunity cost of forgone investment returns on fees paid.

Before long, we're talking about fees that would make a loan shark blush. When all management fees were added together in my friend's account, she was paying nearly twice as much money to Wall Street advisers each year as she was paying for her mortgage. Where are the customers' yachts, indeed.

I believe people who work hard and provide a valuable service should be paid handsomely. But financial advisers as a group abuse the concept of meritocracy, often providing mediocre talent for rock-star fees. They can get away with it because their clients, like my friend, often can't grasp the context of how much they are being charged.

If you're worried about your own money, try this: Add up all the fees you're paying to people who manage your money. That includes everyone from your financial planner to your stockbroker to the managers of the mutual funds you invest in.

Are you paying more than 1% of your assets in fees?

Then you may be paying too much.

The good news is that the industry is changing fast. In the old financial system, brokers and financial advisers acted as gatekeepers and tollbooth takers. In the new one, technology, automation, and low costs are taking the industry by storm. It's similar to the changes that took place in the travel industry over the last two decades. For years, travel agents made a fortune because if you wanted good travel information, they were the only ones who had it. Then the Internet turned that model upside-down, bringing the cost of quality travel advice and the ability to book a trip down to near zero. 

We're building Motley Fool One, a full-service online financial-planning and investing product covering everything from tax advice to insurance and investing strategies with a single flat fee, rather than a percentage of your assets. You'll know exactly how much you pay each year. And we're confident it will be small fraction of what many investors are paying their current financial advisers. Click here for more.

 


Read/Post Comments (56) | Recommend This Article (84)

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  • Report this Comment On February 21, 2014, at 2:28 PM, slpmn wrote:

    Great post.

  • Report this Comment On February 21, 2014, at 3:34 PM, AFMS wrote:

    Fee's are present in the absence of value... Why go to Mercedes when you can go do Honda and pay Half?

    Also depends on asset size and Mutual Funds or ETF's, breakpoint's in the advisor's fee schedule, the service provided by the FA, and other important aspects

    Paying 1.5 percent can absolutely be justifiable

  • Report this Comment On February 21, 2014, at 3:39 PM, TMFHousel wrote:

    "Paying 1.5 percent can absolutely be justifiable"

    Can. Almost never *is.*

  • Report this Comment On February 21, 2014, at 3:45 PM, AFMS wrote:

    You don't know what ur talking about. The firm absorbs 60-70 percent of advisors fee also

    Don't crush all advisors out there

    "never"? Sounds like you have your own personal agenda when you wrote this article.

    I can sum you all up after reading this one article

  • Report this Comment On February 21, 2014, at 3:49 PM, TMFHousel wrote:

    <<You don't know what ur talking about.>>

    I rely on statistics. The IBM study of advisors mentioned in the article, for one. Look up the percentage of mutual funds that have outperformed a low-cost index fund over a 20-year period. It's less than 15%, not including survivivorship bias (which would put the figure closer to 90%).

  • Report this Comment On February 21, 2014, at 3:53 PM, TMFHousel wrote:

    <<Don't crush all advisors out there>>

    From the article:

    "A lot of these advisers are competent and honest people."

    "A financial adviser might be worth a generous fee if he or she were able to consistently outperform a benchmark."

    That's exactly how I feel. Most are great people. The rock stars should command rock-star fees.

  • Report this Comment On February 21, 2014, at 3:54 PM, TMFHousel wrote:

    How about this, AFMS.

    A financial advisor offers his services for a fee of $30,000 that an online service can now offer for $3,000 per year.

    Justify.

  • Report this Comment On February 21, 2014, at 3:59 PM, TMFHousel wrote:

    People were as incredulous about travel 15 years ago. "Travelocity will never be able to replace the experience and service of a travel agent." Yes, yes, it would ....

  • Report this Comment On February 21, 2014, at 5:16 PM, Magis1851 wrote:

    Hi Morgan,

    Excellent article, as usual, and that 1.5% fee is absurd considering the level of service the family friend needed/received.

    One criticism of charging each account the same flat fee, however, is that clients with smaller portfolios effectively subsidize the services provided to clients with larger portfolios. To illustrate, a client with a $10 million portfolio is paying the same fee as a client with a $300,000 portfolio, but the former likely requires far more advisor attention for tax and estate planning, managing concentrated positions, etc. It's a bit like a passenger taking a train for one stop paying the same fare as a passenger taking the same train for 10 stops, even though the latter uses more of the train's resources each day and should in fairness pay a higher fare.

    Conversely, if the advisor makes the point to spend the same amount of time on both portfolios, regardless of size, the high net worth client may not be receiving the attention his/her portfolio needs.

    Ultimately, there's only so many hours in a day for each advisor to tend to the portfolios under his/her management, so what's the best fee structure to ensure each client receives the level of service required?

    Best,

    Todd

  • Report this Comment On February 21, 2014, at 5:36 PM, Magis1851 wrote:

    I should add that the new offering is interesting and seems to be in-line with the Fool's mission of helping individual investors. Just curious to get your thoughts on the right fee structure.

    Todd

  • Report this Comment On February 21, 2014, at 5:50 PM, RetiredFed wrote:

    A few other things bother me beyond the high fees, e.g. a quarterly charge for printed statements, no interest on accumulated dividends, trading fees of $35 each and an annual "maintenance fee" of $45. Finally, last year the S&P rose about 30+% but my account rose 15%. I've already talked to my FA about the fees and look forward to discussing the account appreciation with him.

  • Report this Comment On February 21, 2014, at 6:27 PM, DennisDenuto wrote:

    Good article Morgan as ever.

    I woke up to the idea of how much fees eat into your nest egg when I read somewhere that a private investor had put a lump sum into his pension (UK retirement scheme which is tax beneficial). Whilst the market appreciated by approximately 60% during the term prior to retirement, the fees once compounded over that same period equated to the gain so the individual received only as much as he had initially invested. This was at a time where fees were higher and a charge was levied at the start of the investment but it is certainly a cautionary tale.

    Cheers

    DD

  • Report this Comment On February 21, 2014, at 7:15 PM, LeeG3 wrote:

    I understand the need for a Financial Advisor for those that can't or don't want to learn about managing money/investments. However there is also the cost/benefit ratio that has to be addressed in any business.

    Morgan's example plays out too often with the older members of our country and particularly with widows whose husband made all of the investment decisions. I still remember my aunt saying that my uncle bought shares of Penn Central Railroad so she would have income forever after he passed away. If she had an advisor, she might have sold those shares before the company went bankrupt and gotten some cash. But would she have had to pay a very large fee to have that advisor?

    Because I do my own financial research, I rarely need the services of an advisor. I generally use no load funds and buy individual stocks in companies that I "know". That is not fancy or exciting but I certainly don't need extra help that will cost a percentage of my net worth.

    However, I do have an accountant because I don't have the time and energy to figure out all of the tax laws. He and I actually play a game to see if he can cover his fee for doing my taxes with a larger refund than I could get on my own. Most years he wins which is why I gladly pay the fee!

    With all things, the cost must match the benefit.

  • Report this Comment On February 21, 2014, at 7:27 PM, cmalek wrote:

    @Magis1851:

    "To illustrate, a client with a $10 million portfolio is paying the same fee as a client with a $300,000 portfolio"

    The percentage may be the same but the amount is definitely not.

    $10 million x 1.5% = $150,000

    $300,000 x 1.5% = $4500

    Still, 1.5% is way too much for mediocre results.

  • Report this Comment On February 21, 2014, at 7:37 PM, modestfool13 wrote:

    Low cost providers have to create such a high volume that the service tends to suffer over time. Don't use one crappy advisor to make an example when the good ones take the time to call clients monthly and meet quarterly.

    Most advisors don't even aim to meet benchmarks because the benchmarks are too volatile as far as risk vs return. Greed over rules financial Goals and risk management far too often.

    For those that do pursue outperformance. It's not as hard as they say if you're willing to accept the risk.

  • Report this Comment On February 21, 2014, at 7:41 PM, Magis1851 wrote:

    @cmalek,

    I completely agree that 1.5% of assets is way too much for mediocre results. In my comment, though, I'm referring to the proposed flat fee, whereby each client pays the same amount regardless of portfolio size.

  • Report this Comment On February 21, 2014, at 9:05 PM, TMFBoomer wrote:

    Great article, Morgan.

  • Report this Comment On February 21, 2014, at 10:24 PM, daveandrae wrote:

    After almost sixteen consecutive years in this business, I am, very, skeptical of this article.

    The last five years have been paradise. A monkey could have thrown darts at the NYSE and still made money without an "advisor."

    You pay an advisor 1.5% to keep you from making the big mistake during bear markets. For his voice is the ONLY voice you will hear telling you, over and over again, not to sell, not to panic, when your portfolio is down 50-60% from its peak....which one day it surely will be.

    This is when he earns his money ten times over and rightly so.

  • Report this Comment On February 21, 2014, at 10:42 PM, yellowpatches wrote:

    It's encouraging to hear/read that Motley is making vocal King Jack and the Bogle Heads. Everyone will surely benefit...Motley and their legion of followers as well as all the Bogle boys and girls may well become encouraged to make a major leap forward to join in with Motley and his always exciting adventures. You too can have your own yacht.

  • Report this Comment On February 21, 2014, at 10:43 PM, dcc6 wrote:

    daveandrae: or not. In 1987 crash, my broker (had discretionary power) sold a bunch; I wouldn't have if he could have reached me. Market bounced back in about a month.

  • Report this Comment On February 21, 2014, at 10:50 PM, TMFHousel wrote:

    daveandrae:

    Good financial advice can save an investor. The important point is that good financial advice from qualified CFPs can now be had for a small fraction of the cost of traditional face-to-face advisors.

    -Morgan

  • Report this Comment On February 22, 2014, at 12:01 AM, daveandrae wrote:

    ^

    Once again, I am extremely skeptical of your naive opinion.

    Not only did my Father in law choose to go it at a "discount," and yet still sold out, in a panic, at Dow 8000 in 2009, costing him a hell of a lot more than "1.5%" annualized, for he has never gotten back in, which is common, but I personally know one, very, good, financial advisor at Merrill Lynch that suffered an emotional break down during March of the same year....all in the effort to keep a bunch of rich people from selling out at the BOTTOM of the last bear market!

    I was in those brokerage offices at s&p 666. You most certainly were not. It felt like death. Thus, you young people have absolutely NO idea how insanely difficult it is to be at your very best, when the market is at its very worst.

    Zero.

    THIS is what you pay an advisor for. For these are the moments his 1.5% fee is earned ten fold.

  • Report this Comment On February 22, 2014, at 12:29 AM, daveandrae wrote:

    It should also be noted that the 2014-1994 annualized rate of return from the s&p 500 is right around 9%.

    Over that same time period, the aggregate, annualized rate of return from Individual Investors is around 3%.

    3%!!!

    This is a horrifying juxtaposition and helps to explain the real reason why the customers don't have any "yachts." They all panicked and sold out during their first experience with a bear market!

    Thus, once again, you are fooling yourselves if you think there isn't market for financial advisors in this business. It's an absolutely huge market for people with an ability to get you to HOLD when all you want to do is get out, get into cash.

  • Report this Comment On February 22, 2014, at 6:52 AM, HanshawCS wrote:

    Great article Morgan.

    Fact is things are changing. Its a combination of scale and technology.

    We have a new local advisor is in our town who charges .58 bps and uses Vanguard and Dimensional funds. A full financial plan is 3 pages long and we meet once per quarter.

    I've met him. Nice guy and it sounds like the two of you could have wrote the same article. His story to me was similar.

    He asked, "...why do you think all these advisor firms have pictures of Yachts on their websites? Nautical compasses? Pictures of old men in white shirts?"

    Why? Because that is their lifestyle. I bet in the the entire country there is not one advisor who decorates his or her office with the yachts he's been able to get for his clients based off his savvy advice.

    Most clients at the 1.5% fee are going to die off. Some 40yr old widows might then step in at 1.0%. But at the end of the day, the majority of 35yr olds and lower will not accept anything north of 35bps in my opinion.

    Thing is the advisors who charge 1.5% will also die off. They are already leaving the industry, either retiring or selling their book to JP.

    Give it time. In 5-10 yrs we'll all be sitting a lot better due to lower fees.

  • Report this Comment On February 22, 2014, at 7:05 AM, brigidl wrote:

    Morgan, I agree with your article. Financial advisor's in my country are 'milking it' too. If they delivered decent results one wouldn't mind so much but the reality is that after 5 years of a bull run more than half the pension funds are under funded. The bottom line is inept management and excessive fees. That is why I started my own saving scheme in stocks. It has outperformed the major indices by a factor of 3...and I'm just an amateur. I fail to grasp the reason why this can be, as it has to be possible for the industry professional to manage pension funds to give adequate results AND still make good money themselves.

    I am not an advocate of everyone managing their own money, clearly a high percentage are not up to it, but, from where I see it it is not high IQ that makes a good investor but common sense, discipline and an avoidance of group-think.

  • Report this Comment On February 22, 2014, at 11:18 AM, exileonmainst wrote:

    I enjoy the consistent good writing backed up by good collateral of Morgan Housel. Thank you.

    I reckon that hiring a 'financial adviser' to manage your money if you're an average joe (or even a not so average joe) is not Foolish. Not taking the time to understand your position, opportunities, risks, etc? You deserve to be fleeced by advisers, bankers, brokers and the rest of their ilk.

    These guys are like drug dealers who are merely serving a market for customers who are either ignorant, lazy or stupid.

  • Report this Comment On February 22, 2014, at 12:10 PM, daveandrae wrote:

    ^

    That's the silliest post that I've read so far on this topic. Once again, the annualized rate of return of individual investors over the last twenty years is a whopping 3% compared to s&p 500's 9%. Thus the gap between what the market did, and what individual investors actually ACHIEVED is as large as a grand freaking canyon.

    If Individual investors could achieve even half the market's rate of return on their own over a twenty year time horizon, they would have done so by now.

    Don't take my word for it. Look it up for yourselves.

    Once again, an investment advisor's primary job is keeping you, the individual investor from making the BIG MISTAKE, which happens far more often than this adolescent article would have you believe.

  • Report this Comment On February 22, 2014, at 12:28 PM, SkepikI wrote:

    <Not only did my Father in law choose to go it at a "discount," and yet still sold out, in a panic, at Dow 8000 in 2009, costing him a hell of a lot more than "1.5%" annualized, for he has never gotten back in, which is common, but I personally know one, very, good, financial advisor at Merrill Lynch that suffered an emotional break down during March of the same year....all in the effort to keep a bunch of rich people from selling out at the BOTTOM of the last bear market!>

    daveandrae: I too for many years had a ML account and a VERY good adviser who was one of the key elements that helped me accumulate the retirement funds I am about to depend on, since shifted to Vanguard FOR GOOD REASON (later). I wont speak ill of ML therefore, and I will note to Morgan here that for many decades, there was little choice. By 2007 however there was much choice and I was (too) slowly migrating my funds to Vanguard. I accelerated that when I became aware that ML had screwed up and DAMN NEAR SUNK THE WHOLE ENTERPRISE by their careless management and risk controls, only the merger with BOA saved them. You dont mention this daveandrae, but if you and others were unaware of this or just forgot, it is more likely the source of the advisers near breakdown. Had ML gone under, I doubt I would have seen half of my retirement funds....

    This sort of risk is infrequent but more common than you or I would like to think. And I advise you and others to consider that as well as the cost of high priced, under performing Financial Advisors.

    Morgan: THANKS for referring others to my favorite book on investing "Where Are All the Customers Yachts" I've read it twice, the second time when discouraged about my own under performance vs the S&P I was considering going back into a managed portfolio...it changed my mind....

    AND if I can put in a word against all of the dross surrounding stacking your results up against some index like the S&P, including the penchant the Fool has for doing this. Benchmarking is all well and good, but if you get discouraged from only earning a 12% return when the S&P earns 13% or 15%, you need to seriously reconsider your thought processes....YOU STILL MADE 12%!!!! Its when you are losing 12% or selling out at bottoms and securing losses that get made up later that you really ought to be discouraged. And, if you do this more than once, maybe you DO need a professional adviser. ;-)

  • Report this Comment On February 22, 2014, at 1:52 PM, daveandrae wrote:

    ^

    Rubbish.

    Hell, the whole damn country nearly went down the toilet in 2009. In spite of that fact, Merrill Lynch's aggregate services to me, and my family over the last nineteen years have simply been impeccable.

  • Report this Comment On February 22, 2014, at 2:19 PM, SkepikI wrote:

    ^ I dont agree its Rubbish, but I do agree with your estimate of ML services for ummm maybe 17 of your nineteen, AND about 10 years before that... If you don't take note of how close ML came to closing its doors and that Vanguard did not come close at all, you are ignoring an important risk...not saying you can't choose to take it for what you think of as adequate gain, but being blind to it is not the same thing. Its OK with me, but you just might reconsider...

  • Report this Comment On February 22, 2014, at 4:51 PM, daveandrae wrote:

    Please...

    My financial assets were never, EVER, at risk anytime during the nineteen years that I have banked at Merrill Lynch.

    Obviously, you weren't banking there during the debacle of 2009. That means you, Sir, have NO idea what you're talking about.

    None.

    Obviously, i know far more about this bank and have far easier access to inside information than you do. Why this is so hard for you to understand I do not know, and now, I do not care.

    Good day.

  • Report this Comment On February 22, 2014, at 6:29 PM, SkepikI wrote:

    Nope, by 2009 I had departed, to minimize my risk as identified in the debacle of 2007, which became evident in 2008. An excellent book on the subject is "Crash of the Titans" G. Farrell, which you may choose to believe or not. But it was clear to me in 2008 when the party line was that ML "merging" with BOA was a great move allowing ML to "take advantage" of the liquidity and customer base of BOA... true story as related to me by my broker of over hmmm 20 years at that point. Only later did I appreciate the fact that ML had been at the brink of bankruptcy, and the acquisition by BOA saved them...sort of. So, while maybe you were in an entirely different position, and I might have got back most of my assets, eventually, had ML gone bankrupt, I would not have had control of those assets just when I wanted to redeploy them....

    And at the time I believed after 20 years a customer that I knew ML quite well... which turned out to be serious hubris, overcome only by fortunate timing and a merger/acquisition that might not have happened.

    If you've already read the book, no doubt you appreciate the risk and have decided to live with it, Good Luck to you daveandrae, it saved me.

  • Report this Comment On February 23, 2014, at 6:13 AM, Wolfus123 wrote:

    Now I am going to put my 2cents in. My brother and nephew are financial advisors that have their own business which in turn goes thru a brokerage bank. I think that's how it works. Anyway, they both live in million dollar homes, drive Jaguars and high end BMW. It seems they are always on vacations. They live in gated communities. My brother has only been doing this for about 10 years. Before this his business went bankrupt. I always wondered how he gets all his money. Now I know thanks to this article.

    Thank you

    No More Wondering

  • Report this Comment On February 23, 2014, at 8:19 AM, Lyle1969 wrote:

    Morgan, another great piece...

    I've been one of those individual investors who over 15 years rarely beat the market until I joined SA.

    But your comments make me wonder why I'm still in mutual funds, about 50% of my portfolio. Even the MF mutual funds charge a management fee similar to the FA fees described above. FOOLX, TMFGX, and TMFEX all charge too much for results.

    I think it's time to sell out of all my MF funds, and others.

    Thanks for the reminder.

  • Report this Comment On February 23, 2014, at 1:37 PM, TMFTomGardner wrote:

    There will always be a need for financial and investment advice. The majority of people do not want to spend their time digging through financial statements, building out a portfolio, and learning to manage their temperament through volatile times. Sound, transparent, cost-effective financial advice is an absolute necessity.

    The problem is that the financial services industry has not been providing it. 1-1.5% annual fees, mutual fund fees of 1%+ per year, surrender charges, you name it. Most of the innovation in financil advice over the last 50 years has come in the form of "fees" (how to charge more of them, how to tie customers into products for years).

    That is in the process of changing. The tipping point is coming. And, just as Amazon transformed retail, financial advice online is going to transform the industry. Imagine a world where every advisor's performance was a matter of public record, every advisor's fee was completely transparent, the scale of social online communities enables deep discounting and the ability to find the best performers.

    The days of meeting in offices, in isolation, with no performance accountability and no opportunity for second opinions are numbered. The very best advisors are diving into the new reality. Like the advisor mentioned above using Vanguard and Dimensional funds and charging 0.58% per year. This advisor is providing the same sort of hand-holding in difficult times. But they're using products with substantially lower fees, and they're charging a cut-rate AUM fee.

    All the angst-ridden debating in the world is not going to change things. The tidal wave of technology is bringing performance and fee transparency and accountability. We'll all be better for it.

    Tom Gardner

  • Report this Comment On February 23, 2014, at 3:37 PM, Larry75 wrote:

    I did not read beyond the post. Where are the assets held?

  • Report this Comment On February 23, 2014, at 8:55 PM, kyleleeh wrote:

    <<Not only did my Father in law choose to go it at a "discount," and yet still sold out, in a panic, at Dow 8000 in 2009, costing him a hell of a lot more than "1.5%" annualized, for he has never gotten back in, which is common,>>

    << the annualized rate of return of individual investors over the last twenty years is a whopping 3% compared to s&p 500's 9%>>

    My take away from this is that most investors would be better off just to a psychiatrist before selling and paying $300 to find out if their acting rationally, rather then fork over 1.5% of total assets every year. Losses like that have nothing to do with lack of financial advice and everything to do with loosing control of ones emotions.

  • Report this Comment On February 23, 2014, at 10:14 PM, Nolte808 wrote:

    Yep great article. My FA was a family friend as I got started in investing and sold me into heavy front load mutal funds. A TMF book from about the same time allowed me to ask awkward questions he couldn't answer. I've been happily self sufficient since. So thank you, TMF.

    If as DaveAndrae mentioned, an FA could act as a 'guardrail' and stop folks from selling at the bottom, great, but that is not necessarily the case. At all. I recently experienced them treating a relative's nest egg the worst way possible--the FA had leveraged the nest egg so they had to dump at the bottom, then missed all the upside, while they still sheared the account with annual fees.

    If you look at the FA's glossy brochure, they emphasize personalized service, custom approaches, and their massive AUM. Nothing about performance. The kicker is that the relative is sticking with the FA because they enjoy the concierge type FA service and doesn't understand that getting creamed could have been avoided. The FA is creepy-charming, a Mack-the-Knife type of bilking.

  • Report this Comment On February 24, 2014, at 11:04 AM, Gordogato wrote:

    If you hadn't ended it with a pitch for Fool One, I would have said it was a great marketing pitch for Stock Advisor. :)

  • Report this Comment On February 24, 2014, at 11:25 AM, jordanwi wrote:

    daveandrae I realize that you're defending your own livelihood, but you can seriously believe you're worth 1.5% of the book you manage, yearly. You beat the drum of individuals doing 3% per year, but Morgan also mentioned that 90% of actively managed funds trail the market. And that's before the 1.5% rake.

    I buy low cost Vanguard ETFs every month like clock work, reinvest my dividends at the same time (my brokerage doesn't charge to buy ETFs). Tell me I won't outperform whatever assets you manage. Tell me, seriously.

    A word to the wise: the world is changing, and it's easier to find reasons not to use a FA that charges an ungodly 1.5%. If you want to keep your job and lifestyle, you're going to have to come up with a more compelling defence of your worth than "I've seen bearish markets", "my father in law sold", and "3%* vs 9%*".

  • Report this Comment On February 24, 2014, at 12:21 PM, ERCOOP wrote:

    I don't think it will ever change. People have and still will be ignorant about financial advisory. It might seem like common sense and a no brainer to people who read Morgan's work. But Morgan only has 5,000 twitter followers and he's the best in the business. If the only honest journalist in finance has 5,000 followers, that means and proves there are still millions out there that will be fleeced by "advisor" fees.

  • Report this Comment On February 24, 2014, at 1:54 PM, TheDumbMoney wrote:

    test post to see if it posts

  • Report this Comment On February 24, 2014, at 10:16 PM, mikecart1 wrote:

    Great post because that would have been me if I had stayed with my financial adviser several years ago. I did the math one night, screamed, and the rest is history. I think many of them are counting on investors to never do the math any night, any day, any time lol!

  • Report this Comment On February 24, 2014, at 11:45 PM, daveandrae wrote:

    @jordanwi-

    I am not a financial advisor.

    I manage my own investment portfolio and no one else's. Nor am I a disciple of Morgan's. I simply question the things I read. Especially when what has been written doesn't jive with God given common sense.

    Once again, the annualized rate of return over the last 20 years from Individual "Investors" is around 2.7% compared to the 9% annualized rate of return from the s&p 500.

    This is, quite simply, a horrifying juxtaposition. For this means over the next twenty year time horizon, left unaided, most people, especially the most arrogant ones, will NOT outperform the annualized rate of inflation with their money, let alone their investments.

    Good day.

  • Report this Comment On February 25, 2014, at 9:55 AM, Turfscape wrote:

    Looks like the masses are gathering their pitchforks and torches and starting the march to the nearest Edward Jones or Ameriprise office. There are bad car dealers, bad electronic sales shops, bad grocery stores...and bad financial advisory practices out there.

    Ultimately, a financial adviser should be doing more than putting your money into a few stocks and funds. A financial adviser should be providing you advice...and that should be provided for a fee, not a percentage of your assets. If you have a financial adviser, ask yourself "has my adviser ever provided me advice on anything they aren't selling me?" If not, then they are your broker, not your financial adviser. And buyer beware.

  • Report this Comment On February 25, 2014, at 10:10 AM, timbng wrote:

    I am an investment advisor, not a broker. We charge our clients anywhere between 40 and 100 basis a points a year for our discretionary accounts and our clients appreciate every bit of it. We charge no commissions nor any other fees.

    Additionally we do not take fees from clients accounts. We send them a bill, so they can write a check and be fully aware of every penny they are paying.

    There are many articles vilifying advisors, but at my firm we deeply care about and know every one of our clients; and I feel we more than earn our fees and our clients agree.

    Many of us are tired of these articles depicting us in such a greedy manner. We have about $40 million under management and charge about $300,000 in fees. That pays two advisors, one administrator, our regulatory fees and overhead. We are not rich by any means and do not own yachts (although one has a decent sailboat).

    A lot of us provide a tremendous amount of value, not merely in performance, but in peace of mind, guidance and planning.

  • Report this Comment On February 25, 2014, at 1:09 PM, kyleleeh wrote:

    <<For this means over the next twenty year time horizon, left unaided, most people, especially the most arrogant ones, will NOT outperform the annualized rate of inflation with their money, let alone their investments. >>

    But your assuming that people with the "financial advisor" title are somehow no longer arrogant and are not subject to being greedy at the top, and panicked at the bottom. I've never seen any evidence of that being true.

    I've never used an advisor, but a lot of boomer coworkers of mine do. When the market tanked in 2009 they told them to be 60% in bonds until the recession is over. Two years latter in 2011 they told them they should be at least 10% in Gold.

    It's bad enough when the blind are leading the blind, but when the blind are charging the blind to lead them, it's just crazy.

  • Report this Comment On February 25, 2014, at 2:33 PM, daveandrae wrote:

    ^

    Nonsense.

    Complete, unadulterated, poppycock.

    Over the last sixteen years, I've grown my then five figure investment portfolio, fees included, mistakes and all, at an annualized rate of 18.3%. And I started investing at s&p 1133!

    Shopping for an quality advisor is no different than shopping for a quality attorney. If you don't know who the best in the business is, you're the one that's the fool.

  • Report this Comment On February 25, 2014, at 8:34 PM, kyleleeh wrote:

    anecdotes prove nothing, neither do unverifiable boasts.

    Some hedge funds have shot the lights out with returns, but that doesn't mean everyone should put their money in hedge funds, as most of them have underperformed.

    shopping for a good travel agent is important too, but for 99.9% of the population something like Travelocity suits their needs far better.

  • Report this Comment On February 27, 2014, at 10:36 PM, KayakerRW wrote:

    Here's a new wrinkle in the financial advisor issue from a PCMag article entitled "FutureAdvisor Brings Mint-Style Advice to Investments."

    "FutureAdvisor, a site offering automated long-term financial and investment advice for free, launched on Tuesday with support from top executives at Square and Yelp."

    http://www.pcmag.com/article2/0,2817,2401801,00.asp

  • Report this Comment On February 28, 2014, at 3:54 PM, cmalek wrote:

    @daveandrae:

    You keep pointing out the "3% vs 9%" over and over and over, ad nauseam. However, you carefully are avoiding to mention what the return was on managed accounts.

  • Report this Comment On February 28, 2014, at 4:02 PM, cmalek wrote:

    @timbng:

    "Many of us are tired of these articles depicting us in such a greedy manner."

    Don't blame the messenger, blame the greedy, unscrupulous advisors who take their clients for all they're worth that are giving the rest of you a black eye.

  • Report this Comment On March 01, 2014, at 1:26 PM, tbmpharm wrote:

    I use an advisor that has recently gone to a 1.5% annual fee. The churn in my portfolio is not huge so trading fees is minimized. The returns while good are not terrific. I would like to see my account free of trading charges to me and have a base fee of 0.5% with the % increasing based performance over and above the comparable market indexes, to a max of 1.5 %. This would seem a fair and equitable arrangement to me. Oh incidently...I own a 30 ft SeaRay...so some of us do have them.

  • Report this Comment On March 01, 2014, at 1:28 PM, gert314 wrote:

    I’d like to ask some technical questions about financial advisors / money managers.

    (1) Are they allowed to use clients’ stock portfolios for their own speculation behind the scenes?

    For example, lend shares and keep the interest? Or sell shares, buy them back cheaper later, and keep the difference?

    (2) In case the company the advisor works for goes bankrupt, can creditors (people the company owes money to) use clients’ stock to get paid? Or does the stock strictly belong to the clients and is protected from the managing company’s bankruptcy?

    Of course, if the company goes bankrupt in the middle of a behind-the-scenes shorting strategy like I’ve described above, the client will be out of luck, because their stock is just gone. Gone temporarily in theory, but gone forever in practice.

    (3) If the advisor reports their transactions to the client not every day, but rather every month or quarter, can they „reinterpret“ their transactions after the fact?

    For example, assume an advisor decides to buys shares of company X on the client’s behalf, and shares of company Y for himself. Assume X performs much better than Y. Could the advisor switch the two positions in his monthly or quarterly report for the client?

    I have no intention to manage other people’s money, or have others manage mine. But I’m curious what checks are in place to prevent these kinds of tricks. I’m not trying to be offensive; I think these are legitimate questions, at least for someone who’s not familiar with the financial advisor industry :)

  • Report this Comment On March 01, 2014, at 11:46 PM, herky46q wrote:

    This is fascinating because I just learned that my brother hired a financial advisor. I asked him how he was charged and learned it 1.75 percent of his investments. When I tried to tell him how much that could cost him, he waved me off, gave me the equivalent of a shoulder shrug. Oh well, it's only money. Maybe it will work out well for him.

  • Report this Comment On May 15, 2014, at 9:31 PM, thidmark wrote:

    It's amusing to read the defensive comments by the "investment professionals." Morgan didn't say they were all bad, but many of them are. And the evidence is overwhelming;

    If you need somebody to charge you 1.5% of your assets to tell you not to panic when the market goes south, then you probably shouldn't be investing in equities. Market-beating returns aren't appropriate for all investors. Some just need the ability to sleep at night. A good financial advisor will seek to determine that at the outset.

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