HOW MUCH DO YOU PAY FOR ADVICE ON YOUR INVESTMENTS?
There is a story on Wall Street that is more than a century old about a visitor to New York who admired the yachts the bankers and stockbrokers had moored in the harbor. All of these magnificent yachts were bought with money earned by giving financial advice to their customers. The visitor then naively asked where all of the customer's yachts were. Of course there were none.
There is a famous book written by Fred Schwed in the 1940's inspired by this story called Where Are the Customers' Yachts?This book is a classic among those who work on Wall Street. It takes this old Wall Street story and explains how Wall Street makes money. The reason it is a classic is that even 70 years later many things haven't changed. The theme of the original story and the book is that there is far more money in providing financial advice than there is in receiving it.
So who am I talking about when I say "Wall Street"? Don't think it is just people down on a street in lower Manhattan. That is just where it began. Wall Street is any company that sells investment products to their customers. It could be a bank, brokerage firm or insurance company. They are collectively known as the financial services industry and they are everywhere. These companies spend hundreds of millions or even billions of dollars in advertising and PR every year trying to convince you that they are skilled and ethical. Financial service companies portray themselves as anywhere from the smartest people in the world to your neighbor or the folks next door in order to get your business.
But the purpose of Wall Street is not to make their clients rich. The purpose is to extract fees from their customer. The sooner you figure this out the sooner you can start putting your own money in your pocket instead of the pockets of the financial services industry.
The sad fact is that if you pull an investor aside and ask them how much they are paying for investment advice they will say I don't know or worse yet they will say they are paying nothing for advice. The reason for this is not an accident, financial firms don't want you to know and they make it difficult for you to find out how much money they make from you. There are many different ways they make money and some involve conflicts of interest with their customers.
The clever part about most investment fees is how they are hidden. Some fees you never see. When you open your brokerage statement and look at your mutual funds or variable annuities there are no fees listed. The big fees are taken out before you get your statement. The brokerage firm and your "financial advisor" get a cut of these fees and sometimes the brokerage firm receives revenue sharing payments for selling certain funds. Revenue sharing is a kickback to the broker for making certain mutual fund companies "preferred providers". Financial advisors usually make more for selling preferred funds and the firm gets the kickback.
To find out what you are paying you need to dig deep. First go to the prospectus, that's the tissue paper thin document you receive in the mail after you purchase a mutual fund. If you don't have it and didn't read it you are not alone. No customers read them. Go online and find it or call the company. Then find the exact fund and share class of the fund you own and get the "total expense ratio" The share class you own is important because each fund can have as many as 14 different share classes all charging different fees. They normally range in the 1% to 3% area. Take that expense ratio times the dollar amount you have invested in each fund. Then add all of those separate totals together and that gives you the dollar amount you pay per year in fund expenses.
If you pay some kind of management fee to your financial advisor add that to the expense ratio of the mutual funds they use that you calculated above. Management fees usually run 1 to 2% per year. So for example if you pay 1% for the mutual funds plus a 1.5% management fee to your advisor that's 2.5% total per year that you are paying for advice. That's 25% of your money that you lose over 10 years. Whatever your total is figure it out in dollars and ask yourself two questions - would I write a check out to my financial advisor every year for this amount and am I getting my money's worth?
Yachts are no longer the status symbol of choice like they were 100 years ago. Now it is expensive houses, cars, vacations, toys and stuff like that. Why over pay for investment advice to fund your advisors lifestyle? You don't need a friend that bad. Keep that money for yourself. Maybe I should write a new book titled Where is All The Customers' Stuff?
Bill Oldfather is a fee-only financial planner and investment advisor. Oldfather Financial Services is an SEC Registered Investment Advisor based in Kearney NE. Email to [email protected]