We get lots of emails from our readers here at The Motley Fool. We love hearing from you.
Many emails we receive ask our advice on readers' personal financial situations. A troubling number of these pose the question of whether the staggeringly high fees charged by some financial planners are worthwhile, and if the advice some readers are getting is high-quality advice, worth the money.
The one I'll discuss in just a moment is a good example.
Of course, at The Motley Fool, we're only too keen to point out that we're not in a position to give personal financial advice. We can't hope to understand the needs, objectives and aspirations of our individual readers. That's — rightly — the domain of (quality, customer-focussed) financial planners.
We're also on record as saying that many financial planners are indeed worth the fees they receive — and that many aren't. In short, to be worth the money you pay for advice, any advisor — including your friends here at Motley Fool Share Advisor — must add significant value to your portfolio. You should be better off after seeing them (and paying their fees) than you were beforehand.
We received an email from one such correspondent recently — we'll call him George — wondering whether his yearly $3,000 fee was justified on the basis of a $300,000 portfolio.
An all too familiar story
George's story illustrates a problem faced by many Australians…
On one hand, the $3,000 fee only represents 1% of George's portfolio. On the other hand, that's 1% each and every year until George decides to take his money elsewhere.
The question George needs to answer for himself is whether he's receiving at least $3,000 of additional value from his advisor each year… $3,000 of benefit he couldn't have achieved by himself, or from another source at a lower cost.
We received another email from a Motley Fool Share Advisor member, John, yesterday. The topic was tax.
John wrote:
"I had a business partner who went to one of those 'exclusive' wealth-building seminars with a 1000 others. The question was asked of the audience by the snake oil salesman: 'Who here wants to pay more tax?'
My partner stood up (the only one) to the amazement of the audience and chagrin of the speaker.
'Why would you want to do so?'
Answer of course: 'If I'm paying more tax I'm earning more money'."
Smart man!
That's how I view financial advice. If an advisor can earn me an extra $100,000 in investment returns, I'd happily pay $10,000 or even $20,000 for the privilege.
But I won't pay anything at all — no matter how little — for an advisor who simply earns me the same return I could get elsewhere by myself. And that says nothing of the advisor who would take my money and underperform the market!
But back to George… it's highway robbery
He already smells a rat.
In George's own words:
"On checking the substance of the funds I think they are safe, conservative and uninspiring. And all could be easily duplicated or bettered without paying $3,000 I think per year plus start-up of $1,900 AND we have spent, say, 3 hours with him."
A $5,000 bill for 3 hours work? And $3,000 per year after that for what might be little more than a 'check-in' meeting each year? And this is charged to a retiree who has worked hard to amass an investment portfolio that he is trying to live on!
You'd at least hope there'd be some performance guarantee… Or some of the fee subject to market-beating returns….
Don't hold your breath.
And I have to say, I just don't get it. Well, I do — I guess an advisor will charge as much as his clients will pay — but it's not far from highway robbery.
Three hours. Four pretty standard funds chosen. And $4,900 charged. It makes me mad.
Oh, and by the way, the funds recommended to George have their own fees and charges included — so he's paying fees to his advisor then, presumably, paying another 1% or so in fees for the product itself.
Combined with his advisor's fees, that's a large chunk of his investment portfolio — before he even gets started!
The kicker? George says:
"I am uncomfortable with [the company]; experience from my past finds they're not user friendly, or responsive to the needs of the investor."
George knows he's being taken for a ride. He knows he's being charged too much for too little and he's dealing with a company he doesn't like.
But George doesn't know where to turn…
Regrettably, we can't give George personal advice.
But we can provide our general thoughts. They fall into five broad buckets:
1. Make sure you're getting what you pay for. If you're not getting enough added value from your advisor, either negotiate a lower fee or go elsewhere.
2. Make sure that you only invest money in shares that you don't need for the next 3 to 5 years. The next rule is an extension of this one…. A bit of unconventional wisdom I hope you'll take to heart.
3. If you think you might need to sell your shares within the next 3 years, you shouldn't own them. But, if you're relying on the dividend income from those shares (not the capital), you should be able to afford to ride out any share price volatility as long as you're invested in quality businesses with strong profits. If that's the case, it's the dividend security you should be more focussed on.
4. If you have the time, interest and a good advisor, you should be able to do the investing yourself, saving yourself the time and much of the cost. A good planner will charge you by the hour to set up a financial plan that you can then implement by yourself, saving the yearly fees.
5. Even if you don't want to buy and sell individual shares, a low-cost index fund should provide market-matching performance (less a very low percentage for management costs). Vanguard Australia is as good as any index fund provider… and just in case you're wondering, The Motley Fool Australia has no affiliation with, nor receives any payment or compensation or fees for suggesting their name.
Before the flood of email from financial planners comes flooding in, let me repeat…
There are some wonderful financial planners out there. There are also some planners who are under-serving and over-charging their clients.
To the great planners, we say: Please, be part of the solution. (I'm happy to report that we have many great planners as members of Motley Fool Share Advisor — they're actively looking for the best investment ideas for their clients.)
To the poor ones, we have no sympathy if this email hits you squarely between the eyes.
Clients deserve great service, great returns and should then be happy to pay up for that great performance.
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