The question of whether an investor is paying too much for the advice they receive seems always to be under discussion. Some claim that almost any fee is too much given the ability to get free or very low cost advice from a variety of sources while others, brokers and investment advisers alike, claim that their good track record supports somewhat higher fees than their competitors. Another approach looks at performance fees, arguing that if the fee charged to an investor client does not decrease when the advice turns out poorly, then that is unfair to the investor.
What I believe all of these arguments overlook is the real value an adviser can provide an investor that is NOT directly tied to the investments that are chosen, but, rather to the tailored financial advice (including investments) provided with regard to the investor’s own situation. Advice that helps investors make the most of their situation, beyond simply selecting investments, but also including planning for a variety of future outcomes and events, can save the investors much, much more than a reduction of a few basis points in their investment fees.
It is attractive for many advisers, particularly brokers and fund managers, to tout their ability to pick investments and gain significant returns for their clients. The flaw, of course, is that there is no guarantee they will be right, and it is impossible to correctly predict markets over any appreciable time. Today, with the availability of the so-called robo adviser, fairly decent investment picks at a very low cost are readily available to any investor. Yes, these investors likely won’t get that big 1,000%+ gain some advice sources will promise based on their past successes (while ignoring their failed picks) but the investors using the robo advice should get decent results over time.
What the investors will not necessarily receive is sound financial planning advice, advice which will not necessarily be available from many sellers of investment advice, from brokers all the way to robo advisers. What a good financial planner and investment adviser can give the investor is much more valuable than simply investment advice. So when you are looking at fees, look at what is offered AND delivered in return.