Is an Investment Advisor Really Worth the Investment Advisory Fee?

Is an Investment Advisor Really Worth the Investment Advisory Fee?

Fees within the financial services industry have come under fire recently, as regulators and investors alike evaluate whether financial advisors, stockbrokers, and asset managers earn their fees. DIY platforms like Vanguard and Charles Schwab, as well as “robo-advisors” like Wealthfront and Betterment have taken the investment industry by storm by advertising a low-hassle process and rock-bottom investment costs.

On the surface, it’s easy to see why these new platforms have done so well. The Millennial generation is computer-savvy, fee-conscious, and has a tendency to shy away from professional advice. Some older individuals have followed suit, preferring a “set it and forget it” strategy over traditional active management.

However, good fee-based advisors add additional value in several different ways. Unfortunately, none of them are easily measurable, meaning that the benefits often are discounted or forgotten entirely.

First, a properly-diversified, well-managed portfolio will almost always underperform broad indexes when the market goes straight up. But, when markets turn sour, this same portfolio should follow a flatter path lower. If your portfolio declines 7% when the market declines 12%, your advisor has covered his cost multiple times over.

Second, a good investment advisor will keep you focused on your long-term objectives rather than the market shifting macro events of the day that will have no impact on the long term performance of your portfolio. Many investors who fled the market in 2008 still haven’t recouped their losses, while those who rode the coaster have more than doubled their money since then. A good advisor will help you avoid the many common mistakes investors make, like trying to time the market (which is nearly impossible), or chasing performance (which is almost always a trap), or trying to only pick winners. These mistakes can cost investors a significant portion of their portfolio value.

Third, the best advisors offer ancillary services in addition to just managing investment accounts. Financial planning is the process of reviewing your goals (like retiring or sending a child to college) and ensuring your accounts are best allocated to achieve those goals. This process emphasizes minimizing risk rather than simply maximizing returns. While we all want to earn as much return as possible from our investments, taking outsized risks often causes more harm than good in the long-run (see point two).

Fourth and finally, the benefit from activities like tax-loss harvesting and adjusting portfolios to avoid capital gain distributions from mutual funds is incalculable and varies widely between individual accounts. That said, one study from Vanguard found that these two activities added (on average) somewhere between 0.75% and 1.5% in value on an annual basis.

In sum, appraising the value you receive from your advisor is not easy and requires analysis beyond the annual returns you see printed on your statement. If a good investment advisor can help you in any one of the four ways described above, he could be worth his weight in gold. But the best advisors will typically help you in all four ways (and perhaps more). What’s that worth to you?

*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation by us of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets. This material was developed and produced by Advisor Websites to provide information on a topic that may be of interest. Copyright 2014-2016 Advisor Websites.

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