It may be expensive.
I chatted with another older (we’re not really that old yet!) guy at my local coffee shop this morning. My coffee shop is great for that kind of thing. There’re always a couple of people within earshot that are happy to chat while we sip our morning brew. And I like to chat!
Anyhow, the conversation shifted from Christmas shopping to the state of the economy & the gloomy expectations for a recession in the new year. That led to us talking about how our portfolios were performing this year. I knew how my portfolio was performing year to date, to two places of decimal. He, on the other hand, had absolutely no idea how his portfolio was doing. He thinks he’ll get something in the mail in the new year, but his advisor told him he was doing okay when they last spoke. Since I’m tinkering with the allocations in my own portfolio, I was curious about what his advisor was recommending. My coffee buddy didn’t know. When I asked about what he was invested in, he told me it was with a professional & he really didn’t know exactly what it was in. Was it stocks, bonds, ETFs, or mutual funds? He was almost sure, maybe, that it was mutual funds. But he’s been with this guy for years. He trusts him. He’s a really nice guy. And he does great things for him. Besides, my coffee companion knows nothing about all this investing stuff. Nor does he have any idea how much he is paying for the service.
While I have no idea if he was being frank with me, if that’s the true level of his understanding, it’s a potential exposure to paying more & getting less. It’s totally okay to invest with the help of an advisor, they can bring value in all sorts of ways. But you shouldn’t do it blindfolded. The difference between a portfolio fee of 0.2% & 2.2% sounds small, it’s only 2% after all, but it can be huge over time. Given the historical market returns of about 10%, a kid with $50k invested by age 30 could see their portfolio grow to a value of about $1.6 million by age 65. Without any additional saving. Drop that rate of return to 8% because of fees every year & the portfolio would be worth about $800k at retirement. That 2% reduction means that a full 50% of the potential return goes towards fees.
A retiree planning to live by the 4% rule has to make up an additional 2% to cover fees like that.
Of course, if the advisor is outperforming by at least as much as the fees being charged, that’s great. That could be exceptional value. But if not, the fees might be a potentially significant overhead.
I was just there for a coffee, so I didn’t get into it any further. I don’t want to be the guy that nobody wants to talk to in the coffee shop!
When you get your annual statement this year, slow down & look at it. Compare your asset allocations to some of the ETFs that are available on the market today. Chances are pretty good that you’ll find an ETF that matches the asset allocation in your managed portfolio. The traditional 60:40 split between stocks & bonds is replicated by all the big providers in Canada, for example. BMO has ZBAL, iShares offers XBAL & the Vanguard one is VBAL. For fees around 0.2%, these ETFs might compare very favourably against a mutual fund that does the same thing. But charges a significantly larger fee of 2%, possibly more. Or compared to an advisor that is charging 2% to put a similar portfolio together for you.
Look I’m not for a minute suggesting that you drop your advisor. Advisors bring all sorts of good things to the party too. They can structure a portfolio to minimize taxes, help with decumulation strategies, provide guidance when the markets crash, & so on. But you should learn enough to have a discussion with your advisor on the cost & value of having the advisor manage your portfolio. Performance and fees are important. They should both be part of the conversation during your annual portfolio review. Who knows, you might even be offered a discount on the fees being charged. And even if you don’t, you’ll at least have an improved understanding of the cost & value of the advice you are paying for.
Knowledge is always useful. Even when it undermines the sense of bliss a little.
Important – this is not investing, tax or legal advice, it is for entertainment & educational purposes only. Do your own due diligence & seek professional advice before investing your money