The Cost of Investment Advice is Still Too High

The Cost of Investment Advice is Still Too High

There are 118 million U.S. households and 108 million have under $500,000 of investable assets while 100 million have less than $100,000 to invest. What does it mean?

It means the vast majority of the investing public still doesn’t meet the dollar minimums required to work with a licensed financial advisor. And for those who do have adequate investment savings to hire an advisor, they are routinely overcharged and fleeced with self-serving investment advice.

If you’ve hired a financial advisor, how much are you really paying?

The investment fees you pay today are compounding. A person with a $250,000 IRA, 401(k) plan, or investment portfolio that pays advisor and fund fees of 1.5% (I excluded sales and trading commissions for simplicity) might mistakenly believe they only pay $3,750 per year in advisory fees. However, over 25-year period the actual compounding cost of investment fees is just over $112,000 – or almost half the original amount invested! And the larger your investment portfolio becomes, the more money you will lose to fees.

The cost of advice should never supersede the benefits. Today, many financial advisors use low-cost ETFs as portfolio building blocks (NYSEARCA:SCHB) and it’s a great trend. However, when the low-cost benefits of ETFs (NYSEARCA:VNQ) are destroyed – as it is being done today – by advisory fees layered on top of ongoing fund fees (NYSEARCA:IVV), the damage done to investors is often greater than the value of the advice rendered.

(Audio) Portfolio Report Card on a $3.6 Million Account + Hedge Funds Imploding

Contrary to media reports, roboadvisors grossly overcharge. The media has been tricked into misreporting the facts by Silicon Valley and Wall Street’s spin-doctors on the true cost of financial advice. The spin is that roboadvisors – math-driven financial software programs – are “cheap.” Is it really so?

The unapologetic truth is that paying 0.15% in advisory fees to a faceless algorithm is highway robbery. Not only can you can do the same thing with a Microsoft Excel spreadsheet without the ongoing fee, but during the next bear market (NYSEARCA:VXX), I estimate that 90% of roboadvisors will go bankrupt. And guess what? Their clients won’t have anybody to talk to about the sinking value of their life savings.

Double-dipping fees. Other roboadvisors double-dip by charging investment clients two fee layers: 1) one fee for advisory services, and 2) another fee for the underlying funds.  (Sadly, this same perverted phenomenon of double-dipping routinely occurs in the mutual fund space with target-date funds that own funds managed by the same company.)  The final roboadvisor tally might be slightly less compared to a traditional RIA, but the cost is still excessive and far more than what investors should really be charged.

What about the delivery method of financial advice by both traditional RIAs and by roboadvisors? It too is clearly broken. Both groups overcharge for what they do and their portfolio building methods are antiquated. How?

Prescriptions without a proper diagnosis. For example, people today are not properly diagnosed about what specific type of investor they are before they are given a portfolio recommendation. (There are easily over one thousand different combinations of investor profiles/types based upon our data.) Instead, people are assigned a portfolio of investments that is allegedly suitable based upon a generic questionnaire invented by somebody in the advisor’s compliance department who has never rendered investment advice to a real person in their entire life. Then, after the client’s portfolio has been recommended, the people are sent away without a matching investment policy statement to keep them on track. (Not that it would help them anyway, especially if the portfolio’s design is wrong in the first place.)

To understand how grossly negligent this way of doing business is, imagine going to a doctor who gives you a few prescription drugs before you’ve even been properly evaluated and diagnosed. Is that the kind of doctor who deserves your business and trust? If not, why should you trust financial advisors who operate in the same despicable manner?

It’s for these reasons and more that ETFguide’s Investing Club – which I carefully crafted – solves the big-league problems facing individual investors. I believe that all people – regardless of their portfolio’s size – are entitled to affordable investment advice. That means no sales commissions or asset fees on the investment products recommended – ever. I also believe that investment advice should be a face-to-face activity transmitted by one intelligent human to another.

Finally, I vehemently reject the deplorable devolution of Silicon Valley and Wall Street’s stampede into faceless, expensive, and de-personalized investment advice. Not only can the financial services industry do better than that, but the investing  public deserves it.

Ron DeLegge is the Founder @ ETFguide. Get a FREE Portfolio Report Card and enroll in his 5-star rated online course “Build, Grow, and Protect Your Money: A Step-by-Step Guide.” Visit ETFguide.com to learn more.

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2 comments on “The Cost of Investment Advice is Still Too High
  1. John Williams says:

    I estimate that 90% of traditional advisors will go bankrupt. Traditional advisors charge far more than 0.15%. Yes some are worth it and provide great advice and manage the funds without conflicts of interest. But sadly many charge 1% and interest their clients money in mutual funds with kickbacks to them.

    Roboadvisors are a classic disruptive technology – they aren’t as good as top human advisors today, but far better than many. But each month they are adding more functionality and getting better. Many even compliment their online services with human advisors.

    So you’re basically betting on Blockbuster video winning because Netflix video isn’t as high quality as DVDs. Or paper maps over Garmin. Or

    I wouldn’t bet against technology – you pretty much lose everytime. Humans can’t outpace moores law.

    • Ronald Delegge says:

      Hi John,

      Algorithms have been right in the middle of every single Wall Street crisis over the past 15 years and the next time won’t be different. Since roboadvisors are not really “advisors” but algo-driven software, they are guaranteed to be right in the thick of the next crisis. Sadly, the risk control techniques used by robos – just like most traditional RIAs – is embarrassing and grossly negligent.

      King Solomon correctly said there is nothing new under the sun. There is nothing fundamentally innovative or “new” about robo-built portfolios that use MPT models from the 1950s.

      Robo portfolios are essentially dressed-up target date portfolios but with slick advertising. And the track record of TDFs during moments of market stress is undeniably bad. And Robos will have the same unavoidable fate because they’re fueled by the same Kool-Aid. In a world of zero guarantees, this is a virtual guarantee. Moreover, this generation of robos was born after the financial crisis. That means none of them have endured the pain of a bear market, let alone survived one.

      For the record, charging an asset fee – of whatever amount – to a faceless and unaccountable algorithm is highway robbery. FYI, a Microsoft Excel spreadsheet can do the same task without the ongoing fee.

      What about the claim that robos are unemotional and more disciplined vs. humans?

      There’s an inherent flaw with the dogmatic but mistaken belief algo-driven systems are “unemotional” or “unbiased.” In truth, they are just like Dr. Victor Frankenstein because they fully reflect the hidden and sometimes perverted emotions (and biases) of the software designer(s). Or as Taleb might say, they are the essence of fragility because they are inflexible.

      The multiplicity of roboadvisor faults – and this is hardly an exhaustive list- are hardly an endorsement of the traditional RIA model, which too is broken.

      The business of investment advice is personal and much more complicated than renting a movie stream or using a GPS system. From another angle, you could say that rendering investment advice is surgical. In other words, the technology may help the surgeon to execute his or her job, but it doesn’t completely replace the surgeon.

      P.S. See Humans are Underrated

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