Fees vs Value: An Easy Argument.
Recently there has been a rash of TV and Web commercials that aim to take advantage of a single but vital fact that is inherent to the investment industry: no one knows what things actually cost.
Commercials with Millennials & single moms in coffee shops talking about how times have changed, and that they can do it themselves. Vague ads showing retiree’s walking away from their retirement parties, or arguing about “those high fees” with their advisor with no real context, just a vague idea that people in our industry are inept and greedy.
These commercials and marketing concepts bring out an almost primal urge in people to always be looking for the best deal. In today’s society, the best deal is often construed as the cheapest option. Sure with a lot of products on the market having a generic option that bares little to no difference from its brand name counterpart, or markets so saturated that even a few bucks saved can really stroke the ego:
ie: Ford v. Chevy v. Chrysler v. Honda v. Toyota etc
they’ll all have something worth considering but the lowest price wins for most households.
orCompeting gas stations: face it, you’re going to go to Costco to fill up because they have the cheapest price.
The majority of people view price = value to be a true and fair statement in all cases. Lower price, higher value…
We will try to explain why this isn’t true in the world of investments for most people.
The first reason this isn’t true in the world of investments and insurance:
Time
You don’t have the time to become an analyst. To sit and work your tail off every day to understand why what is happening in the world is happening and how any single or grouping of events could affect your life, investments and future. You have a job to do, it keeps you busy. You may have or in the future have a family; family keeps you busy.
Financial Advisors are paid to spend the time, this is our job and what we spend our time doing. Perhaps there is Value in paying for this?
note: this is not meant to imply you download everything to your advisor, if you are not informed and involved in the process, you will not do much better. We are here for advice, we don’t make the decisions for you.
Very few people are motivated and convicted enough to truly be on top of their investments, and even if they are, they run into the second problem.
Emotion
In our opinions it is an almost universal truth that emotion will have a negative effect on your portfolio more than it will a positive one. When the chips are down, are you making the right decisions? You won’t know, and you will second guess yourself. It will be easy to be fearful when you must be brave, and brave when you must be fearful.
Some great quotes no one pays attention to:
Price is what you pay. Value is what you get.
We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
Someone's sitting in the shade today because someone planted a tree a long time ago.
Rule No.1: Never lose money. Rule No.2: Never forget rule No.1.
Risk comes from not knowing what you're doing.
It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you'll do things differently.
It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
It's only when the tide goes out that you discover who's been swimming naked.
Chains of habit are too light to be felt until they are too heavy to be broken.
Our favourite holding period is forever.
It is too easy to forget that you’re working for the long term, and you become emotional because there are far too many factors pulling you in different directions; sooner or later you’re going to make a bad call on your own.
Financial Advisors ought to act as a buffer to emotional decisions, and while they aren’t necessarily paid to do so, we often take on the role of a “behavioural guide or coach”; perhaps there is value in paying for this?
Even if you have or make the time, have the patience and discipline, statistically you are better off with an advisor because:
on average an investor will make 3% more money per year with an advisor than without: source
If by chance you were able to get everything right, do it all correct and invest prudently and regularly on your own, you would still be out 3% on average per year, which is 3x more net earnings compared to those commercials claiming you could make up to 30% more by investing with them:
Retiring 30% Wealthier illustrates how investing with a Questwealth Balanced Portfolio could improve your retirement savings using a hypothetical example. The Questwealth Balanced Portfolio has an annual fee of 0.41%, compared to mutual funds that have an average annual fee of 2.16% (94 comparable Class-A Canadian Global Neutral Balanced Funds). This is based on an initial investment of $20,000, compounded annually over 30 years. Fees may change over time and actual results may vary. No representations and warranties are made as to the reasonableness of these assumptions. Questwealth Portfolios is a service provided by Questrade Wealth Management Inc.
Buy ETFs commission-free: may include other fees, such as data, exchange and ECN fees.
Source
And that is on average, the median, 50% of advisors can do better than that and doesn’t take into account the compounding effect of an extra 3% per year.
note: the 30% saved by not paying higher fees is a simple interest calculation, not a compounded one, therefore the annual average of 3% compounded is much much more than 3x higher.
We haven’t even begun to discuss insurance, wealth protection, tax planning and partnering, estate planning and a number of other things only tangible to you and your advisor.
Robots might seem like the future, but if on average they save 1% net simple interest annually on fees over similar platforms advisors have access to where they don’t take into account compounded annual returns or the other aspects of financial advise.
The fact of the matter is that this net 3% has a cost.
A good advisor is literally worth half their weight in gold* over the years of quality service they can give you, we at Financial Value Inc. believe we can provide you with service, advice, education and quality products that yes, cost more than some online portal that takes your deposits and provides you with tools you are unlikely to use, but if you are willing to put that effort in without us, imagine what you can accomplish while working with us.
The real cost to you is about 12 hours a year, every year.
Is that worth your time?
We believe it is.
Contact us right away if you believe it is too.