Occasionally, I experience disappointments as an investment adviser. It comes with the territory as I get to see behind the curtain of the financial services industry. It saddens me to report, when it happens, it’s often not a pretty sight.
An individual recently came to me for advice about his IRA account. After years working with an adviser, his gut told him he needed another set of eyes to take a look. His hunch was right. In a nutshell, the investment expenses he was paying were outrageously high.
The primary lesson is, you should periodically conduct your own review. It’s not difficult to do. The savings you might find can add up to a substantial sum over time.
Casting the curtain aside, here’s what I saw.
First, this individual’s adviser charged him 1% of his account value per year for services that largely focused on investment management. He described to me a relationship that was very light on personalized financial planning. For that 1% fee, which isn’t uncommon, the delivered services shouldn’t be light on this front.
But, as they say, there’s more.
Next, his adviser chose to outsource his duties to another investment advisory firm. Outsourcing is also not uncommon in my industry, especially for advisers who either don’t have the professional skill or the inclination to actually manage their clients’ assets themselves.
However, as a prudent consumer, you should be very aware of the possible double-layer of expense an outsourcing decision creates. In this individual’s case, his adviser’s outsourcing added yet another cost of 1.25% per year.
Unfortunately, as bad as this might be, you guessed it, there’s more.
Third, the outsourced investment adviser outsourced his work too. As part of their service, they chose to invest the money in various mutual funds that, together, added at least 0.75% per year in additional costs.
With the curtain fully drawn back, this individual incurred total expenses of roughly 3% per year. Expenses like these create a hurdle so high, few investors can ever get ahead. And, these expense layered cakes are not rare enough, especially for smaller investors who can afford them the least.
Think about the math for a moment. With interest rates so low today and with the economy now entering its eighth year of recovery, future investment returns – after expenses like these – may indeed have a hard time staying in positive territory.
Learning how to analyze your investment costs is a skill worth developing.
