Why Financial Advisor Fees Matter

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I have a love-hate relationship with math. I love getting the right answer, but I hate showing my work. I love the mathematical proofs proved by showing one example where it failed, yet I hate the proofs proved by showing it can’t fail. Debunking a theory by finding just one failure is ingeniously simple and straightforward.
This also works in finance. We in the financial community get into heated debates about fees, quality and transparency. Do fees matter most, or does quality? Do built-in, non-transparent fees matter most or only the ones you can see and control? Fees do matter, and non-transparent fees are important, and like in math, it’s possible to prove.
Before I dive into this, I need to disclose my inherent bias about fees and transparency (I’m using fees and costs interchangeably here). I’ve only been an investment advisor, regulated as a fiduciary, and as such, my costs have always been transparent. Therefore, I have an inherent bias to think costs should be as transparent as possible. Plus, I’ve never seen an example where someone was hurt by knowing their costs, yet I’ve seen many examples where people have been hurt by not knowing.
It amazes me how this is accepted in the financial world, but wouldn’t be accepted elsewhere. For example, would you accept not knowing the cost for each item at the grocery store? What if, instead of showing the cost for each item, you only got a total for everything? Would you accept this? I wouldn’t.
If the total was in line with your expectations, then would you no longer care if you were overcharged for any individual items? Of course not. Yet, many have no clue what their investment costs are. Why do we accept this in the financial world but not in others?
Costs aren’t inherently negative, though. In fact, you could argue costs can improve quality. For example, if an advisor works for free, will they be as thorough? Will they work as hard? Will they be as qualified? Will they be as proactive? The reality is, most likely not.
There’s a cost for quality, but is there a point where no amount of quality can overcome cost? Sure there is. I’ll use my old mathematical proof knowledge to prove it.
Imagine you’re given the opportunity to have Warren Buffett as your advisor (feel free to substitute with your dream advisor). It would be super cool to work with Warren. But, the first thing you should ask is: How much does Warren cost? What if it’s 1%? Is he worth it? Absolutely. What about 2%? Probably. What about 5%? Maybe (when I ask this in person, this is where most people say no). But if Warren’s still a good value at 5%, then is he at 10%? I’ve only had two people say yes to 10%, and to those two I asked: How about 20%? Both said no.
You can see, no matter what, there’s a cost that no amount of quality can overcome. Therefore, costs do matter. So, what about non-transparent costs? Do they matter? Again, we can prove very simply that they do.

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