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Brad Tinnon

Myths About Paying Advisor Fees

Have you ever wondered whether it makes sense to pay for the services of a financial advisor?  Over the years I have compiled information regarding some of the myths surrounding advisor fees.  Hopefully this information can arm you in deciding whether or not to work with a financial advisor.  With that in mind let’s discuss some of the myths about paying advisor fees.

Myth #1: Paying a fee will mean that my investments will not perform as well.

Reality: According to the DALBAR study, the average investor return over the 20 year period ended 12/31/2011 is only 3.49% per year, while the market return (S&P 500) is 7.81% per year.  The reason is because the average investor moves their money around too much. Additionally, the average investor makes emotional decisions by selling when the economy is in turmoil and buying when the economy is growing.  This is basically buying high and selling low – the opposite of what you should be doing.  A good advisor can help protect you against yourself and help to prevent you from being like the average investor.

Myth #2: I’m paying less in fees by doing it myself.

Reality: In some cases, people who manage their own investments are paying more in fees than they realize.  These costs can come in the form of advisor fees, taxes, trading charges, and investment expenses.  I have seen some people paying as much as 3.00% to 4.00% and they didn’t even realize it.  A good advisor can help you sift through this.

Myth # 3: If I stay within the same mutual fund family, then I’ll pay reduced fees or perhaps no fees on new contributions.

Reality: There are a few issues regarding this myth.  First, putting all of your eggs in one mutual fund family may not be a great way to spread out risk.  Second, Exchange Traded Funds (ETFs) offer significant advantages over Mutual Funds (see my last blog post regarding Mutual Funds). Third, even though you may not be paying a load, commission, or advisor fee, the internal expenses of your mutual fund could be very high potentially reducing your return.  An independent financial advisor not tied to any mutual fund company, investment company, insurance company, etc. can help you to understand your options and the fees that you are currently paying.

Myth #4: There is no value in paying an ongoing fee to an advisor.

Reality: This can be true if you aren’t partnered with the right advisor.  Some advisors legally don’t have to act in their client’s best interest.  Hard to believe, but true.  Luckily not all advisors operate this way.

Reality: As mentioned above, the average investor return is only 3.49% per year.

Reality: There is more to investing than stocks, bonds, and mutual funds.  Adding alternative type investments (i.e. real estate, gold, silver, commodities, etc.) can help to lower risk without sacrificing return.

Reality: There is a lot more to a financial planning relationship than just investing, or at least there should be.  A good advisor can help you establish goals, reduce unnecessary risks, improve cash flow, plan for retirement, discuss ways to reduce taxes, and put a plan in place for you to follow.  After all, the investment is just a tool to reach an intended goal.  Which begs the question, “Why don’t more advisors talk about the goals?”

Reality: People are not as diversified as they think.  Just because you own a lot of mutual funds does not mean that you are diversified.  In other words, you may not be necessarily lowering your risk just by owning a bunch of mutual funds.  You might even be surprised to learn that you own the same stocks in many of your mutual funds.  This is known as stock overlap.  Additionally, many mutual funds change their style.  You may think that your mutual fund owns U.S. stocks, but you might be surprised to learn that it also owns International stocks.  So, if you already had an International stock mutual fund, you now have more International exposure than you probably wanted.  This is known as style drift.  A good advisor can help you to eliminate stock overlap and style drift.

To paraphrase Ric Edelman of Edelman Financial Services, “If you have the time, desire, and knowledge to handle your own financial planning / investing matters then hiring a financial advisor may not be right for you.”  If that description does not fit you then hopefully this post has given you some insight about whether to hire a financial professional.  If you have any questions or would like to learn more then please feel free to Contact Us. Here’s to making you a more “informed investor”.

Brad E.S. Tinnon, Owner

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