I refer to most financial broadcasting as “financial pornography” because the majority of this information is based on fantasy that’s all very exciting and engaging. There are flashing visuals about stock price movements and a constant stream of talking heads and broadcasts from the chaotic, noisy floors of the exchanges.
The goal of all this stimulation is to keep you interested long enough to view a commercial. But it’s not based in reality and will not help the average viewer reach their financial goals. The financial media is mostly interested in creating inflated excitement to sell advertising, because commercial advertisers pay the bills.
If you watch too much financial pornography, you’ve heard that you need to pay for really great advice to capitalize on all the so-called opportunities and avoid all the risks in the short-term market news. But what does the scientific research say about fees and expenses?
How much is too much to pay for financial advice?
If you have read more than five personal finance articles in the last 10 years, I’ll bet you have seen tons of data that talk about how important it is to avoid fees and expenses. The scientific consensus is pretty clear and consistent: The lower the fees the better.
As experts look forward over the next five years in the investment markets, they expect a recession and fall in investment prices. This is partly due to the fact that the market has expanded mostly without a break since 2009. The general agreement is that the next five years in the markets will show less total growth than the last five years have done.
Most predictions are in the range of 5 or 6 percent per year average growth for stocks over the next five years. If this is correct, extra investment expenses of 1 percent or even 2 percent are a very large portion of the total return you can reasonably expect.
The value of exchange-traded funds
That’s one of the reasons I favor index-based exchange-traded funds (ETFs) for my clients. These funds have between 25 and 50 percent less expense than a traditional actively managed mutual fund alternative.
To me the logic is simple. If a client needs to own stock in U.S. based large companies, there is no reason to pay for active management of an S&P 500 mutual fund. You can own an S&P 500 ETF for about one-third the cost.
The question is, how much of the client’s investments should be in the S&P 500? How much should be in bonds? How much should be in foreign companies? These questions are trickier and often relate to the client’s financial goals.
What are your personal financial goals?
For me, it quickly becomes a conversation about financial goals. You are using saving and investment to reach a financial goal. You are not investing just to own the coolest strategy you can find. For my clients, this advice about how and where to use investments to most effectively reach their goals is where I earn my fee.
Research shows that most investors do worse than the investments they are trying to own. This is generally because most people decide to buy an investment after it has gone up, so they pay a little more than average to get in. Most investors also tend to sell out of investments after they have gone down, so they sell at less than average prices. Over time this can lead to as much as 7 percent per year underperformance. Good advice from a seasoned professional can help reduce these mistakes.
Benefit to fee-only financial advice
As an advisor who is my client’s advocate at all times – a fiduciary advisor – I am focused on low fees and a clear alignment between my client’s goals and the investments she owns. Since I am only paid by my client – a fee-only advisor – I can use any investment tool I believe will help my client without restrictions or limitations. Thanks to this approach, I think my clients are better prepared to reach their financial goals than most investors.
If you would like some advice about better connecting your financial goals with your investment strategy, you might want to talk with a CERTIFIED FINANCIAL PLANNER™ professional.
To find a CFP® professional near you, start your search here.
As you visit with financial planners, I suggest a couple things to check:
- Is the advisor always the client’s advocate – a fiduciary advisor?
- Is the advisor only paid by clients, not any financial product manufacturer or distribution network? That would be a fee-only advisor.
These two points help assure that you are working with a professional who is committed to your best interest at all times. It seems sort of obvious to me that a professional would work in this way, but it’s not automatic.
A fiduciary, fee-only, CFP® professional can help you make great investment choices and develop a comprehensive financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will be better prepared to understand your options at every step along the way.
Yes, I am a CFP® professional. I’m always a fiduciary and I only work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.
If this article has you thinking about your own circumstances, contact my office at rdunn@dunncreekadvisors.com. I am always happy to meet with people who are working on their financial goals. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.