Friday, September 10, 2010

Watch for High-Fee Advisors (Even if Indexing)

Index fund expert Richard Ferri has an excellent article on where he points out that of the 20,000 or so fee-only advisors who manage portfolios for individuals like you or I, roughly 3,000 or so advocate index investing.
Ferri in turn lambastes some of those same fee-only advisors for being hypocrites:

"Unfortunately, many passive advisors talk the talk but don't walk the walk. They preach low-cost, but it doesn't apply to their own advisor fee. Many passive advisors will berate the brokerage industry and the fund companies for charging high fees, and then stick their clients with the same high fees for investment advice and portfolio management."

Basically, if you're investing with a fee-only advisor to avoid the onerous brokerage commissions and transaction costs associated with a stockbroker or pay-as-you go financial "advisor", then you should expect to pay a reasonable, flat fee. Ferri explains that, "A fair fee for servicing a $1 million client should be no more than $5,000 annually, which is 0.50%, and that includes basic personal finance advice."

I agree with him here and any fee nearing 1% seems outrageous to me. After all, in a portfolio that's almost entirely indexed, you'll likely have most of the legwork done once your investment policy is implemented, provided you re-balance yearly and stick to a passive strategy.

Passive investing is key because you can invest in a cost-efficient, headache-free manner. There will be no reason to constantly call your advisor inquiring about a falling stock position or what to do if you feel that you are overweighted in a certain asset class. Provided you formulate an investment policy that works well for you, the advisor's job will be to provide a quarterly and/or annual review and to manage the portfolio (which will take up less time with an indexed portfolio). Thus, Ferri is right - there's no reason to pay an exorbitant fee to a fee-only advisor who advocates passive investing since there's little further value added in the process!

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