Do you know how much your investment advisor
is actually costing you - I mean, the actual
dollar impact their fees are having on your
long-term goals? We’re going to explore
the fee structures of some of the largest
advisory firms in the world and actually quantify
the impact those fees will have on your bottom
line, so that you can be fully-informed when
it comes to your financial future. Coming
up!
Hey there! If this is your first time here,
my name is Stephen Spicer and it’s my goal
to help you invest smarter. There are too
many people not hitting their long-term financial
goals and so many more unknowingly on that
same path. I’m going to remedy that as best
I can. I hope you’ll join me for the ride
by hitting that subscribe button and the little
notification bell.
Thanks! Welcome aboard.
I still remember the day when I finally decided
that I was going to buckle down and really
dive deep into the investment options I was
recommending to my clients. That’s right,
I had been working for several years by this
point for one of the largest financial planning
firms in the nation and recommending solutions
that (if I was being honest with myself) I
didn’t fully understand. Yet, at the same
time, I’m pretty sure I understood them
better than like 95% (probably more) of the
field force—I mean, I was one of the go-tos
for our region, one of the ‘investment guys.’
After getting my CFP® (Certified Financial
Planner™) designation as quickly as I possibly
could so that I could finally have access
to my firm’s investment options, I had eagerly
burst onto the investment scene (earning the
MDRT—Million Dollar Round Table—acknowledgement
for investment performance that year—that’s
awarded to the top 1% of the industry). This
was the reason I had gotten into the financial
planning world: investments fascinate me.
I had mastered the language from our home
office sales representative. You see, our
Specialty Investment Vehicles were pretty
complex. There were managers on the individual
fund level who were constantly researching
the best positions to hold. We had experts
in our home office reviewing the overlap of
the underlying funds’ holdings. We even
boasted some additional oversight from the
highest level analysts at Morningstar. It
all sounded very sophisticated.
It, if nothing else, created a compelling
enough excuse for rather high fees.
For smaller accounts, the total fees would
sometimes be more than 2.5%. I had become
a pro at explaining them away. You’d probably
be surprised by how few people even batted
an eye.
Please don’t get me wrong, it wasn’t that
I was lying to them. I was just doing what
I was told. I was listening to people who
had decades more experience than I did (I
was in my early-20’s at the time), who I
felt were smarter in this area than I was,
who I trusted to direct me to the best solutions
for my clients.
That’s what started to eat away at me though…
Something wasn’t right, and I think I had
been putting off this deep dive into our solutions
because I was afraid of what I might find.
But, I couldn’t shirk my fiduciary responsibility
to my clients any longer, so I dug. I spent
days seeking answers.
In short, I discovered that the primary solution
our firm was pushing consistently underperformed
the market. It had been around for more than
a decade (since before 2000), and the actual
annualized return for each of our models was
quite a bit lower than their respective benchmarks—to
the tune of one or two percentage points.
And, we’ve already discussed in a previous
video how much of an impact that can make.
Maybe there was an entire team of experts
monitoring these models and they needed to
be paid. But if that ‘monitoring’ is not
generating a superior performance… ever…
not even for one of their models… then,
why?!
If our investment solutions were outperforming
by more than their fees over the long run,
then the value proposition might make sense.
But, they weren’t. They consistently underperformed,
costing my clients money, and they were expensive…
losing them even more money.
It wasn’t long after this initial period
of self-discovery that I left that firm in
search of something better (ideally, the best
possible solutions for my clients).
And, that company I was working for, Northwestern
Mutual, is not a small player in the investment
industry. Their investment services arm is,
in fact, the fifth largest independent broker
dealer by revenue raking in more than $1B
in commissions and fees on those complex investment
strategies pushed by their massive field force.
This isn’t, however, some isolated case.
The list of highly-regarded firms charging
significant fees to manage investment dollars
is upsetting.
Edward Jones, with its $1.1T (trillion, with
a T) of assets under management, has its field
force charging an ongoing 1.35% management
fee for a client’s first quarter million
(plus other smaller ‘hidden’ fees and
the underlying fund fees—more on those in
another video).
JP Morgan charges a 1.45% advisory fee; Merrill
Lynch, 2.00%; Wells Fargo, 2.00%; Morgan Stanley,
2.50%; UBS, 2.50%...
One of the worst culprits of this ‘high-fee’
madness is Ameriprise Financial. With half
a trillion of assets under management, Ameriprise
gets away with charging a 3.00% advisory fee
on smaller accounts. And that’s just the
advisory fee—add in the other smaller ‘hidden
fees’ and the underlying funds’ fees and
some clients could end up paying 3.50% or
more each year in fees!
It’s no surprise to see Ameriprise consistently
at the top of the list of independent broker
dealers by revenue. Cashing in almost $4B
in fee and commission revenue in 2018 (almost
twice as much as the next company on the list
with a similar business model despite managing
significantly less than some other firms).
All the firms I’ve listed thus far are what’s
called broker-dealers. But, what about the
fees charged by registered investment advisors
(RIAs)? Those firms are actually held to a
fiduciary standard. Meaning, they legally
are supposed to be acting in your best interest.
So, in theory, you’d think their fees might
be more agreeable. Wouldn’t you?
As it turns out, they're not much better in
the fee department. Work your way through
Barron’s 2019 list of top RIAs and you’ll
discover more high fees eating away at investors’
returns.
By far the largest RIA in the world with its
more than 1.2MM clients, Edelman Financial
Engines charges its smallest (by account size)
clients a 1.75% annual fee.
The Tony Robbins-promoted Creative Planning
takes the second spot on that list with its
1.2% fee. Followed by Private Advisor Group’s
2.00% annual fee on accounts under $500,000.
Next you’ll find Mariner Wealth Advisors
with its 2.50% annual fee for ‘smaller’
accounts.
You get the idea: there are a lot of people
out there paying a lot of money in fees year
in
and year out. The big question, then, is:
are they worth it?
To best answer that question, you’ll need
to understand what the ‘cost’ really is.
Because, it’s not just 1.5% or 2.5% or any
percentage—that’s meaningless when it
comes to your financial aspirations. Percentages
are too disconnected from what your goal actually
is when enlisting the help of a ‘professional.’
We need to evaluate this cost in terms of
dollars.
In a future video, we can evaluate the effectiveness
and value of the various strategies these
firms employ. This video, however, is the
perfect place to evaluate and develop your
understanding of that ‘true cost.’
The average annual advisory fee from 2017-2019
for an investment account with $1MM was 1.02%
(larger accounts averaged less, smaller accounts
averaged more). For this ‘true cost’ exercise
and to understand the impact these fees have
on what your reasonable expectation for average
annual growth in the market should be, let’s
round down to an even 1.00%.
After accounting for this average advisory
fee (remember: this fee is usually much higher
for ‘smaller’ account sizes—i.e. sub-$1MM),
the actual realized return (that we discussed
in our last video) drops from the S&P 500’s
geometric average of 10.2% down to 9.1%.
Remember from our last video that $100 invested
in 1926—that would have been projected to
grow to $4.6MM with the 12.1% assumption but
then, in reality, turned out to be less than
$1MM?
Well, when you add in this 1% advisory fee,
it’s more like $350,000. From $4.6MM to
$350,000—that’s less than 8% of the expectation!
The practical implication for you? Your actual
portfolio value would now only be…
76% of its projected value after 10 years
58% of its projected value after 20 years
44% of its projected value after 30 years
So now, even if everything goes according
to plan, your $10,000 investment after 30
years has only grown to $136,000 when you
were projecting (and planning for) $308,000.
In his 1996 New York Times bestseller, The
Truth About Money, Ric Edelman uses multiple
convincing hypotheticals to encourage readers
to invest in the stock market. Here’s one:
“Although the average stock fund earned
14.5% over the past 10 years, we’ll say
that yours performed below average, earning
only 12% a year. At that rate, your $5,000
will grow to $99,000!”
Let’s check in with my (made-up) 42-year-old
friend, Brody. Reading this advice in 1996,
he was convinced by Mr. Edelman’s case for
stock market investing and excited by his
‘conservative’ 12% expectation. He eagerly
handed his $80,000 nest egg over to Edelman’s
firm expecting (needing) that sum to grow
to $1MM by the end of 2019, when Brody would
be 65 and ready to retire. (An $80,000 investment
at 12% per year for 23 years (1997-2019) would
grow to $1,084,000.)
The reality for my poor friend was far from
that ’conservative’ $1MM projection. From
the beginning of 1997 through the end of 2019
(a remarkable year for the market, by the
way), the market realized a simple average
of 10.3%. A far cry from that 14% seed that
Edelman planted in Brody’s (and millions
of others’) mind.
His actual return (remember the difference
explained in this video?) was only 8.6%—leaving
him with less than half of his original projection!
That’s right, that real 8.6% would have
left him with $538,000 instead of the more-than-$1MM
that projected 12.0% should have gotten him.
But, we’re not done here...
Add in Edelman’s advisory fee of 1.75% for
an account of that size (that’s his current
rate, it used to be higher), and the effective
annualized return drops to 6.7%, resulting
in an account balance of $359,000—67% less
than what Brody was expecting…
That $5,000 Edelman was talking about didn’t
grow to $99,000. When you apply the real,
geometric average and account for the advisory
fee, it only grew to $25,000 over those 25
years.
Edelman Financial Engines is not even the
worst offender here (at least from the fee
perspective it’s not, but from the ‘12%
claim’ perspective, Ric Edelman is definitely
on the list of worst offenders). The title
of ‘Most Outrageous Fees’ (that so many
people are talked into paying) should probably
go to the aforementioned Ameriprise Financial
with its roughly $500B of assets under management
and 3% advisory fees.
That 3% fee takes your ‘since-1926’ number
down to $52,000—1% of your original expectation!
Your 10-year return would be 62% of its projected
value
Your 20-year return would be 39% of its projected
value
Your 30-year return would be 24% of its projected
value
That $10,000 is only $74,000 now after 30
years (instead of the $308,000 you were originally
projecting and planning for)...
They’d have to be providing some major value
over there for this to be worth it. And, I
can’t imagine some fancy computer software
and friendly customer service would do the
trick—I’m thinking (that for it to be
worth all that…) more like maid service,
child care, a private car when you need it…
you know, the works!
To be fair, with this video alone, we don’t
have enough data here yet to determine if
these fees are actually worth their impact
or not—it is hard to imagine that being
the case for some of them, but in our honest
pursuit of truth, we’d have to consider
both sides of the equation (including what
you actually get for all this expense). In
this video, we’re just looking at the bottom
line impact of these fees on your long-term
plans. In a future video, we’ll explore
the other side—what firms are actually offering
and if some are worth their elevated fees
or if they’ve just realized that it’s
easy for people to brush over all these ‘relatively-small
looking’ percentages.
Regardless, this exploration of the impact
any fee has on our real returns demonstrates
that we need to manage our expectations even
more.
Now, once you’ve come to terms with everything
we just went over in this video… hold on
tight cause we still gotta knock down those
expectations just a little bit more…
We’ll do that in the next video. So, hit
subscribe and the notification bell so that
you don’t miss it.
And, if you want more access to some of the
behind-the-scenes research we’re doing to
help you better understand and overcome financial
issues like this, you should go poke around
our private community at Community.SpicerCapital.com/.
I can’t wait to see you there.
I wish you all the best! Take care.
