Pamela Yip: Make sure your financial adviser is worth what you’re paying
I recently wrote a column about how important it is to pay attention to fees and costs when investing.
These fees may seem small, but over time they can have a major impact on your investment portfolio.
Steve Scanlon said investors also should ensure that what they’re paying their financial adviser is worth it.
“Most people pay much more than they think for the advice they get,” said Scanlon, a former managing director at Bernstein Global Wealth Management in Dallas. “If you are paying 2 percent to get 5.7 percent (in an investment return), what that really means is that you are paying 35 percent of your return for this advice, which is outrageous.”
To help investors stay on top of investment costs, Scanlon and partner Audie Apple started GuardVest, a website that measures and tracks key portfolio measurements so that investors can “hold advisers accountable for the advice they deliver.”
The free service, which is expected to launch in a few weeks, will enable investors to see a confidential evaluation of their financial adviser based on investment risks, the investor’s return and the fees they’re paying, compared with a “less expensive alternative.”
“Your adviser has no idea you’re running your report,” Scanlon said.
According to Scanlon, 87 percent of money managers don’t beat the performance of market indexes, like the Standard & Poor’s 500.
That’s critical because of the growing popularity of exchange-traded funds, or ETFs, with lower expenses.
Like mutual funds, ETFs bundle together investments, such as stocks, commodities or bonds. Both offer generally low-cost, professionally managed investment portfolios.
The difference is ETFs are traded throughout the day like stocks while mutual funds are bought or sold at the end of the day after the price for that day has been set.
The most widely traded ETFs are market index funds, which reflect average prices on the S&P 500 and other stock indices.
“The indexes are really, really hard to beat,” Scanlon said.
The problem, Scanlon said, is that returns of traditional stock and bond portfolios have fallen, but advisers haven’t adjusted their fees to compensate for that.
“Therefore a much larger percentage of the portfolio returns will go to fees,” he said.
“Capital markets are expected to be 35 percent lower for a 60/40 mix (a portfolio of 60 percent stocks and 40 percent bonds), and that’s for indexes,” Scanlon said. “This problem can be compounded even further if an adviser picks actively managed, more expensive funds that underperform.
“If you are now going to get a 5.5 percent return and your total fees are 2 percent, you get 3.5 percent. If your funds underperform by 2 percent, then you now are getting 1.5 percent with market risk.”
The dominance of index funds makes that even harder to justify, Scanlon said.
“If you were in an index fund that could get 6 percent a year, very realistically, you, the investor, at a full service brokerage firm could get zero after you pay the fee and the active management underperformance,” he said.
Scanlon said GuardVest will highlight the total fees an investor is paying and his or her returns vs. indexes.
The advice to pay close attention to what you’re getting for your money is sound. But some investors may want to keep their adviser simply because they like him or her.
That’s fine, Scanlon said, but ask yourself is the adviser delivering for you? “What are you paying for liking your financial adviser?”
Scanlon likens his service to Carfax, which provides consumers with a used vehicle’s history report that includes such things as structural damage reported, accidents, previous owners and airbag deployment.
“Eighty-seven percent of managers underperform the indexes, and the indexes cost you pennies to own,” Scanlon said. “If you don’t know how your adviser is doing vs. the index, then it is entirely likely that you are underperforming and paying 10 times more for the privilege.”
ABOUT THE WRITER
Pamela Yip is a personal finance columnist for the Dallas Morning News. Readers may send her email at firstname.lastname@example.org; she cannot make individual replies.
©2014 The Dallas Morming News
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