Fees - What Are We Paying, Or What Are We Buying?
Written by Lee Stoerzinger, CFP®
There are not many things in the financial world that get discussed more than the fees investors pay. The retail world is in a race to tell you how low their fees are. The regulatory side is focused like a laser on the disclosure. And fees are always at the top of the list of questions to ask a financial advisor when engaging in a relationship. While we would be the first to agree that the amount of compensation earned by someone in our industry should be fair and fully disclosed, we also believe there is room for a much larger and needed discussion.
I have to admit that being in business over 25 years, I have always been intrigued by the fact that one of the first questions people ask is how much our fees are. This is often before they hear our story or even learn what we can do for them. It’s almost cultural, where we all seem trained to ask the question. Fair enough, I get it. It’s coming from everywhere. However, if I dare say, I think it could be healthy to shift the global conversation from not just what are we paying, but what are we actually buying? Our industry has many different types of people offering various service levels. Some just do investments. Others do comprehensive planning. In addition, and very importantly, there are different ways in which we get compensated. Yet, we often seem to get lumped into one similar group. It is our belief that if you drill down on what you need most and find the team of people you trust to serve you, the clarity in compensation will become more meaningful and you will be better able to determine value.
THE INVESTMENT SIDE
When we look to investments specifically, there is another layer of discussion which arises. While we are all for keeping investment management fees as low as possible, there are many different types of investments and they all come with different costs. For example, passive investing has very little cost because there is not management associated with it.
Active investing costs more because you are paying managers to do research, pick individual holdings, etc. It may cost more to manage through international markets or certain sectors. So again, we need to be mindful not only of how much we are paying the people we hire, but what it is we are actually investing in. In addition, we take it a step further. We believe that various economic conditions call for different resources at different times. While we always take cost into account, we also want to be sure we are using the right tool for the job. Performance net of cost is always a good rule.
There is one last thing worth mentioning which may provide some guidance on how our industry operates. There are mainly two ways to access the world of investing; either direct or via an advisor relationship. For those interested in investing on their own, one can access markets pretty much anywhere, 24 hours a day. It’s what we believe is the commoditized side of the business. You may see commercials telling you about their low cost or online trading and you can directly gain access to their offerings. The advisor channel is where you engage a company like ours and go through a comprehensive approach, with investments being part of an overall plan. Having access to a box of tools can be fine for some. But for many, showing up to an empty lot to build a home with just tools and no blueprint can prove difficult. For those individuals, having comprehensive guidance may make more sense. But know this, despite what perceptions may be, someone is being compensated somewhere on both sides.
When it comes down to it, financial planning can be one of the most important and comprehensive things we go through in our lives. The compensation we pay the people we entrust with our money and personal goals is always to be in the open. We just wanted to expand the conversation and explore the ways in which it is viewed, as we believe there are increased benefits in discussing value as an equal partner in cost.
This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.