In the investment world, advancements in technology have impacted the industry in two major ways over the last several years:
1) Financial advisors are offering more services
2) The underlying cost to own investments has been reduced
Let’s look at what I believe are the two categories of costs for those working with a financial advisor.
The Cost of Advice
Industry-wide, the average fee most advisors charge for the cost of advice is approximately 1% annually on assets under management. Most often there are breakpoints that reduce your overall fee percentage as your asset values grow. This fee structure aligns the advisor’s interest with the client’s in growing assets to receive more compensation.
In the last several years, we have seen the rise of online “robo-advisors.” What is a robo-advisor?
Investopedia defines them as:
“digital platforms that provide automated, algorithm-driven financial planning services with little to no human supervision. A typical robo-advisor collects information from clients about their financial situation and future goals through an online survey, and then uses the data to offer advice and/or automatically invest client assets.”
Simply put, robo-advisors use technology to manage investment portfolios based on an investor’s answers to a questionnaire. In doing so, they can provide a service at a lower cost, but investors lose the relationship with an actual person who can give them advice over a lifetime. While some robo-advisors offer access to financial planners at a call center (referred to as “cyborg advisors”), this service is still lacking a personal relationship and is offered at an increased price.
In my opinion, the two most important sources of value from working with a human advisor is having someone not only give you sound advice but also hold you accountable. Numerous studies have shown that behavior has a substantial impact on your financial success, whether it is in your spending, saving, or the ability to stick with your investments in volatile markets. The best advisors will blend the latest technology efficiencies utilized by robo-advisors with expert advice and personalized service.
Today, many advisors (including us) are offering flat fee monthly retainers to those who have not accumulated a sizable investment portfolio with the goal of offering advice to a broader group. Visit our website to see our complete fee schedule.
The Cost of Investments
Most people do not realize that there is an underlying cost to investing. Whether you invest in a mutual fund, exchange traded fund (ETF), or individual security such as a stock or bond, there are costs associated with purchasing and owning those investments. While the cost of advice has evolved over time with the offering of more services, the cost of investments has clearly been lowered in the last few years. Mutual funds and ETFs have an underlying expense ratio or cost. You do not see this cost deducted from your investment, but it reduces the overall investment return. This underlying cost is for the ownership and diversification of many individual securities that the fund provides. Fund expense ratios industry-wide can range from as low as 0.03% to as high as 2% depending on the type of investment. For individual securities such as stocks and bonds, the cost is associated with transactions in buying and selling the securities. To broadly diversify your portfolio, for example, an investor might want to have 30-50 individual securities.
In my opinion, technology and competition will continue to reduce these underlying investment expenses and transaction costs. The bottom line is that cost matters. At Eaglestrong, our investment philosophy includes utilizing low-cost investments. We believe cost awareness is one of the essential elements to your overall financial success.
For a quick comprehensive summary table of the total cost to investors (do it yourself, robo, cyborg, traditional) check out this investing blog post – All The Fees In The World.
Value is Most Important
Cost aside, the value you receive in your relationship with your advisor is most important. This value may be organizing your finances, reducing taxes through strategic retirement savings, or committing to a sound investment strategy. A recent Vanguard Study showed that the value of working with a financial advisor may add as much as 3% annually to your overall portfolio return. A great quote from a book that I recently read, The Go-Giver, states it best:
“Your true worth is determined by how much more you give in value than you take in payment.”
At Eaglestrong, we take that quote to heart and are constantly looking for strategic value to add in each client’s specific situation.
Our goal at Eaglestrong is to guide, inspire, and educate our clients to be financially wise.
-The Go-Giver by Bob Burg
Eaglestrong Financial is a Registered Investment Advisor (RIA) with the state of Tennessee. The information contained herein is not intended to be used as a guide to investing or tax advice. This material presented is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.