Tuesday, January 22, 2013

Hard to Find: Retirement Help At a Reasonable Price

Hard to Find: Retirement Help At a Reasonable Price

Very often, individual investors ask me to recommend a financial advisor to  help them with their retirement savings.  If the investor has a million dollars or more, I can probably come up with a recommendation or two.  However, if they’ve got less than a million dollars, I pretty much draw a blank.  Although, I know some capable folks who can provide competent advice, but the cost is usually too steep.

Let’s begin with the basic math of a typical retirement account.  Assume you have a balanced portfolio of stocks and bonds invested in a group of mutual funds.  By the time you pay all the mutual fund fees and hidden trading costs, it’s going to cost you somewhere around 2% and 2.25% in fees, and I’ve yet to account for the brokerage commission or advisor’s fee.  Once your advisor is paid, you’re going to be down at least 3%.  If your investments were growing by 15% or 20% per year, the fees wouldn’t be too bad.  It would be like leaving a big tip after you’ve won a lot of money at the gaming tables in Las Vegas.  However, annual returns aren’t likely to be much better than 7% or 8% on average.  Although you’ll never receive an itemized statement, your mutual fund, traders, and advisors are going to “earn” 40% or even 50% of your gain.  Your money will be working for money managers and Wall Street.
Flawed Model (2001)

To address some of this unfortunate math, you can use index funds and exchange traded funds.  The good news is that your fund-related expenses can be cut to 0.40% to 0.50% or less than 10% of your hard-earned gains  However, there’s still the problem of getting advice about asset allocation and financial planning issues.  Assuming you have enough money to be of interest to a traditional adviser, you’re going to have to pay about 1%, which, once again, eats into your returns.

Ron Lieber of the New York Times lists a number of software driven services that cost between 0.25% and 0.50% per annum[1].  Clearly, these services are a financial improvement over the traditional human model.  However, I’m still not sure these services are worth the price, so I’m reluctant to recommend them.

In the end, you have three choices.  You can invest in active mutual funds assisted by advisors and pay way too much.  You can switch to passive funds or ETFs and get your expenses under some semblance of control.  Or, you can do-it-yourself and pay reasonable fees.  Do-it-yourself, however, requires courage.

Until money management isn’t seen as profession in which the practitioners are trying to get rich, the fees we charge are simply going to be too high.

[1] http://www.nytimes.com/2013/01/19/your-money/finding-investment-advice-for-more-modest-retirement-accounts.html?ref=your-money&_r=0

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