How Much Are You Paying for Investment Advice?

This op-ed was submitted by Audie Apple, co-founder of GuardVest, a service aimed at informing investors and holding advisors accountable.

Have I got a deal for you...Oscar Wilde once quipped that "nowadays people know the price ofeverything and the value of nothing." As clever as that seems, itcertainly doesn't apply when the subject is investment advice. In fact,investment advice is the only thing I can think of in which the buyers don't actually know what they pay. How could they? Has yourportfolio manager or investment advisor ever sent you a bill? Ofcourse not -- they have access to your money already and just helpthemselves. Consider a recent study in which investorsworking with investment advisors were asked what type of fees their advisors charged -- not even how much they were paying.Only 40% of respondents were even willing to guess!

Furthermore, the explosion in variety and complexity of investmentproducts obfuscates the issue to the point that even investmentadvisors themselves are often confused about the fees their ownclients pay. In another recent study, 63% of advisors underestimatedthe fees they charged their own clients -- on average by 20%.

At this point, investors should ask themselves, "If I don't know what Iam paying in total expenses, what are the chances that when I findout I am going to be pleasantly surprised?" Not good.

To shed some light on the subject, a 2011 study by PriceMetrixcovering 15,000 advisors and 1 million fee-based accounts found that theaverage advisory fee charged on accounts between $250,000 and$500,000 was 1.47%. Note -- this is before considering embedded investmentproduct expenses such as mutual fund expense ratios, which can often add another 1% to the advisory fee.

If that isn't alarming enough, the dispersion of fees acrossadvisors and accounts is startling. The PriceMetrix research found that of100 investors with accounts valued between $250,000 and $500,000, 11were paying less than 0.75% while 15 were paying more than 2%!For a $100,000 investment over 20 years, that extra 1.25% inexpenses will cost the investor $59,000 -- more than half his or her investedcapital.

One of the "framing" tricks financial firms use to make alarmingly highexpenses look reasonable is to express them as a percentage of theinvested capital. But really, investors should think of these fees inthe context of their likely return on investment -- a framework thatcasts a very different light on the subject. After all, the investor putsup all the capital, assumes all the risk, and shares the rewardswith the advisor. If the returns are low or evennegative, the advisor still gets paid. What a deal!

As unappealing as that sounds, today's reality is even worse. From 1980-2007, a typical portfolio of 60% U.S. stocks and 40% bonds would have returned about 8.4% beforeexpenses. A quick survey of the published research of the largestproviders of investment advice to retail investors produces a returnforecast for a similar portfolio of 5.6%. Normally, when you get lessof something, you pay less. Not so with investment advice. Feeschedules haven't changed. So let's do the math and look atexpenses as a percentage of expected investment returns over 10years.

Using industry data that suggest 2.43% as the "all in" investmentexpenses including advisory fees and investment product expenses,the 8.4% market return produces a nearly 6% net return to the investor. Of the $124 in earnings an initial investment of$100 would produce over 10 years, $45 would be consumed byexpenses -- 37% of the pre-fee return.

Now do the math based on a reduced return forecast. To begenerous, this analysis uses a pre-fee return of 6%. Now fees consume 47% of the expected return. If that isn'tdisheartening enough, the net return on the invested capital to theinvestor is only $42 -- down by over half from the $86 returned to theinvestor in the past.

Just to restore the proportionate split of returns from the past wouldrequire that investment expenses be reduced by 25%. And certainlythere is room for debate on whether that is a reasonable split of thereturn on investments between Wall Street and its clients.

When you stop and think about it, this is the deal Wall Street isoffering investors today:

If the offer were framed in that way, I think most investors would beinsulted. But with clever complexity and opaqueness, Wall Streetkeeps investors in the dark about how much they are really payingand it is business as usual.

It is time for investors to demand a better deal. Waiting on theinvisible hand of market forces to naturally deliver this outcome willnot work when the buyer of the product doesn't have all the facts andinformation necessary to hold his or her advisors accountable. Particularlywhile the industry continues to resist calls to be viewed asfiduciaries and be required to always place client interests first. Areyou sure you know what your total investment expenses are? Don't you owe it to yourself to find out?

Are you getting good advice at a fair price? Find out quickly and securely with GuardVest.

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