The ART in FIRE

On The Money

By Ben M. Reynoso, Investment Advisor FCG Wealth Management

Do you know how much you pay each month for utilities? How much does a
gallon of gas cost? What about the cost of your health insurance? It’s safe to say
that most Americans can easily answer these questions without much trouble.
But, ask a group of investors how much they are paying each month to their
mutual fund companies and advisors and they will probably have no idea.
The intention here, is of helping investors realize the effect of fees in their investment account – especially the fees they pay to fund companies and their advisors. There are many hidden costs to investing that investors never see, or do not understand.
By bringing to light the various fees, the impact of those fees, and the
true value of working with a professional financial / investment advisor we
are creating transparency of advisory fees,  and I believe the client-advisor relationship
has a much greater foundation of trust.
Within the investing landscape, there are many factors that are out of our control:
economic conditions, political turmoil, and natural disasters that affect industries
and sectors, but the one aspect of investing that we can manage is costs.
Costs come in many forms:
• Advisory fees, commissions, and sales loads. These are the amounts
paid to the broker or advisor. Advisors may receive a sales commission
from the mutual fund company. These commissions may or may not be
fully transparent.
• Trading costs / custody fees. This is the amount paid to the broker or
custodian who buys and sells the stocks, bonds or mutual funds. These
are either paid as a percentage of assets, or on a per trade basis.
• Mutual fund expense ratios. This is the administrative expense of the
fund charged to investors.
Why should we manage our investment costs?
In the uncertain and volatile world of financial investments, investment cost
reduction is the one strategy that is most likely to improve the future value and
investment performance of your portfolio. Many individual investors hope that, if
they pay higher investment fees, they will get higher investment returns.
Unfortunately, for the average investor the opposite tends to be true – particularly
after investment costs and capital gains taxes are taken into account.

Are high fee advisors smarter than their lower cost competitors? Do they
produce higher investment returns?

Probably not.
First of all, a high fee produces a significant reduction in the size of the client’s
account over time. The fees that a high-fee advisor siphons from the account
create a significant headwind to overcome. Remember, while the advisor’s fee is
guaranteed by contract, the promise of superior results are not.
In investing, the old adage “you get what you pay for” generally does not hold. In
general, the more you pay in fees, the lower your overall performance is likely to
be. So fees are an important consideration when selecting investment advisors.
There is no reason to believe that an expensive investment advisor is any better
than an inexpensive investment advisor. In fact, there is significant reason to believe that the opposite is true — in general, every additional dollar you pay in advisory fees will reduce your portfolio’s net returns dollar-for-dollar.
An advisor’s ability to extract an outsized fee from a client is more of a testament
to his sales, marketing, and self-promotion skills than any superior investment
acumen.  Most high-fee advisors will first pitch a client with a “superior service” argument. Kind of like the way a high cost, full-service brokerage firm says it will “watch
your money” a lot more carefully than a low-cost provider.
If a high-fee advisor can’t give you a detailed description for what additional
services he’ll be providing for the tens of thousands of dollars in additional annual
fees, it may make sense to hire a low-cost advisor.

As a note, the true goal of investing is not to outperform the market. Beating the
market is not a goal. Having enough money to enjoy retirement, send a child to
college, or to pay for future expenses, those are goals that we strive to achieve –
not outperforming the market. The true value of a professional investment advisor is not to find the best investment or help you achieve the highest returns, but to help you reach your goals.

For more information on the Impact of Fees
Contact Ben M. Reynoso at
FCG Wealth Management
(559) 679-5010