Cutting the cable: financial advice in the digital age
Originally published on: October 15, 2015
Last time in this space we compared the complexities of IRA and 401(k) fees to the perennial mystery of your cable bill. While we think most people pay too much for what they’re getting (both on their screens and in their retirement accounts), there’s one area where paying an extra fee is well worth the money you spend. Naturally, that would be investment advice.
Not all advice is equal of course. We won’t weigh in on that one, at least not now. But apart from the value of the service you receive and what you spend on it, it’s also important to look at how you pay for advice. There are three basic ways.
The first is based on commissions. Every time a trade is made in your account, a fee is charged, and together these pay for the advice and assistance you get. It’s easy to see why this old-school brokerage model is out of fashion. Your broker/advisor has a pretty clear incentive to make a lot of trades, which benefit him even if they don’t help you. Poorly-disclosed “distribution fees” paid by mutual fund companies to brokers make matters even more doubtful.
Fortunately, there are better ways to get advice. Perhaps the most common today is to pay a monthly or annual fee based on the total value of your portfolio. This aligns your advisor’s goals with your own: you’re both interested in making your savings grow.
However, this approach has its own issues. In the modern, highly automated advisory business it often takes about the same effort to give advice for a tiny account as it does for a huge one. If your account is small, a given percentage of it might not cover your advisor’s costs. If it’s very large, that same percentage may add up to way too much. For this reason, you’ll sometimes see a sliding scale based on portfolio size.
Then there’s the third option: a flat fee. This is simple, transparent, and fair. It’s the way we charge for our GuidedSavings and GuidedSpending services, and it’s what we recommend for anyone considering an advice-only service. However, if the advisor you choose actually manages your money, costs for mutual fund and custodial fees still have to be passed through on a percentage basis. That’s why we charge based on asset value for our GuidedIRA.
If comprehending the full range of investment fees is like trying to read your cable bill, portfolio-based fees are more like pay-per-view: they’re easier to understand, but can get expensive if you have a lot of assets. A flat-fee, advice-only service is like Netflix. It’s dead simple, but might not meet all of your needs.
What’s the best answer for you? That depends on the kind of services you want, the size of your portfolio, and your preferences. Like many financial decisions, making the right choice can be a little complicated, but the essential starting point is clear: know exactly what, why, and how a potential service will charge you. If you’re not sure what you’re paying now, try our IRA Fee Checker. For once you won’t have to consider the cost – it’s free!
Image courtesy Mike Light via Flickr Creative Commons