Why You Should Fire Your Investment Adviser Today

Adviser fees take a big bite out of investment returns.

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Burton Malkiel's famous tome, The Random Walk Guide to Investing, begins with the right exhortation for most investors: Fire your investment adviser today. Although it takes moxy to say "no" to that special someone who has earned your trust, the facts reveal that your investments will do far better with your wealth manager's hands no longer dipping into your cookie jar.

The facts are plain to understand. According to the U.S. Securities and Exchange Commission (SEC), the average adviser charges 1.11 percent in annual fees to manage your money. This same adviser is likely to put you into a portfolio of actively managed mutual funds that average more than 1 percent in fees. That places a more than 2 percent burden on your portfolio and drags down performance.

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Some investors think that 2 percent is a small price to pay for expert guidance. What many investors fail to realize is that 2 percent represents a shocking 25 percent business partner in your annual earnings. With the average diversified portfolio earning around 8 percent annually, with every dollar you earn you are paying 25 cents for "expert" help.

It is not uncommon for a business partner to invest large sums of money or to work for years to gain 25 percent ownership of a business. What is it that an investment adviser does that should result in such a favorable perch?

Performance? Active management was exposed as a loser game decades ago by the academics. If that is hard for you to accept, add in adviser fees, and it should be easy to see that your portfolio is doomed to underperform.

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Trust? Advisers sell many things, trust being at the top of the list. How much can you trust a person that is willing to sell you high-fee, actively managed funds? Trust is a feeling that a smart investor should not trust. Strategy is key. If the adviser fervently recommends indexing, then you have the first building block of trust.

Allocations? How difficult is it in today's information age to obtain sophisticated asset allocations designed for your needs? Not hard at all. At MarketRiders, you can obtain a globally diversified allocation customized to your needs and optimized for your broker. There is no longer a need to pay high fees for such guidance.

Personal Attention? The average adviser has more than 100 clients and is rewarded for new business development, not taking a deep interest in current customers. Ponder how difficult it must be to stay current on the specific needs of a client when you have 99 others to think about and five more this week you are trying to close. Where do you think that adviser will put his energy? Toward new business and new revenue. Think about it. When was the last time your adviser contacted you?

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Although firing your adviser is probably the best thing you could do for your portfolio, some investors do benefit from outside management. Here are three reasons to keep your adviser on staff:

  • Problem solving. If you are faced with a unique set of problems, tax concerns, or major life decisions, an expert may be the perfect person to help you get on the right track. For problem solving, it is best to hire a financial planner who works by the hour. Get your problems solved and then move on.
  • Busyness. You may be so busy with your career and family responsibilities that the extra burden of managing your portfolio feels unbearable. Before you go with an adviser, be aware that managing a globally diversified indexed portfolio should take no more than a few hours a year. Even still, some may find the burden too heavy and want someone else to make the call. An adviser might be right for you.
  • Hand holding. The most notable reason to have an investment adviser manage your account is for behavior reasons. Research reveals that some investors have difficulty staying the course. Buying when the market is up and selling when it is down can be costly. Whipsawed by emotion and market hysteria, such investors would do far better having an adviser oversee the disciplines of smart index investing. While such oversight will cost, being suckered into the next stock tip, chasing trends, and timing the market will result in much greater damage than advisory fees ever could.
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    If you do hire an adviser, be sure he is committed to indexing, has reasonable flat-rate fees no greater than .25 percent of assets under management, and has transparent reporting and timely communication. Better yet, fire him and take control of your own retirement. Either way, index, stay the course, and retire on schedule.

    Steve Beck is cofounder of MarketRiders, an online investment advisory and management service helping Americans invest for retirement. MarketRiders gives investors greater peace of mind knowing that they are leveraging the best thinking of Nobel laureates and the investing methods used by the world's most elite institutions and wealthiest families. MarketRiders is on the investor's side, helping reduce investment costs and risks, and increasing retirement savings.