Q: I hate paying fees when I don’t have to. Currently, I’m paying my investment adviser a “wrap fee” of 1% on my $500,000. This means each year I’m paying him $5,000. I’m struggling to justify the fee, especially since my portfolio is matching market returns and not beating market returns. As far as I’m concerned, my situation is pretty basic and my adviser and I only talk for a total of 90 minutes per year. Additionally, we very rarely make changes to my portfolio. I’m a buy and hold investor, and It’s stock I’ve held for years. I fought and scrapped to grow my money to $500,000. It stings to think that all my adviser has to do to make $5,000 is to make sure I’m still his client. Paying someone $5,000 to keep his eye on my money seems a bit ridiculous. Do you think I should dump him and manage my money myself? — Tony, Tampa
A: Buy and hold investors often feel the way you’re feeling, Tony. These feelings frequently lead to a parting of ways between the investor and the adviser. The real question being asked here is “does my adviser deliver $5,000 worth of value?” If you try and answer any other questions related to this situation, you likely won’t arrive at the right decision. But unfortunately it’s not as easy as your adviser doing $5,000 worth of work. We also have to consider whether or not you’re allowing him to do $5,000 worth of work.
An adviser can have many different duties. He can help pick and mange investments, create a retirement income strategy, implement a tax-loss harvesting strategy, assess and cover your insurance needs, and much more. Ideally, these services are what your $5,000 buys you each and every year you pay the fee.
If all you’re really doing is holding stocks and you aren’t receiving any additional services, paying your guy $5,000 per year doesn’t make a tremendous amount of sense. But I believe this is where the disconnect between clients and advisers often occurs. Your adviser may either be performing these services and you don’t know it, or offered you these services and you declined for no particular reason. I actually see the latter quite often. Clients can get distracted by their own assets and miss the need to plan the rest of their financial lives. Your frustration, while justified, is likely a byproduct of a mismatch of services and strategies.
Think of it like your cable or satellite package. If you typically only watch three channels, yet you’re paying for 300 channels, you’ll eventually find yourself frustrated. It’s not particularly the cable or satellite company’s fault that you only watch three channels, yet here you are, three-channel Tony. Of course to make the analogy work, the three channels you actually watch are only available when you purchase the 300 channel package. You can’t actually purchase the channels a la carte.
If you’re not going to utilize any services other than “keep an eye on my money,” then it serves both you and your adviser for you to move on without him. However, if you want the adviser to “earn” his money, then he’ll need to be able to use more tools in his tool box than just the “keep an eye on my money” tool. Presumably, the reason you hired your adviser in the first place was because he knows more about investing than you do. If you haven’t already, hear him out. Call him up and ask the following question – if we were to rebuild my portfolio from scratch, what would it look like and why would you structure it that way?
While you’re at it, make sure he’s put together a retirement income strategy for you, including an analysis of when you should start taking Social Security retirement. Also, have him evaluate your insurance needs and create a tax-loss harvest strategy. You gotta use him or lose him.
As it stands today, you are definitely not getting the biggest bang for your 5,000 bucks. But again, I don’t necessarily blame your adviser for this. Either start watching the 300 other channels, or cut the cord.
Peter Dunn is an author, speaker and radio host, and he has a free podcast: Million Dollar Plan. Have a question about money for Pete the Planner? Email him at [email protected]