Cost Versus Value
Dec 04 2009
In How Much Are You Paying Your Mutual Fund I wrote that the quickest and easiest way to increase your investment return is to eliminate unnecessary expenses. This is another one of the Not-So-Secret Secrets of Successful InvestingSM that everyone understands but few seem to follow.
But while cost is an important consideration, what really matters is value: are you getting fair value for what you pay? We all know that “you don’t get something for nothing” so you should expect to pay for investment advice and services through fees or commissions. But what is a fair price?
Before you can judge if you are paying a fair price you have to know what you are paying. This isn’t always easy. You could be charged commissions, direct advisory fees (either a percentage of your invested assets, hourly rates or a fixed fee) and/or indirect fees (e.g., mutual fund management fees and insurance product fees). Then there are those internal expenses that you cannot calculate or control such as trading costs (what your fund pays to buy and sell).
While a variety of fees and charges are clearly disclosed others are not. In many cases it is difficult, if not impossible, to determine how much of a commission you will pay when you buy investment or insurance products. Since it is a fact of life that riskier products are more difficult to sell and therefore require a bigger commission, the size of a commission is a material fact that should be disclosed to you. If you don’t know what you are paying in commissions then you should ask. Some people may consider it rude to ask about costs but it is better to ask difficult questions than it is to remain ignorant and simply hope for the best. If you are told that there is no charge or that someone else is paying the commission I would advise you to get that in writing – unless you also believe in the Tooth Fairy.
Once you know how much you are paying the next question is: “what am I getting for my money?” Fundamentally, what you receive is access to a professional who can answer your questions, provide objective advice, persuade you to maintain investment discipline and not act impulsively, and help you avoid making amateur mistakes. My most recent article Choosing an Advisor provides criteria you can use to judge the relative value of one advisor over another.
You should now know how much you are paying and what you expect in return. Next comes the tough part. You need to make a judgment call: is it worth it?
If it isn’t clear to you that this is money well spent then you should reevaluate what you expect from your advisor and what you think it is worth. If you are not getting what you want for your money then you need to either renegotiate what you are paying or find an advisor who will give you fair value.
