The Benefits of Low Fee Fiduciary Advisors

Even without Warren Buffett winning his ten-year bet on the performance of a handpicked collection of hedge funds vs. an S&P 500 Index Fund, the argument is settled—passive beats active. Thankfully, more and more investors are coming to this realization as we witness an ongoing massive transfer of assets from high-cost actively managed funds to low-cost passively managed funds. Unfortunately, many of the investors utilizing low-cost funds are paying a high percentage of their assets (1% or more) as advisory fees. The latter easily cancels the benefit of the former.

Personal Capital recently compiled advisory fees charged by the big-name brokerage firms of Ameriprise, UBS, Morgan Stanley, Wells Fargo, Merrill Lynch, JP Morgan, and Edward Jones.  They ranged from 1 to 3% for clients with assets between $100,000 and $1,000,000 (as noted, some clients can pay less, depending on the rate they negotiate with their advisor). Even more disheartening is that according to a survey conducted by Harris Poll on behalf of Personal Capital, 61% of Americans do not know how much they pay in advisory fees. Worse yet, just 46% agreed with the statement, “My financial advisor only makes recommendations that are in my best interest.” Sadly, many of the 46% made that statement out of ignorance since the majority of financial advisors are not obligated to act as fiduciaries to their clients. Perhaps the most depressing result was the 32% who agreed with the statement that higher fees for investment accounts generally result in higher returns.

In today’s environment of low interest rates and high valuations, future returns are likely to be lower than historical returns, further magnifying the corrosive impact of high fees. As Jason Zweig notes, a balanced stock and bond portfolio that is expected to earn a 2% return after inflation has very little leeway to sacrifice further returns to fees and other expenses. For example, a $1 million investment that grows at 5% before fees will have 20-year ending values of $2.19 million at a 1.0% fee and $2.41 million at a 0.5% fee. The present value of the $220,000 difference at a discount rate of 3% is $122,000, or 12% of the original investment. Although the 0.5% fee difference may seem trivial, the long-term impact is certainly not.

From the perspective of a retiree who may not have 20 years, the fee should be evaluated as a percentage of the annual withdrawals from the portfolio. Let’s examine the case of a retiree with a $1 million portfolio who annually withdraws $40,000 (or 4%) and pays a 1% fee. This fee is 25% of the income generated by the portfolio, and it is also potentially the single largest expense faced by the retiree.

At Clarity Capital Advisors, we believe that a fiduciary advisor who charges a high fee is arguably not acting as a true fiduciary. If you would like to learn more about how Clarity’s low fee/high service approach to investing and retirement planning can benefit you, please call us at 800-345-4635 or email us at info@clarityca.com