Should the average investor use an investment advisor? I used to think no, but now I would say yes.
I thought no because investing well isn’t that hard on the surface. In its simplest form, you invest in a Vanguard Target Retirement fund closest to the year you will retire. Done deal.
If you can’t invest in a Vanguard Target Retirement fund because it’s not in your 401k, you can mimic it. Look at how much it invests in stocks versus bonds, and how much in the US versus international. You will end up with three mutual funds in your 401k: a US stock fund, an international stock fund, and a bond fund, like this:
How hard can it be?
However, the average investors don’t invest that way. My co-workers sitting next to me sometimes talk about their stocks. They talk about when they bought this or that stock and whether it’s time to sell. When I went camping with a group of people, a woman told the group around the camp fire she switched everything in her 401k account to money market because she thought a crash was coming.
If you ask random people at your workplace “what’s your asset allocation for your retirement?” How many do you think will be able to tell you? If you get to see the investments in their 401k and IRAs, what percentage do you think have a risk-appropriate portfolio that’s within plus or minus 10 percentage points of a Vanguard Target Retirement fund?
These average investors will be better off if they use an investment advisor. Not just any random investment advisor, but a good one at an affordable price.
That’s the other hurdle of using an investment advisor. If you don’t know where to go, it’s very easy to find a salesperson as an investment advisor. You can’t just go by who appear to be knowledgeable and trust-worthy. When you don’t know much, a good salesperson who talk a good talk will appear to be knowledgeable and trust-worthy. Their training makes them master the art of making you trust them.
The best deal in financial advice comes from the Vanguard Financial Plan service. If your household invests $50,000 with Vanguard, you can get a financial plan from a Certified Financial Planner for a one-time $250 fee (free if you have $500k or more with Vanguard).
$250 is very reasonable to have a trained person look over your investments and give you advice. It’s reasonable even if you pay the $250 fee every year to keep the plan updated, although it’s probably good enough to do it once every 3-4 years. Too bad Vanguard isn’t marketing this option more prominently. Many people don’t know this option exists.
Some may quibble how the Vanguard financial plan isn’t perfect. Considering the alternatives for the average investors, I would say it’s more than adequate. It’s better than what the average investors are doing now and it’s better than what they will likely find if they throw themselves out to the open sea.
If you have $100k or more with Vanguard, you can use the new Personal Advisor Services that charges 0.3% a year. That’s $300 a year or $25 a month on a $100k portfolio. It’s less than most people’s cell phone bills. It gets your money invested right and you also get access to a personal financial advisor all year long. In my opinion it’s the best deal for investing $100k to $1 million.
Once your portfolio goes above $1 million, you have more options, although Vanguard’s fee at 0.3% per year is still competitive. Cardiff Park Advisors and Evanson Asset Management offer their services for a flat fee in the $2,000-to-$6,000 range. Purpose Wealth charges 0.25% of assets but caps the portfolio management fee at $6,000. Portfolio Solutions offers its service at 0.37% per year for up to $3 million.
Although most don’t like to admit, it’s very easy to be overconfident in one’s ability to resist behavioral mistakes. The hidden cost of such behavior can be many times the investment management fee we pay to an advisor. I think most investors will be better off using one of the advisors mentioned in this post.
In the spirit of do-as-I-say, I started the process of getting a Vanguard Financial Plan.
[Photo credit: Flickr user SalFalko]