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 Vanguard Personal Advisor Services that charges 0.3% a year with a minimum investment of $50k. On a $100k portfolio, that’s only $300 a year or $25 a month; 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 $50k to $1 million.
Some may quibble how Vanguard’s service 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 don’t care about talking to a human advisor and you just want your money invested, you can use an automated service such as Betterment. Betterment charges only 0.15% if you invest $100k or more.
Once your portfolio goes above $1 million, you have more options, although Vanguard’s fee at 0.3% per year is still competitive. The fee numbers below are of course subject to change by the respective advisors.
- Cardiff Park Advisors offers services for a flat fee of $3,000 to $6,000.
- Evanson Asset Management offer services for a flat fee of $2,500 to $6,000.
- Bason Asset Management offers its service at $4,500 per year per client relationship.
- Altiora charges $6,000 per year for investment planning and management.
- 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.
[Photo credit: Flickr user SalFalko]
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