You need only to turn on CNBC for 5 minutes these days to hear the next market expert explain to you how they forecast the stock market’s 30% increase in 2013 and how certain they are that they know exactly where the market is going next. (I’ve never quite understood how stock market experts can have no qualifications but to be good at self-adulation, have decent PR and average marketing skills.) These folks – and an entire industry behind them – have been dusting off their marketing skills that they had left in the back of the closing in 2008. Many of them are back pushing “for-fee” or “fee-only” financial advisory services for which they charge anywhere from 0.70% to 1.00% as a flat fee on your asset base that they manage.
I myself have met with some of these folks. While I find stockbrokers to be lacking in many respects, I can say pretty much that I find the entire industry of fee only financial advisors to be not only lacking but disingenuous. Investment ideas that these folks have are never fully flushed out and can never really be explained with anything other than the most specious of arguments. Since these folks never really worked a real job and usually sport MBAs from places like Harvard, Wharton or Chicago, they really cannot back up their investment theses. They are cheerleaders for everything without deep knowledge. In fact, one even tried to explain to me on January 16, 2014 why Argentina was a great investment for Americans, an argument which was not only not plausible, but especially troubling since he had just returned from an annual vacation there (Argentina’s currency free fall accelerated with rumors of default that circulated the next day). Anecdotal evidence aside, these folks bring little to the table in terms of knowledge or insight into the market.
Since fee only advisors have no real inside knowledge, they wind up selling access to products that even moderately wealthy investors cannot otherwise invest in. For example, a fee-only advisor could get you into a fund of funds that is composed of investment in leading hedge fund managers for only a $300,000 investment, whereas accessing those funds of funds directly would otherwise require $1 million. While many investors would die to have someone like a Dan Loeb or Bill Ackman manage their money, accessing through a fund of funds is a watered down and expensive way to do it (these fund of funds usually charge their own management fees of 1 to 1.5%). When you add up all of the fees here, you are paying not just the investment managers’ fees, but the fund of fund fees and your own for profit advisor’s fees. The fees on top of fees on top of fees can easily total 3 to 4%.
Dan Loeb, Bill Ackman and many others are managers worth having on your side, but paying three levels of fees makes their continued exceptional performance necessary just to break even. They and their peers will need to collectively meet such a high hurdle rate to make investing through fee only advisors worthwhile. Most investors will find they will perform much better directly investing in individual stocks that they know and / or ETFs that match a strategy that they desire, and avoid all of these ridiculous fees by going to a discount brokerage.
Inside Edge: Pay Professionals for Professional Knowledge, but You Can See Cheerleaders for Free by Watching CNBC