Investment Advisor Fees Matter

Investment advisors in the financial services world typically charge their clients based on a tiered percentage of assets under management. The tiered schedule might start as high as 2.5% or more for smaller account balances and decrease to 1.25% for portfolio balances of $100,000 to $1 million. Fees may continue to decrease all the way down to 0.25% for portfolio balances beyond $10 million and higher. When defined on a percent of assets basis, these fees may appear to be insignificant. Many investors never fully understand the full detrimental impact of high fees on their long-term portfolio potential which can be considerable as shown in the following example.

Let's say an investor has 35 years to retirement and $100K to invest. Assume the base amount earns 6% annually. If advisor fees reduce returns by only 0.25% (25 basis points), then the base amount will increase to $700K over that time frame. However, if advisor fees reduce returns by 1.25% (125 basis points), the base amount invested will grow to only $500K; a whopping 40% less! Over time higher fees cost the investor $200K, but their cumulative impact is often overlooked because fees leak away portfolio value quietly over time

Traditional investment advisors, the type most investors hire, spend time trading stocks and timing markets to try and outperform market benchmarks to offset the corrosive effects of charging higher fees. These advisors examine track records, consult economic data and forecasts, analyze income statements and balance sheets, evaluate the quality of top management, and assess the competition. Collectively these efforts, known in the financial services world as Active investing, certainly do require serious work by hardworking skilled professionals to gather and analyze data and make forecasts. But a key question remains for investors: Does the higher cost of active portfolio management translate into superior investment outcomes? High-fee advisors and their representatives have well-practiced sales pitches that may lead investors to assume they have the skills needed to outperform the market. However, when compared to real returns analyses, the opposite is often the case. Empirical evidence from more than fifty years of research on actively managed mutual fund performance shows at least two out of every three actively managed funds underperform the overall market in any given year. Is it just a matter of picking the right advisor? Unfortunately, no. The year-to-year correlation between the outcomes of the winners from one period to another is barely higher than zero. In other words, the winners don’t repeat.

The central idea for passive and index investment managers, like Cardiff Park Advisors, is that a stock's current price incorporates all the available information about the value of that stock and the best predictions about its future price. If all assets in a market are priced correctly (as passive and index investors believe they generally are), then no advisor can expect to outperform the market by trading or carefully selecting other managers to trade for them. We know that markets aren’t always perfectly efficient. Some professionals have the skill to win at the trading game, but few have the skill needed to beat the market year after year.

Spending capital to try and beat the market isn’t smart. The logic is simple. All stock pickers, market timers, or tactical asset allocators are playing a game of chance, whether they acknowledge it or not. In highly efficient markets like the stock market, educated guesses are no more accurate than blind guesses. When you reject costly guesswork, the portfolio management process becomes a matter of identifying the risks that are likely to be rewarded long-term, and choosing how much of these risks to take. Passive and index investment managers, including Cardiff Park Advisors, remove costs from the investment process, avoid risks that aren’t likely to deliver expected return, and pass the savings on to investors. Passive and index investing is a smarter strategy because it allows Investors to capture more of what the markets offer over time.

Not all Passive and Index Fund Investment Advisors Are "Low Cost"

One private study analyzed 340 passive and index investment advisors handling 23,000 portfolios with an average account size of $835,000. This study showed that average advisor fees were 0.65% (65 basis points) on assets under management. These rates are clearly lower than the 2.50% or 1.25% tiers in the example referenced above. But consider how much the investor stands to lose from even this seemingly modest fee. With average fees of 0.65%, it’s not uncommon to find passive and index investors with $1 million portfolios paying $7,000 to $10,000 or more in annual advisor fees. Those fees could be $15,000 on a $2 million portfolio, or climb as high as $50,000 annually on a $10 million portfolio. But billing at these levels may still translate into a $700 to $1,000 hourly rate or more. Passive and index investment managers perform important services, but billing $700 to $1,000 per hour is nonetheless excessive for helping investors formulate a plan, stay on track toward financial goals, and avoid foolish financial decisions. These fees are over and above what most other professionals earn in other high paying occupations like medicine, engineering and the law. It defies common sense that an investor should be penalized by higher fees because they have more assets, or because markets are doing well. Furthermore, unless advisory percentage charges decline over time (highly unlikely), investors will pay much more to their advisors as their assets grow. Passive and index investment advisors who charge high fees are generally easy to spot. They lease fancy offices in prime locations, and have a staff to run the espresso machine and manage paperwork. They may have elaborate websites with beautiful pictures to promote their services and provide the appearance of better investment returns. But on the bottom line, the high fees they charge to pay for these frills drain returns from their client portfolios resulting in huge forfeiture of future profits.

Cardiff Park Advisors: True Low Fixed Fees

At Cardiff Park, we believe that passive and index portfolio management fees should reflect the lower costs of passive and index portfolio management. Advisor fees should be transparent, reasonable, and in accordance with what other professionals charge for their time in highly skilled positions. Click the following link for a detailed description of our “Fees and Services.”

Learn More About Us

Cardiff Park Advisors is located in San Marcos, 25 miles north of San Diego. We work with clients throughout the United States. We welcome the opportunity to discuss your financial goals and how we can help you reach them. You may reach us by emailing our principal at jgorlow@cardiffpark.com or calling our office at 760-635-7526.