Is Your Financial Advisor Overpaid?

Every few years, Forbes magazine does what is possibly their most entertaining annual list: Most overpaid actors.

Simply enough, they compare the estimated earnings of the people on their Top 100 Celebrities list to box office results to find a ratio. The math is the operating income of each actor’s last three films vs. their compensation.

The result is a very simple number. For every dollar this actor was paid, how much did he bring in? Topping the “worst” list last year was comedian Adam Sandler, who by Forbes’ calculation was paid $1 and brought in $3.20.

Compare that to, say Shia LaBeouf. He starred in some big-budget action flicks but commanded a relatively paltry $5 million for the robot movie Transformers. That’s a lot of cash, but a fraction of what a big-name actor might demand.

Accordingly, LaBeouf is (or at least was) a great deal for Hollywood, turning over $81 for every $1 he earned filming.

Let’s compare that to your financial advisor. He certainly needs to carry his weight, right? Otherwise you might not retire at all.

If you have $250,000 in a retirement account, the typical advisory fee is going to be 1% of your total assets. Chances are, your advisor will farm out the actual stock picking to a selection of mutual fund managers.

Combined, they will charge you another 1.5%, although that money is coming out of return so you aren’t likely to notice it leaving your account. Added up, though, the impact is real: 2.5% of your money, each and every year.

That’s $6,250 in cash leaving your retirement fund. But wait a minute, doesn’t your advisor “earn” his or her pay?

Consider that the goal of your retirement savings is to compound, that is, to double every certain number of years without any headaches. You might reasonably expect to earn 7% in your portfolio. That means $17,500 in cash coming.

And $6,250 in cash leaving. The managers and advisors are keeping a whopping 36% of your return! Each and every year! Startled yet?

It gets worse. The impact of that loss is just starting to be be felt. Over the long run of an investing life, financial advisors keep half and up to 80% of your earnings from invested money.

Yet they took no risk at all. It’s your investment that’s in the market, not theirs. All they do is slice off their take and hope you don’t notice.

Disconnected

Okay, they do more than that. They disconnect you from the work of picking your investments. And in theory they help you manage risk.

But the fact is, you could buy index funds and build a portfolio that does the same thing for pennies on the dollar compared to their fees, and risk is not that hard to manage if you build a solid, diversified portfolio and rebalance it periodically.

Next time you’re standing in line to buy tickets to a Hollywood blockbuster or some Adam Sandler family comedy, consider just how much you pay for investment advice and if it’s worthwhile.

Chances are, the answer will be “Yes, but not 36% of money!” And you’ll reconsider your approach to retirement.