One of the surprise lessons of this tax season was learning how many sophisticated and successful clients are paying more than five figures annually for what essentially amount to picking mutual funds. Many of the cases I saw while preparing tax returns were fees paid through Charles Schwab for funds offered in retirement plan accounts by Vanguard or TIAA-CREF. The accounts typically show little trading activity but the fees are levied based on assets or a contract above the fees charged by the mutual funds.
I’m biased, of course, but I feel like one of the values of a CPA financial adviser is that they can point out that some of these investment advice expenses may be unnecessary. The core value delivered by CPA financial advisers doesn’t seem to be in question. People who pay several thousand dollars per year for accounting and tax planning services recognize what they get for that expenditure. The expense is easily justifies in terms of tax savings, personal record-keeping time savings and the psychological benefit of avoiding tax and legal troubles. Investment commentary like I am making here is just peripheral and a natural extension of the core advice. Certainly there can be many reasons for the investment fee and many ways that a financial adviser can add real value. It’s just that in the case of these asset-based fees, I don’t see the value from where I’m sitting.
The value of financial advice is a topic often covered by industry analyst Michael Kitces and I’ve cited him often in this blog. This week he commented on a Wall Street deal where a robo-adviser (essentially a program designed to help you pick mutual funds) has valued the service at $700 million! Human financial advisers are nervous. I seem to miss the point altogether. If you are a person who is willing to pay for advice on what mutual funds to own, then why wouldn’t you be willing to really go over the top and splurge to get this interaction from a human? What type of person says I’m willing to pay for advice dispensed from a self-serve machine? Certainly not the affluent individuals I know and work for. I just don’t get it. On the other hand, and the real question in my mind, is why are you asking for this type of “Investment 101” advice in the first place?
My viewpoint is slanted from past experience working for a Wall Street firm. I realized that it is mathematically well-proven that investors are better off buying market index funds and staying put for the long term rather than trying to employ active investment management. This is the fundamental scientific basis of modern portfolio management.
One thing is certain: the question about the value of investment advice has been around for a long time and it won’t be resolved anytime soon.