Over at MarketWatch, Chuck Jaffe's latest column deals with the state of the investment advisory business. The whole piece is worth a look, but we'd like to draw your attention to Jaffe's discussion of fees in particular [emphasis added]:
The average fee for assets under management is now a flat 1.0%, according to the Rydex survey. If you ask most consumer advocates for the level of fees they think is appropriate, the industry has now reached it; as a general rule, anything north of 1.0% of assets under management is pricey.
While there are times and reasons why an investor might pay more -- including someone starting with a small amount of assets paying a fee that declines as their wealth grows -- it's hard to justify fees above this level, especially with mutual-fund expenses or annuity costs or other charges ultimately layered on top of the base fee.
As we've written repeatedly (see this item for our purest statement of the argument), good investment advice is itself a good investment for most investors in most circumstances. But the key benefits of an advisory relationship are advice, guidance, discipline, and (long-term) performance, not products. Investors should be wary of advisors who disregard (or don't understand!) the pernicious effects of multiple layers of fees and expenses (which, in the case of actively-managed mutual funds and variable annuities, to take two prominent examples, aren't easy to get a handle on in the first place).
Some investment advisors produce performance by managing portfolios in-house. Some outsource the money management function by using external products. Some do some of each. Whatever a given advisory shop's model might be, investors should always ask what they're paying and what they're paying for. If a financial professional can't answer those questions directly and completely, his or her answers probably aren't worth hearing anyway.
As we did back in April, we recommend "Cutting Through the Confusion," a handy guide assembled by the North American Securities Administrators Association that investors would do well to consult before entering into any advisory relationship.
Chuck Jaffe, "Advisory Numbers," MarketWatch, September 27, 2007