I figured this out a few years ago but now some of the 'insiders' are saying the same thing. Bottom line: The fees you pay for financial advice are huge and the financial advice you get isn't worth it.

"... the BCT study found that the raw returns of equally weighted mutual funds (net of all expenses) for 1996 to 2002 were 6.626% for the investors working on their own and were 2.924% for funds provided by advisors." - Daniel Moine, Research Scientist

"A vast industry of stockbrokers, financial planners, and investment advisers skims a fortune for themselves off the top in exchange for passing their clients' money on to people who, as a whole, cannot possibly outperform the market." - Michael Lewis, Conde Nast Portfolio, The Evolution of an Investor

"Investment managers sell for the price of a Picasso [what] routinely turns out to be paint-by-number sofa art." - Dunn, Patricia C., CEO, Barclays Global Advisors

"It is not easy to get rich in Las Vegas, at Churchill Downs or at the local Merrill Lynch office." - Samuelson, Paul A. , Massachusetts Institute of Technology, Economist, Nobel Laureate in Economics

"Santa Claus and the Easter Bunny should take a few pointers from the mutual-fund industry [and it's fund managers]. All three are trying to pull off elaborate hoaxes." - Jonathan Clements, Wall Street Journal

Warren Buffett wrote about this:
http://money.cnn.com/2006/03/05/news/newsmakers/buffett_fortune/index.htm

Please, if you use a 'financial advisor' (probably a product salesman/broker) find out about ALL the fees you pay. Including the expense ratio for your funds, the load or wrap fee (percent of assets) you are paying, cost of turnover within your funds (that's not included in the expense ratio)and get it all in writing. Figure out the dollar amount you are paying every month. Would you write a check for that amount?

Consider that the safe withdrawal rate in retirement is considered to be 4%. (This is what you can safely withdraw from your investments and not run out of money before you die). It's typical for clients to pay 2 - 3% of their investments in wrap, commission and fund fees. What does that leave the retiree? Not much.

We're all so careful with our budgets, but because we do not directly pay for fund costs and so-called 'advice' (it comes out of our investment accounts with no full accounting) we don't think about fees that add up to tens and hundreds of thousands of dollars.

Let's look at the impact of fees, over time, on your nestegg. The table below (used by FINRA/NASD to educate investors) assumes you invest $2,000 on January 1st of each year and earn a 10% rate of return before deducting fees.

The Balance after 5 Years 10 Years 20 Years 30 Years 40 Years

Mgmt. Fee @ 0.02% $13,423 $35,022 $125,696 $360,454 $968,249

Mgmt. Fee @ 0.25% $13,334 $34,556 $122,204 $344,402 $907,762

Mgmt. Fee @ 0.50% $13,238 $34,077 $118,528 $327,816 $846,479

Mgmt. Fee @ 1.00% $13,047 $33,121 $111,529 $297,150 $736,584

Mgmt. Fee @ 2.00% $12,672 $31,291 $98,846 $244,692 $559,562

Mgmt. Fee @ 3.00% $12,307 $29,567 $87,730 $202,146 $427,219

Think about the numbers on this table. It is common for people to be paying 2, 3 and even 4% in combined mutual fund and advising costs. If your investments are costing 3.00%, your nestegg will be some $541,000 lower after 40 years than if you used low-fee investments and did your own investing. How many years of retirement is that? Shouldn't a Financial ADVISOR be showing his clients this chart? But they do not. Did yours?

This shows you how to use Morningstar to look up fund costs:

http://www.saveyournestegg.com/costs.html

Please find out about your fees, especially if your 'advisor' is a trusted friend or relative. You were their 'natural market'...an easy target.

Thanks for listening!! I'm very concerned about what will happen to people in retirement that are paying all these fees and people working towards retirement that are losing YEARS of that retirement to fees.

Edited to add some further reading:

http://www.bkconnection.com/ProdDetails.asp?ID=9781576754078

http://www.Amazon.com/Wall-Street-Versus-America-Investments/dp/B000N3T4PG/ref=pd_bxgy_b_img_b

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=616981

Message edited by: nobrokers on 2008-03-31 08:57:52 CDT

This is just a bunch of cut-and-pasted crap from all over the internet. Can't you write an article yourself?

"but by the % they get back, their "advice" is still better than the majority of American public can do on their own."

You would think so, but this doesn't seem to be the case. Again:

"A landmark study from Harvard Business School/University of Oregon concludes that when it comes to the selection of mutual funds, individual investors outperform financial advisors by 100%, amounting to 8.8 billion annually." - advisorroundtable

"... the BCT study found that the raw returns of equally weighted mutual funds (net of all expenses) for 1996 to 2002 were 6.626% for the investors working on their own and were 2.924% for funds provided by advisors." - Daniel Moine, Research Scientist

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=616981 - The study

So, using a 'financial advisor' will get you much lower returns. As far as I know, there is no rebuttal and other studies are using this study as a resource.

Also found in the study:

"4. Do advisors provide superior asset allocation? After years of research covering trillions of
dollars of asset allocations, the finding is that advisors do not provide superior asset
allocation. Even without this study, one only had to look at how advisors overemphasized
technology funds in the late 1990s and how many advisors are overemphasizing energy,
gold, and foreign funds today.

5. Do advisors help correct bad investor behavior such as chasing fads and chasing
performance? The sobering answer is no. In fact, the evidence shows that advisors even
contribute to such behavior. Again, look at all the money advisors are pouring into energy,
gold, and foreign funds."

http://trendfollowing.com/whitepaper/The%20Study%20of%20the%20Decade.pdf

This study looked at funds sold through the broker channel(banks, advice givers, RIAs, IARs,
broker-dealers, mutual fund wrap accounts, wire houses and captive agents) and funds sold directly to investors who buy mutual funds directly, on their own, or through no-load fund supermarkets. So, this study is looking at anyone buying funds, including 'regular Joe's'. Remember that 'regular Joe's can now buy Target Retirement Date funds for a very low cost.

The solution is to learn to do your own investing and if that is not possible for some reason, buy a low-cost retirement date fund (index funds), If that's not possible, then I agree - using someone that charges by the hour or a one time flat fee is best. Hopefully you will find someone that knows what they are doing.

BTW, I do my own investing and it's easy. There are plenty of free tools available and excellent articles and books available and...it is NOT hard to do. I spend less than 8 hours A YEAR on my investments.

I am heartsick when I see what brokers parading as 'financial advisors' are doing to people.

Think about it - Conflicts of interest, 12b-1 fees, soft dollars, revenue sharing, ongoing % of ALL assets charged no matter the performance, money taken directly from investment accounts with no full accounting, hidden fees, expensive actively managed funds, high fund turnover, churning, inappropriate products sold all over the place (like VULs), the BS marketing of 'fiduciary', RIAs, lack of education, the fund scandals, putting stockholders ahead of client interests, surrender fees to get out of horrible products, 'fake it till you make it', 'professionals' underperforming DIY-ers and charging a huge amount to do so, the mess of fees charged in 401ks and the consequences, the hard selling of products, hedge funds, terrible asset allocations, market timing, chasing past returns, manipulating clients, scripts, firms hiring kids with no experience to get to their natural market, 'advisors' that are really salesmen that sell what they are told to sell and never think of comparing products, survivorship bias, and on and on and on. It's a scam.

I have been looking at this from the client's side for years and I've spent years looking at portfolios and helping people (FOR FREE!!!) learn about their investments. I have seen FIRST HAND how the industry operates.

That there may be rare exceptions to the rule (some fee-ONLY) does not make the industry less of a scam.

"This study and you are missing one point - all these individual investors are people with knowledge and understanding of the market, not average Joe."

What do you base that conclusion on? This study isn't quizzing anyone about investment knowledge and eliminating those that don't have knowledge and understanding of the market.

"If you let a Joe to invest his own money without ANY advice it's quite possible that he'll end up with zero "

If you mean advice from a 'financial advisor' it's way more possible that he'll end up with better returns than those using 'financial advisors'. It isn't either/or. There are plenty of places to get excelent advice for free. An average Joe could buy a low-cost target retirement date fund made up of index funds, leave it alone for 30 - 40 years and beat the pants off the vast majority of 'advised' clients.

http://money.cnn.com/2006/03/05/news/newsmakers/buffett_fortune/index.htm

I'm providing important information to investors. I have never, ever met an investor that knows all the fees they are paying for 'advice' or fund expenses let alone knows what those fees add up to every month. None have a clue that 3% is going to eat away at their nest egg over time. "Advisors' don't give out that information. I'm trying to get that information out to people. I'm showing them how to look up fund costs and returns. FOR FREE. You should be thanking me. Really.

Then can we conclude that people taking their cars in to mechanics have problems with their oil filters much, much more often than people that change their own oil? That sure doesn't say much for the mechanics who are supposed to be the experts.

I would add that when you get your oil changed the mechanic doesn't have access to your investment accounts, pulling money out without giving a full acounting of what you are being charged for oil.

Really, look at these returns!!
"the BCT study found that the raw returns of equally weighted mutual funds
(net of all expenses) for 1996 to 2002 were 6.626% for the investors working on their
own and were 2.924% for funds provided by advisors.

In other words, the public working on its own did more than 100% better than financial
advisors when it came to selecting equity mutual funds. After factoring in inflation and
taxes, clients of financial advisors lost money and lost purchasing power."

http://trendfollowing.com/whitepaper/The%20Study%20of%20the%20Decade.pdf

We all talk about how people don't have enough saved for retirement...well, look at the returns 'professionals' are getting for their clients!

'Financial Advisors' are usually selling products, have little or no proper investment education, do have many conflicts of interest with their clients, charge high fees and get poor returns, manipulate and outright lie to their clients and are unable to predict the future any better than you can - which is not at all. So, you are paying high fees to a salesman and fund managers who will help you lose potentially hundreds of thousands of dollars over time but love to talk about your 'dreams' - which they are delaying by years.

If you want to use one, that's fine. But I think the public should be informed about this so they can look at their own costs and returns. If they can find them:
"The study finds that 43 percent of the funds’ expenses are omitted from their expense ratios and that the transaction costs of some funds exceed 400 percent of their expense ratios." - Zero Alpha Group

Point estimates get us nowhere. Variance is key here, particularly for the risk averse. One person winning a million dollars and another 999 losing $100 has a higher expected value than giving everyone $9.

The problem with the oil change analogy is that mechanics don't siphon off a bit to pay themselves. If the average financial adviser charges 3.5%, then the two are basically a wash- the experts do as well as those who choose to do it themselves. However, since there is potential selection bias, you can't categorically state that everyone should go it alone and the fee isn't ever worth it.