Don’t miss the forest for the fees

The following column was published in The News Star on Saturday, September 13, 2014.

Question: I will be retiring in about a year. I’ve talked to a few different advisors. The one I like the best charges higher fees than any of the others, but I really like her and think I would work well with her. I keep reading on financial websites and blogs how important fees are and how they can really impact total returns on your investment portfolio. Which do you think is more important, the fee or the advisor?

Answer: You have to decide if you are purchasing a commodity or a specialty item.  

A commodity is usually uniform in quality between companies that produce or sell it. You cannot tell the difference between one firm's product and another. When dealing with a commodity, price is the only thing that can differentiate. It becomes all important. Why buy a bag of sugar for $2 when I can buy the same bag for $1?

A specialty item, by definition, is special. You can’t just get it anywhere. The quantity is limited, therefore the price (usually) is higher. Not all specialty items are worth their stated price, so every consumer must decide for themselves.

The financial services industry can be divided into two different camps – they represent two different sets of target clients.

Let’s call the first group DIY (do it yourself). DIY financial services firms are like Lowe’s or Home Depot. They promote the idea that you can do certain projects (home or financial) yourself just as well as anyone else can, and save money by doing so. So price comes up over and over again in their marketing.

DIY financial firms promote the idea that all investments boil down to a few basic elements than can be easily understood and manipulated. Therefore, low price and ease of service (cool websites, mobile apps, etc) become paramount. Advisors, in this world, may represent additional expense for no value in return. After all…you can do it yourself.

The second segment of the financial services world is the DIWH (do it with help) crowd. Some of these firms employ salesmen who sell their products. Others promote their services through advisors, but usually do not pay the advisor. They let the advisor negotiate their fee directly with their own clientele, and simply provide their products to the public through the advisor.

Neither approach is right or wrong, but they are fundamentally different and (I believe) are for fundamentally different people.

It is mathematically true that fees can erode the performance of an account over time. But I think real life tells another story.

Investors and retirees today are probably not in bad shape today because they have paid high fees.

More than likely, they are in bad shape today because they (a) failed to start early enough; (b) failed to save enough; (c) failed to have an investment plan, rather they had a collection of investments they were either sold or which they bought because they read an interesting blog post; (d) sold out when they were scared; (e) kept buying when they shouldn’t have because “this time it’s different”; (f) bought when everyone else was buying and sold when everyone else was selling.

In my experience, a mediocre investment with higher fees combined with good discipline (good investor behavior) will far outperform the best performing investment with the lowest fees in the hands of an undisciplined investor.

Don’t be so focused on the gnat of fees that you let the elephant of bad behavior step on you.

Pick the advisor you like and pay the fee. See the big picture. Don’t miss the forest for the fees.

Byron R. Moore, CFP® is Managing Director / Planning Group of Argent Advisors, Inc. Email him at bmoore@argentadvisors.com. Write to him at 500 East Reynolds Drive, Ruston, LA 71270 or call him at (318) 251-5858. The opinions of any single advisor do not necessarily reflect the opinions of Argent Advisors, Inc.  No forecasts can be guaranteed.  Argent Advisors, Inc. does not offer tax, insurance or legal advice.  The information contained in this column should not be construed as a substitute for personalized investment, tax, insurance or legal advice.