Logic Fails in Love and Money

Quote of the day:
“You must change your life.”
--Rainer Maria Rilke

How do mutual-fund portfolios managed by financial advisors perform when compared to mutual-fund portfolios managed by average investors? In a word, worse, according to a new study from the Harvard Business School.

This makes official something that has been known for a long time.  And it's 100% logical.

Most financial advisors charge an annual asset fee, usually 1%.  Most financial advisors also work under the umbrella of a firm providing mutual funds.  These mutual funds assess an average annual management fee of 1.5% or so.

Individuals investing in funds on their own, using the online guidance of a low-cost mutual-fund family, pay no annual asset fee, and the average management fee is likely .5% or so.

So people investing in funds on their own begin with an advantage of approximately 2%.  When you consider that a reasonable, conservative expectation of long-term financial return on any well-diversified portfolio is between 6 and 8%, using an advisor makes that expectation between 4 and 6%.

This doesn't mean that advisors make bad recommendations.  It's just that they start out with a significant cost disadvantage.  Yet some advisors get above-average returns, while some people investing on their own do poorly.

At minimum, this new study can be a wake-up call to know exactly what your costs are, so that you can ensure you get what you pay for.