The Cost of Financial Advice

An analyst commenting on a major discount department store chain said, “Every product on their shelves represents the cheapest item in its class that the free world can produce.” If you bought a $99 lawnmower at that store, for example, you could be assured that the only reason they weren’t selling a cheaper one is because they couldn’t find one. By shopping at such a store, consumers understand that the quality of many products will reflect the store’s goal of having the lowest prices. Over the years I have bought many items from that retailer, but as I have gotten older, I shop there less and less.

Most know that I use an aircraft for business. When you own an airplane, your attitude towards price changes. No one wants to travel five miles above the earth and have their life at the mercy of “discount” parts. When a part is needed you set a high standard for quality first, then seek the best price that fits the standard.

This concept comes up regularly in financial planning. It is natural for investors to seek out low cost or discount financial advisory solutions. The client whose experiences I referred to in my past two articles said that he initially chose his prior advisor because he had offered to work for free, saying that the product provider paid his fee for the client. The client eventually learned that the “real cost” of the product was the very poor returns he had received. We call this “opportunity cost” or the cost of missing out on what you might have done instead.

Another individual came in my office recently whose account had literally not grown in over ten years. He asked me what I would charge to take over management of the account, and was seeking to compare my “costs” to what he had been paying. I pointed out that the fee charged by his current advisor was insignificant compared to the real cost, that being a huge loss of potential earnings.

The most significant cost an advisor is to a client usually results, not from the fee, but from the actual investment decisions. Seeking the cheapest option can be like looking for the cheapest lawnmower at the discount store. This is not to say you should overpay, but in seeking financial advice, either from an individual, a newsletter, or a computerized trading program, the first and most important questions should revolve around finding the best quality for your needs, then seek to find the best price that meets that level of quality. In most areas of life, it makes sense to focus less on what something costs and more on what it is worth. Few have regretted buying quality.

Pilots never want to be at 27,000 feet with a cheap connector holding everything together. Likewise, investors, after a lifetime of saving, should not seek advice from what appears to be the cheapest source in town, unless that source is also the best.