By Christopher W. Beale, CFP®
Good advice shouldn't be expensive but bad advice will always cost you, no matter how little you pay for it.
I believe everyone wants to avoid bad advice. But how much should good advice cost? As a Registered Investment Adviser, New England Capital Financial Advisors, LLC typically charges a fee as a percentage of the money we manage. Our fee, as listed in our disclosure brochure (filed with the Securities and Exchange Commission, provided to all new clients and offered to all existing clients annually) starts at 1.5% of the assets we manage. This percentage decreases as the account size increases, similar to the way a large box of laundry detergent or a large bag of potato chips will have a lower unit cost than a smaller box or bag. The average fee our clients pay is about 1%.
Fee transparency is very important to us as well as to you. I think we do a good job of disclosing our charges to you. Today I want to disclose our value to you.
I have always felt at New England Capital we have added value through our relationship oriented services and holistic approach to wealth management and financial planning. Our value proposition is typically easier to describe then define. Quantifying our process, however, with specific numbers to show the true benefit of working with us has been a challenge. A distribution or annual rate of return is easily calculated, but trust, peace of mind, or the feeling of true financial freedom doesn't translate to exact numbers on a personal balance sheet or income statement.
While the benefits we provide our clients can be subjective and will vary based upon individual situations, a recent research paper from the Vanguard Group estimated the value financial advisors bring to clients each year to be as much as 3%. The strategies Vanguard identifies which can create this 3% average annual added value are:
- Proper asset allocation
- Diversification within asset classes
- Portfolio rebalancing
- Total return versus income investing
- Spending and distribution strategies
- Cost-effective implementation of strategies
- Behavioral coaching
It's important to be aware that 3% added value can’t be expected annually. In fact this return, like most market returns, is likely to be very lumpy, with greater value added in some years and less value added in others. Overtime, 3% may prove to be a low estimate. The Boston-based research firm, Dalbar, has shown one strategy--behavioral coaching-- to be extremely valuable over time. Dalbar research has shown that investor returns in balanced asset allocation funds have been 2.29% over the last 20 years. At the same time market returns on a balanced asset allocation strategy has returned 7.4% annually over the last 20 years. This difference is attributed to bad investor behavior of selling low by panicking and buying high by chasing returns. On a $100,000 investment over 20 years the difference would be $157,000 versus $417,000, or a difference of $260,000 in added value.
In my next newsletter, I will explore some of these strategies in greater detail than space allows here. I would like to conclude this newsletter with a partial list of other activities and services we can provide for our clients:
- Develop financial goals including creating a timeline to accomplish your goals
- Identify how much money you need to save to accomplish those goals
- Manage expectation by understanding risk tolerance and expected returns
- Use data to analyze existing investments and make recommendations for future investments
- Help decide which investments to own in non-retirement accounts versus retirement accounts
- Look for ways to reduce taxable income
- Understand when taxes are incurred and timing investment purchases and sales
- Provide access and knowledge to many types of retirement accounts to use, for example, IRAs, Roth IRAs, 401(k) s etc.
- Analyze insurance needs including life, long-term care, disability, even property casualty and health insurance
- Review employer benefits including 401ks, pensions and stock options
- Make mortgage recommendations including refinancing
- Evaluate the purchase of vacation properties or other large purchases
- Work with accountants and attorneys to coordinate tax and estate planning strategies on behalf of you and your family
My goal for you at New England Capital has been the same for over 30 years: it is to far exceed in value what you will ever pay us in a fee.
