I have written many articles about the danger of fees eroding your nest egg — from the danger of over-active strategies that burden you with higher fees and taxes to the underperformance of overpaid fund managers to watching important expenses on your 401k statement.
But in my zeal to pinch pennies I sometimes throw around overstatements and blanket condemnations that all fees and all managers are bad. And that’s fundamentally untrue.
Sometimes, you get what you pay for. And a good investment advisor — just like a good dentist, mechanic or accountant — is worth their weight in gold and earns every single penny.
I had a very earnest exchange over e-mail with Tom McGuire, President of Bert Reames Investment Advisors, about this issue. He had some very good points and rather than muddy the topic with more hyperbole, I simply welcomed him to make the case for the good guys in his business. What follows is his take, in his own words. It’s worth reading.
Pay close attention to the part about being brought on to help a firm where over a third of employees parked their 401k funds in money market accounts.
Anyway, here’s Tom:
As a registered investment advisor (RIA) that services group retirement plans, I have been thrilled with the industry confronting the unwarranted high fees paid by many groups for their plans. Many providers (usually insurance companies) have charged fees far too high, and financial pundits have been right in revealing the costs to an individual’s ultimate balance by having to pay these padded fees. One cannot argue with the math. Paying more than 0.5% will mean you will have less at retirement than if you paid just 0.5%.
However, in the frenzy to right an obvious wrong, many well meaning pundits have associated any fee higher than 0.5% as an evil. This is simply a gross oversimplification of the legitimate services provided that warrant a higher fee.
You cannot compare a basic-service plan such as what is offered by Vanguard to a bundled service plan as offered by non-commissioned RIA firms. A basic service plan offers a selection of funds, third-party administrative services (TPA) including sign-up materials, and a toll-free customer service number. A full-service bundled plan will offer a selection of funds, TPA services including sign-up materials, and a toll-free number as well.
However, a full-service bundled plan will also offer on-site education, knee-to-knee advice and determination of risk tolerance for each new employee, acceptance of fiduciary responsibilities for fund selection, ongoing fund review and replacements as warranted, and the offering of an on-site periodic portfolio review for existing employees.
Therefore, if you are going to compare the cost of a basic plan with the cost of a full-service plan, you might as well compare the costs of a Porsche with a Pinto. Clearly the Pinto is cheaper, so it has to be the better car, right?
Case in point: My RIA firm took over a 4,000 employee group from one of the most respected mutual fund companies in the business. The group was paying low fees (around 0.6%) but they became disenchanted with certain aspects of their plan.
Firstly, there was no investment advice at all. New employees picked up their packets in the H.R. Department and were on their own from that point on.
Result? After three years fully 36% of the groups total allocation was in the money market fund. The next largest allocation was a long-term bond fund. Many employees as young as 25 had 100% of their contributions going in to the money market fund. They just didn’t know what to do, so they went conservative.
The error of the pundits is clear. When you compare the effects of fees, you cannot assume that employees of groups with very cheap basic retirement plans paying as little as 0.5% are by default doing better than employees paying around 1.0% for a full-service bundled plan. Comparing the two plans makes no sense without pulling off the layers of what the fee entails and what employees are getting for those fees.
As to the employer group that we took over, it’s overall exposure to the money market fund is down to 4%. All employees attended meetings explaining basic investing and almost all employees immediately reallocated their portfolios to reflect their age and individual risk tolerance after one-on-one meetings with an advisor from my firm.
We’re RIA’s so we don’t have a dog in the fight, and have no allegiance to any one particular mutual fund. We utilize Vanguard Admiral shares, some DFA funds and some Dodge & Cox funds. Our client is thrilled with the result, and we have lifted a fiduciary concern off of his back by properly allocating his employees among well respected mutual funds based on their individual risk tolerances.
My plea to the well-meaning financial pundits? Please compare apples to apples.
Yes, there are large commissioned-based companies out there who charge too much for group retirement plans, and they deserve to be exposed, but let’s not throw out the baby with the bathwater. There are some RIA firms doing a great job for group clients who have needs that a basic retirement plan cannot fill. It’s true, the financial savvy employee doesn’t need me, but 98% of employees of a large group couldn’t tell you the difference between a balanced portfolio and a balance beam.
It is for those employees that we do what we do, and we don’t do it for 0.5% a year, without apology.
I can be reached at BRIA.firstname.lastname@example.org. Let’s share some ideas.
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP.