Invest in Financial Advice, Not Hot Tips

Physician's Money Digest, February28 2005, Volume 12, Issue 4

I can understand why most physician-investorsthink that investment advisory fees are too highand that much of the advice bought is highlybiased or useless. So I'm not surprised that mostphysicians choose the do-it-yourself route. Unfortunately,financial self-help can be dangerous, or atleast costly. That's because most people don't have theknowledge or the discipline required to produce goodlong-term investment results.

As Richard Thaler of the University of Chicago anda pioneer of behavioral finance put it, "Most investorsare clueless, and their results show it." Even investorswho don't lose money generally leave a lot of money onthe table. So instead of shunning the investment advisoryindustry altogether, physician-investors are better offdevoting the necessary time and effort to finding theright investment advisor at the right price.

Reasonable Investment

What price is reasonable? One major financialinstitution charges investment management fees of0.75% per year on the first million dollars of assets,0.35% on the next million dollars, and 0.2% onamounts over that (with a minimum portfolio size of$500,000). This is probably as low as fees go; mostinstitutions charge much more. You should be willingto pay this level of fees provided the institution oradvisor makes every effort to keep your other managementcosts low and the advice you receive is good.

On the first count (ie, other investment managementcosts are kept low), this particular institution deservesan A. However, on the second count (ie, good advice isdispensed), I am not as impressed. What you get isessentially cookie-cutter advice. Therefore, your best betis to look for a competent and honest fees-only investmentadvisor who is in solo practice or is part of a smallorganization that charges fees in this range.

Proper Perspective

When you translate fees into dollars, they can lookhigh. If the percentage numbers don't scare investorsoff, the absolute dollar numbers often do. But that isthe wrong reaction. The question you need to askyourself is, "Is the advisor going to be able to improvemy return by at least the amount of the fees relative towhat I am likely to be able to earn on my own?" Ofcourse, we're talking about expectations over the next5 to 10 years or longer, so no one can know for sure.But if you are realistic about your own investmentskills, a competent advisor is likely to earn back thatfee for you plus a lot more.

Fiscal

note:

You will mislead yourself if you compare the feesin absolute dollars with your current income or livingexpenses and view them as money coming out of thesesources. Such a comparison can be particularly misleadingfor investors near retirement or already retiredwho have portfolios that are generally large relative totheir current income. These are probably the peoplewho need good investment advisors the most. Look at the fees as the price of generating a betterreturn on your portfolio and, therefore, as moneycoming out of investment return (ie, as a reduction inyour investment return).

When you also consider that a good investmentadvisor should save you all the time you would otherwisespend trying to become an investment expert andthe agony of constantly wondering if you are makingthe right investment moves, this level of fee is not a badtradeoff. Especially when you consider that there's nosuch thing as a free lunch. What should matter most iswhether you are getting good value for your dollar.

author of The Only Proven

Road to Investment Success (John Wiley; 2001)

and Financial Modeling Using Excel and VBA

(John Wiley; 2004), currently teaches finance at

the Fordham University Graduate School of

Business and consults with individuals on financial

planning and investment management. He welcomes

questions or comments at chandansen@aol.com.

Chandan Sengupta,