Being wealthy doesn't mean having all the money in the world, just not having to worry about it.

Why Pay an Adviser a Quarterly Fee Just to Invest in Index Funds?

Question: As an investor, I have always tried to invest in very low-cost index funds, since costs are one of the few things in my control other than the asset mix. Paying a percentage of my assets every quarter for management (even very good management) somehow feels “wrong” to me. What am I missing?

Answer: Before answering, I want to note that my own practice is focused on clients who need ongoing comprehensive advice and individualized tax-management of their portfolios. I have a
few clients for whom I essentially do nothing more than index-fund investing (although I still provide comprehensive advice to most of them), but if all of those clients fired me tomorrow in order to become DIY investors, it would reduce my assets under management by less than 10%. So I’m not really the target adviser of this question, although I certainly know and respect many advisers who fit this description.

I also am going to take for granted that the questioner and my readers see the value in having an adviser help choose an appropriate asset allocation based on the personal circumstances of the client and provide comprehensive advice on estate planning, insurance, spending, and taxes. Moreover, doing a review at the time of retirement and other major life events should need no defense.

Still, a lot of advisers, as the question correctly suggests, choose a strategic mix of index funds for a client, perhaps review the allocation annually to ensure a change in circumstances hasn’t altered the desirable mix, and then just rebalance periodically while collecting a quarterly fee.
There is actually a great, book-length answer to that question, written by Nick Murray, entitled Simple Wealth, Inevitable Wealth. But I know you’re just looking for a bloggy response so here goes:


My typical reader is far more knowledgeable about investing than the average person. And since so many of you came here in the first place because of my friendship with Andy Tobias, I know a lot of you are cheapskates. But you still have one characteristic in common with others that some of you seem unwilling to acknowledge: you’re a human being. And you are prone to THE BIG MISTAKE.

What an adviser does is (1) aid your peace of mind by letting you ignore the market and (2) stop you from making big mistakes: the decision to cash out because the market looks overpriced; the failure to rebalance because it is hard to move from winners to losers; reconsidering allocations merely because of a sustained period of underperformance or an article or book that reinterprets investment principles; being persuaded to make exceptions because of a belief in a particular stock, industry, or strategy that one has read about; worrying whenever current events or pundits talk of changing realities, special circumstances, disasters, and new paradigms; and always, always, watching your portfolio way too often so that the volatility looks even worse than it is.

Now I’m not denying the possibility that there are actual people investing on their own who did nothing between 2007 and 2009 except continue their investing based on a previously determined asset-allocation plan and rebalancing with a brief quarterly check of their portfolio and without paying the slightest attention to world events or the opinions of others. I’d just like to see the brokerage statements of these people before believing them and hook them up to lie detectors when they claim not to have had a crisis of confidence at any time during that period.
Andy was honest enough to admit in his book that he has underperformed the market averages once ALL of his mistakes are included, and even I have done much better for my clients than for myself, mainly because of a bad choice I made way back in October 1987 involving puts and calls that professional discipline would never have permitted with the account of a client, followed by a period of cautiousness in the market that I needed to recover my comfort with it, but which caused me to miss some of the bull run that followed the crash.

Even if a mistake only causes one to miss a 20% move in the market, that’s around 20 to 40 years
worth of fees paid to an adviser. As for the peace of mind that comes from focusing on family, friends, and career, that alone is worth the fee for most.

Still, if you know the allocation you want, know you’ll have the discipline to rebalance periodically without exception, and won’t find it emotionally trying to stay the course during volatile times, feel free to save the fees. If you are a committed indexer but see the value in delegating, there are plenty of fine, ethical index-based advisers eager for your business whose prices strike me as a bargain even at 1% per year. And there are now a few robo-advisers with rock-bottom fees, although they will restrict you to a limited set of choices based on your chosen risk profile and won’t actually provide a human adviser to talk you off the ledge and personally persuade you to stay the course.

Once again, I do something else, and unless you’re already a client reading the blog for entertainment purposes, it is highly unlikely that my specialty will fit your needs. For you, I’d much rather give free answers to questions and post them for others to benefit. Keep them coming at