Post Department of Labor ruling, financial advisors of IRAs are required to be fiduciaries. As I described in A Brave New World with the DoL ruling, the ruling essentially makes it so financial advisors have to manage funds on a fee basis. For example lets say that a financial advisor charges a 1% fee. Is that 1% fee worth it?
1% in vacuum doesn’t sound like a lot, but on $250,000 you would be paying your advisor $2,500 every year. If you meet with you advisor twice a year for about an hour that means they are charging you about $1,250 per hour. That sounds very expensive, but the ways to lower that hourly rate are to manage the money yourself or utilize your financial advisor more to make that fee more worthwhile.
Credit: Mark Zhu
In my experience, especially in 2008, the people that really got burned were the ones who either didn’t have a financial advisor or disregarded their financial advisor. I haven’t had too many people come to me complaining that their current advisor is charging them too much, but I have had a number of people who did not understand or feel comfortable with what they owned and went to cash near the bottom. If you advisor was able to maintain your confidence and keep you invested through 2008 that 1% fee paid for itself in spades if it meant not realizing a 30%+ loss.
The second option to reduce the hourly rate is to utilize your financial advisor. Any good financial advisor has a lot of experience financial planning. Instead of looking at a financial advisor as the person that handles investments, lean on your advisor for any financial decision like when to take social security, what pension election to take, or what insurance is necessary. Many financial advisors realize the value of each client and would be willing spend the extra time. If you are paying for a financial advisor, don’t be afraid to get your money’s worth.
If you are looking for some financial vocabulary or a good book to read to your kids try F is for Finance.
Quite often I have older people coming in romanticizing yesteryear and the interest rates they used to get at the bank. At this point it has become a joke with many people, and yet I still see people moving from bank to bank trying to catch an extra 0.10% in interest. Two things that these same people don’t remember is that interest rates work both ways and that inflation plays a big roll in interest rates.
When most people who are now retired or are entering retirement were in their prime working years, we were in a much different interest rate environment. JP Morgan’s Guide to the Markets has a great chart that shows real and nominal yields of the 10-year Treasury bond.
In 1981 the 10-Year Treasury yield was 15.84%. That is a great interest rate if you are looking to generate income or grow your savings. Unfortunately for most people that are now around retirement age, in the early 80’s they were just starting to accumulate wealth and buying their first home. Can you imagine if banks tried offering 16+% mortgages nowadays? No one would be buying houses.
The second side of the equation is inflation. Inflation is how much the price of things goes up each year. Generally speaking, when interest rates are high a lot of it is due to inflation. This was the case in the early 80’s. JP Morgan has another great chart showing historic inflation.
We see here that inflation in the early 80’s was extremely high along with interest rates. This means that a person back then would have been paying huge mortgage payments while at the same time losing buying power to inflation at an incredible pace in their savings account.
The bright side is that today we have the exact opposite situation. We have super low interest rates that make housing much more affordable. The buying power in our savings accounts is almost flat with such little inflation. For those millennials with substantial invested savings, they can afford to take the risk with equities that provide good long-term returns. So next time you here someone complain about today’s interest rates, remember the benefits that come with it.