The Wrong Way to Pay for Financial Advice

Morgan Housel, a wonderful writer and one of my favorites at The Motley Fool has a great column this week titled  "The Wrong Way to Pay for Financial Advice".

I am always interested in investing issues and am fully invested in the market, to improve my chances of a comfortable retirement. Most people I talk to about investments tell me they delegate that to a professional advisor and they usually pay 1% a year for this "service".

I, on the other hand, follow the Motley Fools, which have a subscription service for a fixed price a year. I am free to take their advice, or not. I then do my own investments, based on what I learn, They do the heavy lifting (reading the financial statements and doing the professional analysis), which most people do not have the time for and are generally not qualified to do (myself included).

Morgan correctly criticizes the current - and widespread - model of charging a percentage. That is ridiculous! It does not matter the size of your investment portfolio. It does not matter if they perform well, or poorly. They get paid the same. Does it cost them 2 times more to manage a $500,000 portfolio than a $1,000,000 one? Of course not. It's a racket and most people do not even realize they have fallen for it year after year.

I asked a friend not long ago about this (he is paying 1%), and asked how did he do last year. "Very well", he answered, close to 30% up, and he was all smiles!

Wait! He is telling me that in a year when the market went up by over 32% (S&P 500), his expensive professional " expert" did not even beat the market? He could have just invested all his client's money in a passive index fund and gone to the beach the rest of the year and do better than that!

I actively manage my own account, with the excellent advice of the Fool and made over 36% in 2013. That means I beat the market by 4%. For a fixed price for the advice. That's what I am talking about.

Here's Morgan Housel's excellent article again. Go read it.
http://www.fool.com/investing/general/2014/04/07/adv.aspx