Daniel Solin suggests, in his book, The Smartest Investment Book You’ll Ever Read, that the average financial advisor/broker in the U.S. makes more money than the average primary care doctor. He puts the average compensation at $105,000 U.S.
But is the scale of effectiveness as it relates to compensation inversely proportional?
Most people who have studied investing know who John Bogle is. Founder of one of the two largest fund companies on Earth, you’d think he’d be worth billions. But he isn’t.
Abigail Johnson, however, whose family owns the “for-profit” financial firm, Fidelity Investments, is one of the richest 22 people in the United States.
Bogle could have had more money than Abigail Johnson, but he chose not to. Instead of founding an investment company selling mutual funds that—after all taxes and fees—were nearly all mathematically destined to lose to benchmark indexes, he opted for Enough ….a fitting title for one of his recent books on money and life.
John Bogle opted for a salary instead of ownership in Vanguard. And he set a precedent, whereby the owners of Vanguard are its investors. As a non-profit organization, net proceeds (from fund fees) that exceed the company’s expenses find their way towards lowering the management fees of Vanguard’s funds.
This Brings Me Back To Financial Advisors
To make the most money for themselves, it’s a good idea for them to charge advisor’s fees or wrap fees on top of regular mutual fund costs.
But the excess profit for the advisor comes out of the investor’s pocket.
Finding funds that charge sales fees or back end loads ensures that advisors make a lot more money
But the excess profit for the advisor comes at the client’s expense
Buying actively managed mutual funds with high, hidden trailer fees ensures a lot more money for an advisor
But the client pays for those added dollars as well
Here’s the Dilemma:
We know that the average advisor chooses actively managed funds for their clients, and in many cases, wrap fees and sales fees add to their own payload. But we know that low cost indexes save money in taxes, fees, and statistically ensure the highest returns for investors….while lowering an advisor’s pay haul.
The dilemma is real. Is it easy to make a fortune as a financial advisor, if you know that you have to trick or sell your client into buying high cost products? How is the average client going to know anyway?
Considering that the average person isn’t as financially literate as they should be, they rarely know how to measure their own investment performance. Very few people, for instance, even know how they’ve performed relative to a benchmark comparison, as Robert Wasilewski, at RW Investments explains: …read more.
So if the average person doesn’t understand the conflict of interest within the industry, and they have no concept of how to measure their success, as investors, then doesn’t that create a massive challenge for the average financial advisor? Should they make more money for themselves, at the expense of the clients who trust them?
Perhaps we can’t all be as altruistic as John Bogle.
Or is that a cop-out?