Despite my enthusiasm for do-it-yourself investing, I understand that most people need help. The problem is that far too many investors who seek help end up just being sold expensive mutual funds. This got me thinking about what is the minimum that investors need to do for themselves; what one thing can they not afford to leave to their advisors? Here is my suggestion:
All investors should be able to work out for themselves how many dollars they pay per year in fees across their portfolios, including management expense ratio (MER) costs, fund loads, commissions, and any other costs.
Instead of focusing on the “top ten things to look for in a financial advisor,” investors would do well to learn enough to be able to protect themselves from bad advisors and recognize good advisors. I think the knowledge required to add up portfolio costs is a great starting point for learning how to evaluate advisors.
Reasonable financial advisors should be able to help their clients understand how to add up costs. Investors who don’t know what they pay in fees and don’t know how to work it out for themselves have no idea if they are being taken for a ride or not.
I’ve been told by several people that they have a “great financial guy,” but many of these people aren’t even aware that this great financial guy gets paid out of their savings. Instead, these people should be able to say “I paid $2850 in total portfolio costs last year and the service I got for this money was worth it.”
No doubt we could all come up with a lengthy list of things people should understand about investing, but given that so many investors start with so little knowledge, I recommend learning how to identify costs as a starting point. I’m open to opinions on other starting points, but I’m not interested in making a list. If there is something better than my suggestion, then let’s replace it rather than add to it.