This tax season, relative to preparing my return by hand, I would say that TurboTax saved me at least $500 worth of time and stress. And I imagine it will save me a comparable amount of time and stress next year. So, come January 2015, if Amazon is selling TurboTax for $400, would it make sense for me to buy it?
Of course not (despite the fact that it would improve my “consumer surplus”). And the reason is obvious: I can buy it elsewhere at a much lower price.
When promoting their services, many financial advisors like to state that their fee is a bargain because they can improve most investors’ portfolio performance by an amount equal to or greater than their fee. For example, an advisor charging 1% per year might argue that the fee is worth paying because, without an advisor, most investors will lose at least 1% of performance per year due to picking poor funds, misguided attempts at market timing, and other mistakes that the advisor will help them to avoid.
The problem with this analysis is that it fails to ask whether the same services can be purchased elsewhere at a lower price.
Paying for Portfolio Management
The price of portfolio management (i.e., the actual running of the portfolio — purchasing funds, rebalancing, etc.) is quickly being driven downward due to competition.
At the most basic end, a Vanguard Target Retirement or LifeStrategy fund is a version of portfolio management — maintaining a diversified selection of index funds for a cost of roughly 0.10% per year (relative to the cost of a DIY index fund portfolio).
But, for various reasons, funds of funds are a poor fit for some investors (e.g., people with lots of assets in taxable accounts or people who want an allocation not available via a fund of funds). Fortunately, the selection of low-cost portfolio management providers is growing (e.g., Vanguard’s Personal Advisor Services or similar offerings from Schwab).
Paying for Advice
As far as paying for actual advice, if your needs are basic, you can again get what you need for a relatively modest cost. For example, Rick Ferri and Jon Luskin offer a “portfolio second opinion” service for roughly $1,000.
Alternatively, there are numerous independent financial planners who can skillfully provide such services for a modest one-time fee. (The Garrett Planning Network would be a good place to look, for instance.)
In short, basic portfolio management and basic portfolio-related advice are both available at a very low cost these days. Paying anything more only makes sense when you need (and are going to receive) more specialized or more thorough services (e.g., a retirement plan that incorporates not only investment decisions, but also Social Security decisions, tax planning decisions, and health insurance decisions).
And paying an ongoing cost only makes sense if you expect your needs to be ongoing.