What Size is Your Parachute?

If you’ve seen videos of professional athletes exercising these days, you see all kinds of creative exercises.  Linebackers roll giant truck tires end over end the length of a football field to increase stamina and strength.  Professional golfers lift weights while sitting on a ball to increase core body strength and improve balance that is critical to consistency in the golf swing.  One of my favorites is an exercise you see used across many disciplines.  Athletes run sprints with a parachute at the end of a cord tied to their waist. 

Over the past several weeks I have repeatedly read about how Americans are going to have to save more and/or work longer to retire on their terms.  This is indeed true for the roughly 80% of Americans that have saved little or nothing for retirement and unless the top 1% of Americans decide to go on a massive spending spree, this advice doesn’t apply to them.  It’s that remaining 19% of Americans that move the economy that have to take a hard look in the mirror to see if they need to save more or work longer.  But why?

As I’ve mentioned previously, the main reason the 19%, the American “diligentsia”, will not retire on time or will be required to live a substantially reduced lifestyle in retirement is due to the fees levied on them by investment companies and financial advisors.  While the professional athlete takes the parachute off when they are actually in competition, we are telling the investing public that they have to run the race with not one, but two parachutes tied to their waist, one for the fund companies and one for their advisors. 

In this drill, a smaller parachute is always better.  Over the past several decades several new forms of investments have arisen that have all but eliminated the first parachute.  Thanks to the work of Jack Bogle and Vanguard and many others that followed Vanguard’s lead, there are extremely low cost funds that even smaller investors can take advantage of.   The rise of the basic index exchange traded fund (ETF) in many cases has driven the fees to levels approaching zero.  Unfortunately, the drag from the advisor parachute has barely budged.

For some inexplicable reason the financial press has almost completely ignored this issue and the American investor remains blissfully unaware of the enormous impact that the industry-wide average 1% fee has on their ability to meet their goals over longer investment horizons.  Perhaps more importantly, the financial industry has made their fees virtually invisible by painlessly withdrawing them automatically from accounts, usually quarterly.  Because they only show up on your statement every 90 days, even if you were looking for them you wouldn’t see fees two-thirds of the time.  Also, because firms charge quarterly, the fees don’t even seem that big relative to the overall size of the other numbers on the page, so you think they are relatively benign.  

But what your advisor has done is tied a parachute to your portfolio.  Those fees become a direct drag on your returns.  Just as a small parachute can make someone a better runner, small parachutes can make people better investors.   There’s a lot of value in the small fees attached to most index funds and ETF’s.  And there’s definitely value in an advisor’s fees as well.  The key is that at some point the parachute is not a training aid, it becomes an anchor.

Here’s a simple way to tell the difference between a financial training aid and an anchor.  Don’t let your advisor simply automatically take money out of your account.  It’s too painless to judge whether you’ve had a good “workout”.  Insist on writing a check to your advisor for his/her fees or at the very least insist that you have to personally authorize the withdrawal.   That way you see the money going out and feel the added pain of the parachute.  If your advisor is adding value, like a good workout, you recognize that the pain was worth the effort.  If your advisor says s/he won’t do this, find a new “financial trainer.”

Remember, no pain, no gain.  Feel the burn! 

 

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