How good are Investment Advisors in their work?
World-renowned value investor Warren Buffet shows disdain towards investment advisors and their advice. He raises the question, “How good are investment advisors?” And in answer says, “Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway”.
Warren Buffett, Chairman Berkshire Hathaway, wants to highlight this ridiculous but true state of affairs. Indeed Wall Street is the only place that people ride to in a Rolls-Royce to get advice from those who take the subway.
Buffett intends no insult to stockbrokers. Nor is he against using the subway. But he is simply advising you to take the advice of the so-called experts with a pinch of salt. He thinks that if indeed these people had valuable investment advice to offer they would have used it themselves. They would have become rich. And they would not be taking the subway.
We have to reflect on what he says, don’t we?
Investment Advisors Charge High Fees
Warren Buffett opposes the high fees investment advisors charge. He says, “Most advisors are far better at generating high fees than they are at generating high returns.” Again an undeniable truth. Stockbrokers and mutual funds charge heavy fees. The fee is mostly 3 to 4% of the assets under management (the corpus). Three to four percent is not justified in the first place. If you still concede it, it may look reasonable on the small, beginning sum. So, you may not feel the pinch and accept it. But if you let your investments be, undisturbed, for about 30 years, they will grow into a huge sum.
For example, a small contribution of Rs.10000 (US$ 150) a month to a systematic investment plan (SIP) will grow big. It will grow into an unbelievable Rupees seven crores (over a million dollars) in 30 years. The compounding power produced this phenomenal growth and not the genius of the investment advisors. A three percent fee on a million bucks, about 32,000 dollars is not justified and will surely hurt you. Please mind this fee is not one time, it repeats every year.
Value-investors who have read “The Intelligent Investor” by Benjamin Graham and following in the footsteps of legendary value-investors like Walter Schloss, Charles Munger, Warren Buffett, of Berkshire Hathaway, do not need the tips and advice of stockbrokers to get significant investment success.