Can Index Investing Be Too Good?

How Investing and Financial Planning Are Not the Same

Steve Stanganelli
CFP®, CRPC® in Amesbury, MA

Can Index Investing Be Too Good?
August 18, 2015

Can index investing be too good for investors? If everyone just follows the market, will we all fall of the cliff together? I don’t think so, but I’m biased here.

For those who are clients of my fee-only planning practice, you know that index investing is at the core of my investment strategy. Research has shown that the the biggest returns on investment come from where you allocate and not necessarily on the specific stocks. I’ve seen articles noting that over 90% of investment returns are a result of where you place your investments – how much is in stocks or bonds – and less than 10% based on specific security selection.

Yes, there will always be those stock pickers or folks in the right place at the right time who will profit handsomely by finding the next great thing: Microsoft, Dell, Apple or any other early-stage tech or But what I'm talking about is the day-in and day-out kind of investing for the long-term.

So when index investing can be done quickly at a fraction of the cost of what investment managers charge (0.20% per year or less for index mutual funds and ETFs compared to 1% per year for actively managed mutual funds PLUS 1% for the investment adviser), how does an investment adviser justify the cost difference?

The big issue is that most investment adviser firms charge an asset management fee for their services. I do too. It is the industry standard way of charging for services. And that’s not a problem if you’re providing value to the client.

Sometimes that value is in planning, tax preparation, or offering guidance on any number of topical areas like stock options or divorce or college funding.

Too often, most investment advisers just focus on the investment side – and then call themselves planners.

This is not how I do things nor many of my peers who are members of the National Association of Personal Financial Advisors ( .

Investment services are charged separately at a lower fee than other firms. Why? Because building an index portfolio is very inexpensive. When you add some tactical management to help protect on the downside it will cost a bit more but still under the industry average. And philosophically, like industry thought leader Bob Veres, I believe that unbundling the planning from the investment services makes it more transparent for a client to know what he’s paying. But there will be times when the best way for the client to pay for all these services is through a percentage of the assets managed.

So any investment adviser like me can do the investing part of things for 0.30% to 0.5% per year – as low as almost any ‘robo advisor.’ The rest of the fee charged - as either a retainer or part of AUM - covers the value of someone like me bringing to the table experience, training, and guidance on non-investment areas of personal finance.

The value is in the planning services and being there to provide guidance to a family in need. And as long as the adviser is providing value there, then the fee can be justified.

Hint: No client service representative at a robo advisor or index mutual fund will answer a tax planning question or help complete a financial aid form or provide guidance through a divorce or be there to help a recent widow get her affairs in order.

All that said, I’ll agree with John Bogle of Vanguard and Dr. Burton Malkiel of Princeton on the main point: Index investing works and saves investors BIG money. And I’m happy to add value on the planning side.

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