Meet the Denialists

I’d like you to meet a fictional couple named Jim and Betty Denialist, two advisors with Reasonable Financial Services.

Jim and Betty insist they are responsible advisors who help their clients make smart choices with their money and until recently, had always encouraged their clients to invest 100% of their money in mutual funds.

Jim and Betty do the usual things most advisors do and are generally thought of as competent, responsible advisors who are always on the lookout for products and strategies that will help their clients. In particular, they actively encourage clients to consider the high cost of their lifestyle and to be better savers.

Ironically, until now, Jim and Betty had never done anything to encourage their clients to consider the high costs of their investment products and to save money by replacing those products with cheaper options.

Lately, they’ve taken to encouraging their clients to visit a web site. They use the site to help their clients come to terms with the effect of mutual fund MERs on client returns. Many people don’t contemplate how MERs can operate in a relatively inconspicuous and seemingly harmless way, while actually producing potentially grave consequences.

In fact, Jim and Betty have taken the somewhat controversial, but entirely appropriate step of linking product cost to their financial independence calculations. The difference between high cost products and low cost products is typically about 1% a year, give or take. For those clients who use high cost products, the expected rate of return in their planning projection is reduced by 1%.

For instance, for most clients, the long-term return assumption for bonds is 2% above inflation, the assumption for tangibles (real estate, commodities, etc.) is 5% above inflation and the assumption for stocks is 7% above inflation. For those clients who insist on using mutual funds, their assumptions are reduced to 1%, 4% and 6%. All this is simply applying over 60 years of historical data as found in the 2011 Andex chart. Two important considerations need to be note. First, today’s environment could be radically different from what has been experienced in the past. Second, higher volatility is to be expected when seeking out higher expected returns.

Talk about focusing the mind.

For years, Jim and Betty have been saying “a penny saved is a penny earned”, but now they actually have a tool to help their clients see, in stark, tangible and incontrovertible terms, just how much money they can save (i.e. how much lifestyle they can buy) simply by substituting investment products. Virtually every client they have saves into six figures- some save well into six-figure territory.

Jim and Betty are clear with their clients that the assumed pre-cost return is the same no matter which products they choose and that the difference in the real return assumption is strictly based on the cost differential. They’re equally clear that since their clients’ asset allocations are unchanged, their risk profile is identical under both formats.

The Denialists now have a clear conscience. No matter which format their clients choose, they know that they have exercised their duty to provide meaningful, useful information to their valued clients. Some clients choose to continue to use the more expensive products, which is their prerogative. Jim and Betty don’t mind, because they’ve shown those clients a range of outcomes based on a reasonable sensitivity to cost. Their concern is for their fellow advisors.

As far as Jim and Betty can tell, virtually none of their peers make this kind of disclosure about the impact of costs, much less incorporate that information into their planning models. The web site is functional, persuasive and totally free.

John De Goey, CFP, is the vice president of Burgeonvest Bick Securities Limited (BBSL) and author of The Professional Financial Advisor II. The views expressed are not necessarily shared by BBSL. You can learn more about John at his Web site: www.johndegoey.com.