I recently read an article titled “When Evidence Says No, but Doctors Say Yes” . In it, David Epstein writes about how:
…it is distressingly ordinary for patients to get treatments that research has shown are ineffective or even dangerous.
Sometimes doctors simply haven’t kept up with the science. Other times doctors know the state of play perfectly well but continue to deliver these treatments because it’s profitable—or even because they’re popular and patients demand them. Some procedures are implemented based on studies that did not prove whether they really worked in the first place. Others were initially supported by evidence but then were contradicted by better evidence, and yet these procedures have remained the standards of care for years, or decades.
For over 8,000 words, Epstein explores this phenomenon of doctors prescribing everything from drugs to surgeries even when modern medicine would suggest that those treatments are unhelpful or even harmful. What I found striking as I was reading this piece was how similar the problems sound to my own field of financial planning and investment management. This series is exploring a few of the similarities.
Lesson 5: Expense is Harm
Near the end of the article, Epstein concludes, “That is the theme of the medicine in your cabinet: It likely isn’t significantly harming or helping you.”
However, the expense of the medication is a harm in and of itself. If you weren’t spending your money on useless treatment, you could enrich your life in other ways, retire earlier, or be richer.
In 2018, national health expenditures as a percentage of GDP was 17.8%. If Epstein’s analysis is correct, this means we are budgeting 17.8% of our take-home pay on many relatively useless medical treatments.
If we saved that 17.8% instead of spending it on health expenditure, we could all retire 14 years earlier or 118.67% richer. Even if removing unnecessary medical treatment only reduced health expenditure by 2.8% down to 15% of our spending, it might mean we could retire 3 years earlier or 18.67% richer. Regardless of whether it is 3 years or 14 years of our life, that is a huge cost of unnecessary treatment.
The same is true in the financial services industry. Expense is harm in and of itself.
Many commission-based advisors will argue that their services are “free” because they do not charge a percentage of assets under management, even though their total revenue from commissions far exceeds normal asset-under-management fees. In reality, the average commission-based advisor might be compensated 1.8% of assets under management or more. In addition to this management fee, they also select more expensive funds. Their average fund expense ratio might be 0.83% or higher.
Compare this to a fee-only financial planner focused on decreasing cost. The management fee might be an open and honest 1% of assets under management (saving 0.8% over the commission-based advisor) and then their asset weighted portfolio might be 0.17% (saving 0.66% over the commission-based advisor).
Even this small estimated savings of 1.46% annually might mean being able to retire 2 years earlier or 9.73% richer.
This savings is only from lowering investment costs. A talented comprehensive wealth manager could produce even more savings from other planning services, increasing their enrichment of your life even more.
At Marotta, we have tried to keep our fees as low as possible for our clients. We believe that excellence and low cost can go together. Our “Comprehensive” service level includes all of our basic, bonus, and premium services for a mere 1%. Meanwhile, many other firms charge 1.25% just for investment management and have an additional charge for financial planning services beyond that.
At Marotta, we believe that integrated and personal advice is fundamental to the financial planning process. If you are a “Comprehensive” service level client, the number and variety of services which you can delegate to us is extensive and ever expanding.
Give us a call to get started with your financial planning today!
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