No one cares about your money more than you.
For this reason, I am a “do-it-yourself” advocate, when in makes sense. In general, most of us who have straight forward finances should be able to manage and invest our own money without the assistance of an advisor. However, I do NOT believe that one size fit alls, and sometimes we need a little help. So let’s explore when it’s appropriate to have an advisor, and when it’s time to kick the advisor to the curb.
Let me start with the major challenges within the financial advisory industry:
There are inherent conflicts of interest with the financial advisor model: Financial advisors are often commission based, which means they are both a ‘salesperson’ and an ‘advisor’. They benefit from selling you certain investments, like kick-backs and commissions. It’s like going to a Ford car dealership and asking the salesperson whether or not you should buy a Ford or a Tesla. They’re obviously conflicted and will want to sell you the Ford. This is often the same case with an advisor.
Financial advisors make it complicated: They often stick you in way too many funds, making it harder to manage and keep track of your investments. They also frequently sell funds or products that lack transparency and are difficult to understand, making you want to stick with them even more. When it comes to investing, I believe simplicity and consistency is the best way to go.
Not all financial advisors are fiduciaries: If an advisor is not a fiduciary, it means they are not legally required to invest in your best interest. Fun fact! Plenty of advisors are not fiduciaries and are allowed to put their best interest OVER yours (WTF!). And even when financial advisors are fiduciaries they often don’t act in your best interest. Remember the Bernie Madoff scandal...he was a fiduciary :/
Financial advisors often get it wrong: When an advisor tries to beat the market, they can often lose. And take a moment to think about this...if your financial advisor had all the magical investment answers, why would they waste their time investing your measly money when they could simply just invest and become rich without you, right?
I’m not saying that all financial advisors are bad at what they do, BUT I am saying the system is flawed. There are certainly situations in which you might need a financial advisor to help you out. But for most of us who are just looking to invest for retirement and maybe a wedding and some kids, we can do it on our own with an advisor.
A personal story
Back in the old days when I was too scared to manage my money myself, I paid a financial advisor to do my investment ‘work’. My advisor was with Bank of America Merrill Lynch. My family had a long history with him. He worked with my grandma, then my mom and my sisters, so of course this was someone I viewed as a trusted resource. Plus, my mom told me to do it and stop being so lazy, so I bit.
Here’s how it worked.
My advisor would invest my money, and I would pay him a fee. Actually two fees.
The first, a monthly advisory fee and the second, the fees I needed to pay to partake in the investment funds (aka the expense ratios I taught you in class). Frankly, I had no idea what he was doing, but I assumed whatever he would do could be better than me, right? It was his job after all.
Below is a snapshot of the investment structure my advisor gave me when we first started out. He didn’t even bother to share the expense ratios of his proposed funds. So for you fine students, I’m gonna manually add them in since they were too lazy / obviously didn’t want to openly share the costs with me.
Total of $145,000 invested across 13 different funds, each with their own expense ratio
I'm also paying $100 monthly advisory fee
My weighted average expense ratio across all 13 funds is 0.25%.
Now to be fair, this advisor could have chosen funds with way higher expense ratios. For reference, he did propose these funds to me as "low-cost". But as we know from class, index funds can be way cheaper than a 0.25% expense ratio.
So over the course of 30 years, I would have been expected to pay this financial advisor:
$74,803 in fund fees (from the expense ratios)
And another $36,000 in advisory services (from the monthly fees)
“BLERGGGGGGGDFSKDFJLSKDJFLKSDJFLKSDF!!!! No. No. No. No. No”, my financially adult brain says now.
After learning about finances, I broke up with my financial advisor, and now I’m invested as follows in my Merrill Lynch accounts*
I have two 2 funds only
Vanguard Total Stock Market ETF (Expense Ratio = 0.03%)
Vanguard Total Bond Market ETF (Expense Ratio = 0.035%)
At an 80% stock / 20% bond split, my weighted average expense ratio is 0.031%.
So now, my fees are 8x less than what they were before with the advisor.
Over the course of 30 years, I’ll now only pay
$9,553.20 in fund fees (from the expense ratio)
And NO monthly advisory fee...well because i’m my own damn advisor now!
And for the record, I never really got much 'advice' from my financial advisor. He never asked what my goals were or what my 5 year plan was. Just seemed like the only advice I was getting was what funds to invest in. And well, YOU GUYS KNOW THAT ALREADY FROM MY COURSE!
So for those of you with a financial advisor who are ready to break-up, know that you are very much so allowed to do that. Feel free to use the exact language I used in my email to my advisor! It my be a little uncomfortable, but the discomfort is worth it if you know you can do it on your own.
So when do you need a financial advisor, and when don’t you? Now that all my frustrations are laid out in the open here, I WARMLY recommend using a financial advisor if you have a unique financial planning issue that you need help solving. Perhaps it's estate planning, or you've moved abroad and need to navigate the tax and investment landscape, or you are coming together with a partner and need to re-configure your planning strategy...you can and SHOULD seek help. And while I'd love for most of you to be a DIY investor, I realize that for some people, working with a professional is the only way they'd invest. And I'd rather you invest, then not. So please do what is right for you. Just make sure you consider the following:
Look for a fee-only advisor: your advisor would be compensated solely on their advisory services vs. the products they sell to you. This helps to remove the conflict of interest since they don't get kick-backs or commissions. I recommend the XY Planning Network if you are looking for an advisor. They are generally fee-based, fiduciaries, and have a wide array of specialities.
Make sure your advisor is a fiduciary: They should act in your best interest
Your advisor actually advises you: Don’t just hire an advisor to invest your Roth IRA. You can do that all on your own after taking my course. Make sure the person you hire is actually sitting down with you and advising you on a holistic financial plan. Not just taking your money, investing it, and keeping you out of the loop. Check in with each other quarterly and re-evaluate your plan based on your personal and financial goals.
Boost your Wallet. Wellbeing. World.
Disclaimer: The information contained in the Yield & Spread website, course materials and all other related content is provided for informational and educational purposes only. It is not intended to substitute for obtaining accounting, tax, or financial advice, and may not be suitable for every individual. Yield & Spread is not a registered investment, legal or tax advisor or a broker/dealer.