How I Hired and Fired My Financial Advisor
How it started
About 7 years ago, I hired a financial advisor. Let me pause while all the do it yourselfers and index fund junkies burn effigies of Buck Stacker. I'm so sorry to disappoint you, but you know what, I'm not sorry I did it and I want to tell you why.
So, I did the most logical thing I could think of. I started asking older people I knew what I should do. A family friend who offered some helpful guidance when I was started out my career mentioned to me that he had a firm he used to manage his money. He said they'd done really well by him for 20+ years, were super smart and well educated, and weren't aggressive or high pressure. It sounded like a great secret money club. I got their contact info and reached out the next day.
They were really impressive and very well prepared given the info I provided. In fact, they had already prepared a full plan for how I might invest my money across all of my accounts and a rationale for their suggestions. It had sexy charts and graphs with all of my financial data included. The meeting was very personal and focused on me, and it didn't feel like a sales pitch at all. It was more like talking to a really smart friend who was just trying to help you.
The take away message was that as a budding professional, I would benefit tremendously from allowing them to be my "CFO" while I focused on things like my career, relationships, and other things I actually enjoyed. As a believer that some things are best outsourced to professionals (plumbing, car repair, dentistry) this all made sense to me. These well educated folks could help me not only with buying stocks and bonds, but also with other important financial decisions like buying life insurance, real estate, and anything else money related.
Then came the best part. All of this was mine for a modest fee of 1% of the assets under management! That's NOTHING!!
I did the math for the small sum I was prepared to invest and it was a tremendous bargain. I thanked them for the efforts and reviewed their plan that evening. I read reviewed of the firm and the advisors themselves. Everything checked out. I signed a contract with them a couple of days later.
Within a week and with very little effort on my part, they had taken control of my existing brokerage account and were starting to sell my old mutual funds (mainly FPURX but I had bought a couple of others by then). They started to buy new ones which I immediately started looking up. A couple of them were mutual funds actually operated by my advisor's company! That sounded great - who better to work with than a company that actually has their own funds! It was exciting to watch as this all happened. It was kind of like watching a magic show put on just for me. I felt I was in very good hands.
I contributed what I could afford on a monthly basis. It was all automatic so I didn't have to do anything except keep getting my paycheck from my job. This chugged along happily for 2-3 years, and I occasionally checked my account to see that it was steadily growing in value.
I emailed by advisor with the good news and he called me back immediately. He recommended I not leave the money in such a low interest checking account and instead invest more in the account if I was comfortable. It was at that moment that I thought maybe I should do a little math.
Over the years, I'd started to notice the quarterly deductions from my account were growing in size. That was expected because I was putting more money in, and the market was doing quite well so the account size was growing steadily. That said, I was a few years older and wiser and the dollars were starting to get meaningful so I stopped to answer some important questions.
1. What if I added more money to the account? How would that affect my advisor fees every year?
This one was easy to figure out. For example, let's say you had $10,000 in an account with a 1% AUM fee (assets under management). The cost is $100 per year. Doesn't seem so bad right?
However what if you had the good fortune to invest $50,000 or $100,000? Suddenly you're paying $500 or $1000 per year and it would just grow from there. It's the same percentage you were paying with $10,000 but you're paying more dollars for the same service. Often, advisors step the percentage down as the account grows, but usually only when you get into the millionaire range.
The reality was that I hadn't had that many complex financial decisions to make in my early twenties that required advising (and frankly I still haven't). All my advisor was really doing at this point was maintaining the same asset allocation as I pumped in more money. It was nice to not have to think about that task for $100 per year but how much would I be willing to pay for the convenience of not logging in and keeping the percentages in my portfolio steady?
One thing I discovered is that most brokerage accounts allow you to do automated investing for free. Fidelity, Schwab, and Vanguard all do from a very quick web search. You just link your bank account and select which mutual funds you want the money to go into and you don't need to do anything each month (this doesn't work for ETFs but that's a different topic). To make sure everything was kosher I could just set a quarterly reminder to make sure I didn't need to alter my contribution allocation for a month to account for natural changes in the asset allocation over time. Pretty easy and no more than 20 minutes of time per year total to figure out.
Since I was increasingly seeing my advisor as just a portfolio rebalancing provider, discovering that I could easily automate most of what they were doing and handle the rest in no time was a big realization.
STRIKE ONE!
2. What did I actually own in those accounts? Were there other fees that I wasn't thinking about?
This question was more broad and required a bit more investigation. A google search led me to articles from various sites about the perils of investment fees, and ultimately to the Bogleheads forum, which has been a major life changer for me.
For those not familiar, Jack Bogle was the founder of Vanguard, which essentially invented the index fund, an investment vehicle that is increasingly ubiquitous and will become a big topic on this blog. Vanguard is by far the largest fund provider in the world today, in large part due to it's unique ownership structure where you and I as investors actually own the company via the mutual funds themselves. The company is incentivized only to serve you at the lowest cost to you possible.
Anyway, one of the core tenets of the Boglehead approach is that the market is unpredictable and so your returns are impossible to control and predict, but one thing you can control is the fees you pay, so you should always look to minimize them to keep as much of your investment for yourself as you can!
The primary fee to look at when evaluating an investment is called the 'expense ratio'. This is always reported for mutual funds and ETFs and is the fee charged by the fund to operate it. The higher it is, the more money that goes to the company running the fund, as opposed to you.
As a point of reference, a total US stock market index fund from Vanguard (VTSAX), which I think is the best mutual fund to buy, charges 0.04%. For every $10,000 you invest that would cost $4 per year. Basically nothing.
As soon as I learned about expense ratios, I went into my brokerage account to see what my funds were charging. The U.S. stock portion of my account was held in a total US stock market fund. It had some fancy descriptions but the holdings were essentially identical to VTSAX. What wasn't the same was the expense ratio. Ready for it?
0.99%
What?! I was paying another almost 1% per year just to own something I could get essentially for free from a much larger and more reputable industry-leading company. Let's do some math with a hypothetical $10,000 account with either the Vanguard fund or my super fancy (but really the same thing) one:
My Advisor Account:
Advisor Fee: 1% -> $100/year
Expense Ratio: 0.99% -> $99/year
Total: $199/year
Vanguard VTSAX:
Advisor Fee: 0% -> $0/year
Expense Ratio: 0.04% -> $4/year
Total: $4/year
Cost difference: $195/year!!
If you had $100,000 it would be $1,195/year. The more money you have, the more those fees hurt, but even for small accounts this kind of thing can kill your returns over time and cost you a ton of money.
STRIKE TWO!
3. I get it, there's a problem here, but how does all of this impact my investments?
When you start to look at how this impacts your investments over time, things get really scary quickly. You might want to sit down for this.
Let's assume a few things:
-Both US stock funds return 7% per year (after inflation of 2%/year). That's an estimate, but it's a commonly used one and good enough for our purposes for now.
-You have an account that starts with $50,000 and you contribute another $10,000 per year (adjusted up for inflation of 2%/year).
Here's how the value of your account would grow over time.
My Advisor Account:
5 years: $129,124
10 years: $231,426
20 years: $549,530
30 years: $1,100,143
Wow, isn't compounding interest great! If you just follow this plan you'll be a millionaire. Before you celebrate all of the expensive cars and vacations you'll be able to buy, let's see what would have happened if you instead opted for the lower cost fund.
Vanguard VTSAX:
5 years: $138,705
10 years: $264,614
20 years: $713,245
30 years: $1,634,902
That's right/ If you'd gone with the low-cost index fund from Vanguard you would have ended up earning an extra $534,759! THAT'S INSANE!
I was blown away by how much this fee snowball was going to cost me, and by how much I could save by being a bit smarter right now. I decided then and there that there had to be a better way. A couple of days later, I let my advisor know that I was no longer going to be requiring their services.
STRIKE THREE! YOU'RE OUT!
While it cost me a little money to make the mistake, the lessons I learned were valuable, and things I'll carry with me for the rest of my investing life. Here were the key takeaways for me:
1. The main thing is that when it comes to investing, time is a huge element and it's important to remember that while those great returns you get compound over time, so do the fees and the potential earnings to miss out on as a result. Always think about your investing time horizon and then project what is likely to happen. Then decide if you're happy with what you see.
2. Beware of "experts" who claim to know what the market is going to do. At least two thirds of actively managed funds (like the expensive one I had with my advisor) underperformed the market in 2016 according to recent reports. If you're investing for the long term, low cost index funds (like VTSAX) that track the whole market and don't try to do anything fancy are a great way to go.
3. Even though you may lose out on some gains if you make high cost choices like I did, it's way better than not doing anything. My account went up over 40% while under my advisor's supervision net of fees, whereas if I'd been paralyzed by my lack of knowledge and left everything in a checking account it would have gone up less than 1% in total and I would have actually lost money to inflation.
After I decided to pull the plug on the advisor, I began my journey into the world of managing my own investments. What I did next is a story for another day!
In the meantime, keep stacking!
BS
Drinking the Kool-Aid
After a streamlined request for data (income, expenses, demographics) I went to meet them at their swanky midtown Manhattan office where they whisked me into an enormous board room and a friendly assistant offered me a beverage. As an early twenties nobody, this was a pretty strange and exciting experience. I felt important! Then a team of three folks in their forties wearing suits walked in and introduced themselves. After some pleasantries, they started walking me through their firm's history and why they were so excited to be meeting with me.They were really impressive and very well prepared given the info I provided. In fact, they had already prepared a full plan for how I might invest my money across all of my accounts and a rationale for their suggestions. It had sexy charts and graphs with all of my financial data included. The meeting was very personal and focused on me, and it didn't feel like a sales pitch at all. It was more like talking to a really smart friend who was just trying to help you.
The take away message was that as a budding professional, I would benefit tremendously from allowing them to be my "CFO" while I focused on things like my career, relationships, and other things I actually enjoyed. As a believer that some things are best outsourced to professionals (plumbing, car repair, dentistry) this all made sense to me. These well educated folks could help me not only with buying stocks and bonds, but also with other important financial decisions like buying life insurance, real estate, and anything else money related.Then came the best part. All of this was mine for a modest fee of 1% of the assets under management! That's NOTHING!!
I did the math for the small sum I was prepared to invest and it was a tremendous bargain. I thanked them for the efforts and reviewed their plan that evening. I read reviewed of the firm and the advisors themselves. Everything checked out. I signed a contract with them a couple of days later.
Within a week and with very little effort on my part, they had taken control of my existing brokerage account and were starting to sell my old mutual funds (mainly FPURX but I had bought a couple of others by then). They started to buy new ones which I immediately started looking up. A couple of them were mutual funds actually operated by my advisor's company! That sounded great - who better to work with than a company that actually has their own funds! It was exciting to watch as this all happened. It was kind of like watching a magic show put on just for me. I felt I was in very good hands.
I contributed what I could afford on a monthly basis. It was all automatic so I didn't have to do anything except keep getting my paycheck from my job. This chugged along happily for 2-3 years, and I occasionally checked my account to see that it was steadily growing in value.
The first signs of trouble in paradise
About 4 years after I opened the account I got a big promotion at work and a healthy raise and bonus plan. Suddenly I had a lot more income coming in but my contributions to the investment account remained the same so my checking account starting to swell pretty rapidly.Over the years, I'd started to notice the quarterly deductions from my account were growing in size. That was expected because I was putting more money in, and the market was doing quite well so the account size was growing steadily. That said, I was a few years older and wiser and the dollars were starting to get meaningful so I stopped to answer some important questions.
The Fee Snowball
I like to structure my thinking in threes. Maybe I've had too much exposure to McKinsey consultants or perhaps I love baseball to much, but for some reason, thinking about problems in thirds has been a good way for me to organize my thoughts. When I sat down to look at my financial advisor in more detail I had three1. What if I added more money to the account? How would that affect my advisor fees every year?
This one was easy to figure out. For example, let's say you had $10,000 in an account with a 1% AUM fee (assets under management). The cost is $100 per year. Doesn't seem so bad right?
However what if you had the good fortune to invest $50,000 or $100,000? Suddenly you're paying $500 or $1000 per year and it would just grow from there. It's the same percentage you were paying with $10,000 but you're paying more dollars for the same service. Often, advisors step the percentage down as the account grows, but usually only when you get into the millionaire range.
The reality was that I hadn't had that many complex financial decisions to make in my early twenties that required advising (and frankly I still haven't). All my advisor was really doing at this point was maintaining the same asset allocation as I pumped in more money. It was nice to not have to think about that task for $100 per year but how much would I be willing to pay for the convenience of not logging in and keeping the percentages in my portfolio steady?
One thing I discovered is that most brokerage accounts allow you to do automated investing for free. Fidelity, Schwab, and Vanguard all do from a very quick web search. You just link your bank account and select which mutual funds you want the money to go into and you don't need to do anything each month (this doesn't work for ETFs but that's a different topic). To make sure everything was kosher I could just set a quarterly reminder to make sure I didn't need to alter my contribution allocation for a month to account for natural changes in the asset allocation over time. Pretty easy and no more than 20 minutes of time per year total to figure out.
Since I was increasingly seeing my advisor as just a portfolio rebalancing provider, discovering that I could easily automate most of what they were doing and handle the rest in no time was a big realization.
STRIKE ONE!
2. What did I actually own in those accounts? Were there other fees that I wasn't thinking about?
This question was more broad and required a bit more investigation. A google search led me to articles from various sites about the perils of investment fees, and ultimately to the Bogleheads forum, which has been a major life changer for me.
For those not familiar, Jack Bogle was the founder of Vanguard, which essentially invented the index fund, an investment vehicle that is increasingly ubiquitous and will become a big topic on this blog. Vanguard is by far the largest fund provider in the world today, in large part due to it's unique ownership structure where you and I as investors actually own the company via the mutual funds themselves. The company is incentivized only to serve you at the lowest cost to you possible.
Anyway, one of the core tenets of the Boglehead approach is that the market is unpredictable and so your returns are impossible to control and predict, but one thing you can control is the fees you pay, so you should always look to minimize them to keep as much of your investment for yourself as you can!
The primary fee to look at when evaluating an investment is called the 'expense ratio'. This is always reported for mutual funds and ETFs and is the fee charged by the fund to operate it. The higher it is, the more money that goes to the company running the fund, as opposed to you.
As a point of reference, a total US stock market index fund from Vanguard (VTSAX), which I think is the best mutual fund to buy, charges 0.04%. For every $10,000 you invest that would cost $4 per year. Basically nothing.
As soon as I learned about expense ratios, I went into my brokerage account to see what my funds were charging. The U.S. stock portion of my account was held in a total US stock market fund. It had some fancy descriptions but the holdings were essentially identical to VTSAX. What wasn't the same was the expense ratio. Ready for it?
0.99%
What?! I was paying another almost 1% per year just to own something I could get essentially for free from a much larger and more reputable industry-leading company. Let's do some math with a hypothetical $10,000 account with either the Vanguard fund or my super fancy (but really the same thing) one:
My Advisor Account:
Advisor Fee: 1% -> $100/year
Expense Ratio: 0.99% -> $99/year
Total: $199/year
Vanguard VTSAX:
Advisor Fee: 0% -> $0/year
Expense Ratio: 0.04% -> $4/year
Total: $4/year
Cost difference: $195/year!!
If you had $100,000 it would be $1,195/year. The more money you have, the more those fees hurt, but even for small accounts this kind of thing can kill your returns over time and cost you a ton of money.
STRIKE TWO!
3. I get it, there's a problem here, but how does all of this impact my investments?
When you start to look at how this impacts your investments over time, things get really scary quickly. You might want to sit down for this.
Let's assume a few things:
-Both US stock funds return 7% per year (after inflation of 2%/year). That's an estimate, but it's a commonly used one and good enough for our purposes for now.
-You have an account that starts with $50,000 and you contribute another $10,000 per year (adjusted up for inflation of 2%/year).
Here's how the value of your account would grow over time.
My Advisor Account:
5 years: $129,124
10 years: $231,426
20 years: $549,530
30 years: $1,100,143
Wow, isn't compounding interest great! If you just follow this plan you'll be a millionaire. Before you celebrate all of the expensive cars and vacations you'll be able to buy, let's see what would have happened if you instead opted for the lower cost fund.
Vanguard VTSAX:
5 years: $138,705
10 years: $264,614
20 years: $713,245
30 years: $1,634,902
That's right/ If you'd gone with the low-cost index fund from Vanguard you would have ended up earning an extra $534,759! THAT'S INSANE!
STRIKE THREE! YOU'RE OUT!
At least I learned something
Do I regret this ordeal? Oddly...no. I'm actually glad it happened!While it cost me a little money to make the mistake, the lessons I learned were valuable, and things I'll carry with me for the rest of my investing life. Here were the key takeaways for me:
1. The main thing is that when it comes to investing, time is a huge element and it's important to remember that while those great returns you get compound over time, so do the fees and the potential earnings to miss out on as a result. Always think about your investing time horizon and then project what is likely to happen. Then decide if you're happy with what you see.
2. Beware of "experts" who claim to know what the market is going to do. At least two thirds of actively managed funds (like the expensive one I had with my advisor) underperformed the market in 2016 according to recent reports. If you're investing for the long term, low cost index funds (like VTSAX) that track the whole market and don't try to do anything fancy are a great way to go.
3. Even though you may lose out on some gains if you make high cost choices like I did, it's way better than not doing anything. My account went up over 40% while under my advisor's supervision net of fees, whereas if I'd been paralyzed by my lack of knowledge and left everything in a checking account it would have gone up less than 1% in total and I would have actually lost money to inflation.
After I decided to pull the plug on the advisor, I began my journey into the world of managing my own investments. What I did next is a story for another day!
In the meantime, keep stacking!
BS
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