This article is about, you guessed it, how to fire your financial advisor (FA) and manage your own investments! I’ll show you how to spend lots of money on study materials, cram for that big certification exam, pass the certification exam, and finally, know more about personal finance than all your friends. FALSE. I won’t do any of this, and it’s all utterly ridiculous.
Instead, I’ll teach you how to avoid all of that. The best part is that this article will be straight to the point, because becoming your own FA is super easy. It’s so easy that actual “certified” FAs don’t want you to know this. I mean, it’s a joke, literally. Here – I’ll give you the recipe to become a FA. Go to college, study virtually anything, get whatever grades you want, graduate, create a LinkedIn account, and in a matter of weeks a FA recruiter from [insert company here] will find you and open your mind to the world of possibilities that come with being a blood sucking hybrid version of a used car salesman. All that is left for you to do is complete the company’s “sales training program” and get your certifications. I know this because it happened to me. Everytime I received a new degree it seemed like the salespeople representing the company full of salespeople would start to contact me. Luckily, I didn’t bite.
What is a financial advisor?
Financial advisors are not personal finance experts, contrary to what you are told to believe. They are not hedge fund managers. They are not Michael Burry. They are not Warren Buffet. They are financial product salespeople. There are legitimate financial advisors, and they normally come in the form of a “fee-only” business model, which means they charge their clients for the service they provide rather than by a percentage of their portfolio. If you want to develop a budget, they charge you for that service and nothing else. These fee-only advisors can be very valuable as they can help you with strategies related to social security, pension, and investment account accumulation and withdrawals, tax-efficient investment planning, budget creation and accountability, and estate planning. There are also experts, usually attorneys, on subjects such as estates, taxes and trusts, real estate transactions, etc., that can be quite helpful to your overall financial situation. With that said, your run of the mill financial advisor is not an expert in anything except for sales, and identifying the most complex, high-cost portfolio possible for their clients. Weird – it seems like they would actually want what is best for their clients. Strange concept, I suppose.
If you want more information on the pitfalls of financial advisors, you can visit Bogleheads.org. This blog is very reputable, and admittedly, has a significant bias against FAs. This blog alone has probably saved people millions of dollars in fees. There is significant value in managing your own finances. There is also significant value in learning how personal finance works, and understanding what you are doing. You don’t need a certification to do this, rather, a good ole fashion desire to learn with a little bit of patience.
Running the numbers
I know what you’re thinking by this point, look at this guy just bashing successful people for being good at their jobs. That’s fair, I suppose even the Russian mob should get praise for being good at their jobs…but that doesn’t mean the line of work is ethical or should receive praise. If you want to understand more about the various fees you can expect to pay with a FA, Google “investment fee impact calculator” and you can see the damage first hand. You can’t hide from the numbers, and neither can your FA as he’s cruising around in a $150k fishing boat while you’re paying $20k a year in fees (that’s more than his yacht payment, FYI).
FA’s charge various types of fees, and some of them are hidden and will never show up on a statement (not sure how this is still legal). Assets under management (AUM) fees are charged as a percentage of total assets being managed by the advisor. If you have $1M in assets with the advisor and he charges a 1% AUM fee, you’ll be paying him $10k a year to simply exist. Over 10 years, this will cost you $146k when accounting for lost compound interest. That is INSANE! Another common fee that virtually all funds have is the expense ratio (ER). This can range anywhere from 0 to upwards of 1.5 basis points. Fidelity has a group of “Zero Funds” that have no underlying ER, and I believe they are the only ones. A total stock market index fund at VG will have a fee around .03, consistent with Schwab and Fidelity’s normal group of index funds. Other fees you need to look out for are surrender charges (typically found in annuities or whole life policies), and administrative fees. There are also front load fees which require a premium to be paid on the purchase. This is normally 5-6%. In this case, you buy $100 worth of mutual funds and pay $5-6 in premiums just for the right to own them. Whew, that’s a lot to keep track of. I completely understand if you’re overwhelmed.
Simple next step: if you have a financial advisor and want out, you can contact Vanguard, FIdelity, or Schwab and they’ll help initiate the transfer process. Remember – they all have advisory services also so you’ll want to specify that you want the “self-directed” investment platform. This will be the best value option.
It would be unfair if I made the claim that FA’s never serve any purpose. Some people are absolutely terrible with money and would never open a Roth IRA or invest in their workplace 401(k) plan without an outside force influencing them. They meet an advisor, and like a good salesperson, they convince them to invest! The good part here is that the individual may have never invested without this push. So, even with the ludicrous fees and atrocious portfolio structure, the FA convinced a person to save when they likely wouldn’t have done so on their own. That’s a win. Hopefully this person learns from this and eventually manages their own investments. Personal finance is full of little steps, so at the end of the day, you could chalk this up as a little success that led to a better overall understanding.
What to do instead
So now you’re asking, “but D.C. I just fired my FA, how do I invest if I don’t have this person in a $100 discount suit telling me what to do”. I’m glad you asked. If you have no personal finance knowledge, and no desire to learn, you can simply purchase a target date fund, i.e. a fund that closely corresponds with your projected retirement year, and let it ride. These funds are available at all of your everyday reputable brokers, including Vanguard, Fidelity, and Schwab. This is truly a product for the DIYer that has no desire to learn anything about personal finance. If you do take this route, be sure to read up on the various retirement vehicles you’ll want to use to reach your goals. Read up on some of the best ways to save with these tax secrets. If you have the desire to learn about investing but not a lot, you should look into becoming an index fund investor. This means you buy ETFs or mutual funds that track the market indices, i.e. the S&P 500 or the total stock market. This exposes you to a large portion of the market, is safer than stock picking, and takes little to no research. You can then set your asset allocation anywhere you’d like (reminder: this is the ratio of stocks to bonds in your portfolio).
There you have it, my short article on why FAs are useless, charge too much money, and should be fired.