Beware of Salespeople & Fees

I hate to burst your bubble, but if you are working with a financial advisor, he is probably charging you a lot more than you realize.

To be clear, if you can find a “good” financial advisor, he is worth more than his weight in gold.

But on average, there are a lot of reasons to believe most of them are costing you a lot more than they are worth. And you do have better options.

For example, a simple “Lazy Man ETF Portfolio” will likely outperform most financial advisors.

Of course most financial advisors are sales people, and the “successful” ones will frighten you into believing you need them, for things like:

• Making sure your beneficiaries are set up correctly.

• Making sure you’re investments are held in the correct type of accounts (e.g. Roth IRAs, taxable brokerage accounts).

• Making sure you’re not making emotional mistakes (over reacting to media-driven fear and greed).

• Helping you with mega backdoor Roth IRAs, employee stock option sales, and making sure you understand “the 4% rule.”

• Making sure you are fully confused by the myriad of unecessary and expensive “investment products” they are piling into your portfolio.

• The list goes on and on…

But sales people are not investment people, and some of you have both the ability AND desire to figure out (and implement) all of the above bullet points on your own.

What’s more, your financial advisor is absolutely charging you (even if you’re not writing a check directly to him every month), and it’s probably (a) more than you realize, (b) more than he leads you to believe, and truthfully (c) more than he may even realize.

Let me explain… with an example…

I spoke with a friend’s co-worker recently, and he asked me to review his brokerage account. He was quite proud that his advisor was charging him only one-half of one percent (0.50%) in annual management fees—a legacy rate because his dad had worked with that advisor (and dramatically lower than most financial advisor fees).

But when I looked into his portfolio holdings, guess what I found out?…

1. High Fees: His advisor had him invested in dozens of fancy mutual funds, which charged him—on a dollar-weighted average—0.85% each year. So when you factored in the advisor’s 0.50% fee, plus the 0.85% in additional fees, the client was paying well over 1% a year in fees—and truthfully that’s still fairly tame when compared to some of the other high-fee-attrocities I have seen.

2. Bad Investments: The fancy (expensive) mutual funds this client was invested in made a lot more sense if he was a 90-year old, with over $10 million in assets, living in the year 1983 (when a 10-year treasury yielded over 15%). Specificially, he held too much fixed income (bonds), he missed out on the digital revolution over the last decade (because the advisor had him concentrated in value stocks—with no growth), and there was no reason for this person to own exhorbitantly priced long-short funds, to name just a few).

Again, this person would have been dramatically better off (he would have a lot more wealth—a lot!) if he had been invested in a simple lazy-man ETF portfolio (instead of being invested with an overpriced financial salesperson that had him in a myriad of unecessary and expensive “investment products”).

And to be fair—but also adding insult to injury—the financial advisor was a nice guy who probably didn’t even know why his clients performed so poorly (his strategies worked great in the 1980s)—while he was hurting his clients so badly for decades. Ugh!

The More You Know:

Did you know…

• Exchange-Traded Funds (ETFs) can be a great low-cost way to get diversified exposure to broad market indexes, but some of them (particularly “active” ETF strategies) charge more than 1% per year (a lot!)—which comes directly out of your bottom line.

• Mutual funds and ETFs are a truly massive fee-generating industry, but by investing directly—in a prudently-diversified goal-focused portfolio of individual stocks—you can avoid that layer of additional fees altogether.

• Even 100% passive portfolios (such as popular ETF target-date funds) end up making huge structural bets on the future shape of the economy.

Learn more about Asset Allocation here.