Something funny started happening a few weeks ago – first with a close friend, then again with numerous colleagues… I have been having more and more conversations about financial advisors and investments. Now, you may think this shouldn’t be so funny, I mean, I do blog about personal finance (well, sometimes). But, if you had told Mr. SSC from five years ago that he would be having multiple conversations about finance where he was considered the ‘expert’ of the group – well, younger Mr. SSC would’ve thought you were drunk.
Let me give you some background, first and foremost mentioning that I am NOT a financial advisor. I had very little good financial sense prior to meeting Mrs. SSC, but since meeting her, I’ve read a lot about investing, different strategies, different funds, and educated myself to the point that I held my own, by myself, in a financial advisors office. Yep, I was really nervous going in and came out thinking, OMG, there’s no way we’re investing with them, followed by – holy cow, I really did learn a lot reading all those finance blogs, and articles and forum discussions! Thanks guys! Anyway – back to my story about my recent conversations…
These conversations usually trend along the lines of:
Friend: “Oh, I’ve got a financial advisor.”
Me: “Nice! Do you mind if I ask how much they charge?”
Friend: “Um, I’m not sure, I think a flat fee. It’s pretty low though, and it’s set up to not go above a certain amount.”
Me: “Cool, how low is low, what’s the ceiling on it?”
Friend: “Um, I don’t know offhand, but it’s worth it. I don’t know about investing. They handle all that for me.”
Me: “So, what are you invested in? Do you know if you have low expense ratios or trading costs if you’re in mutual funds?”
Friend: “Ummmm… I’m not sure because they handle all that, but that’s their job, so I’m not worried. They come by the house twice a year and go over our report. (pause…) What are expense ratios and trading costs?”
Me: “Let me show you.”
To date, I haven’t talked to anyone that has a financial advisor and also knows what funds they are invested in, how much they’re paying their advisor, and especially not their Index Funds Operating Expense Ratio (OER), or mutual fund trading costs. First let’s discuss “What are OER’s?” Essentially, they’re the costs associated with investing in certain Index Funds and they reflect what it costs to own that fund. It is effectively the “overhead” that is needed to keep that fund running. Some have high overhead costs, and some have really low overhead costs. By choosing the right fund for your portfolio strategy and risk tolerance, you can manage to keep these costs quite low.
The same is true with Mutual fund trading costs. If you get sold an actively managed mutual fund, it will probably come along with high trading costs because it takes a lot of overhead to keep people watching the funds and actively trading them around, hopefully to get you more money in your return right? Except that your return is now getting eaten into by the higher trading costs, so it has to do that much better to make money. Generally, you can find mutual funds with lower trading costs that will perform as well or better than higher cost mutual funds.
“But wait!” you say, “my advisor says that by investing with them, I have access to better accounts than you can find as average Joe Investor.” To that I say yes and no. Yes, they have larger sums of money to play with, and these come from you, and all their other clients. These would allow them to buy into different funds that may not be available to me, because I don’t have those large buy in sums available. Oh, and I’m also not a business. Yep, some funds are only traded to business like the ones that employ your financial advisor. (Sad Trombone music – bwaa bwaa bwaa bwaaaa…)
However, this doesn’t necessarily mean that they are better. Getting back to my visit with a financial advisor he showed me how much more his company could potentially make on my current investment portfolio. He showed me the funds they can invest in that I can’t, the historical returns on those, and how they beat or match our current funds’ performance, and how overall, his company should be able to deliver potentially 4-6% better than the historical performance of our current funds. That sounds awesome, right?! Hell yeah it does!
So did I invest with them? Um, No… This is because, behind all of that extra return over what our potential current investments could make was a fee, and higher expense and trading ratios that ate up the other 4-6% “profit” that they could “improve” our portfolio by. In essence, it was a wash, except I wouldn’t have much control over my money, investments, etc… No thanks, I’m good where I am.
For instance, our portfolio had an Index Fund OER of 0.11%, until Mrs. SSC was using a Personal Capital comaprison tool and realized that Vanguard offered essentially the same mix of funds, but with 0.09% OER’s. A simple clickety-click of the mouse, and we she swapped those funds over. The same with some mutual funds that had a little higher trading cost. Mrs. SSC found some that were a little lower, but essentially the same mix of funds, and she lowered our costs. However, the financial advisor I met with recommended a plan with 0.33% OER which is 0.24% higher! This also came with mutual funds that would jump our trading costs up from 0.11% to 0.34%. Of course, this makes perfect sense! (Side note, it really doesn’t, not in my mind at least.)
Going from $90/$100,000 in investments to $330/$100,000 is HUGE. It would mean that if our accounts were at, let’s say $500k, then we’d be paying over $1600/yr just in expense fees alone, or over 3x what we currently pay. Let’s say this stays constant for 20 years, that’s $33k we lost out on through expense fees… not even including any potential returns we could’ve made if that money had been invested. That’s a lot of money! Put his advising fee on there for 20 years, and that’s over $60k just to have someone “manage our money” for us. That’s a WHOLE YEAR of our FFLC budget just gone. Yeah, one whole year of living expenses lost to fees. That’s not even accounting for the mutual funds increased costs. Ridiculous
After explaining all of this to my friends and colleagues, most responses were inquisitive and wanted to learn more. Their situation was, “But, my family doesn’t have a “Mrs. SSC” and investing seems difficult. I don’t want to mess up and lose money.” That led me to forwarding a great post from Afford Anything about investing for people scared of investing. It’s a great article talking about how best to invest and explains the strategies well. Everyone I forwarded it to has gotten something out of it, and I’d really recommend reading it if you’re at all curious about more of this stuff. (Funny side note, I forwarded it to my old boss, and somehow he thought I wrote it. He recommended a couple of younger people to come talk investments with me because, “I think he’s a financial advisor on the side…”)
Let me repeat, I am NO financial advisor. I’m just trying to shed light on some things I recently learned and show that it isn’t that difficult.
We use Vanguard for investing because they are pretty dang cheap, and offer a good mix of funds. We also use Personal Capital and their research tools to compare funds and do some background work. Sidenote- by “we”, I mean Mrs. SSC as she pretty much runs the show.
The bottom line is that with a little background research, you can save yourself a LOT of money over the course of your retirement investments if you just do a little background research into your current fees and see if there are accounts offered that have the same mix of funds with lower fees. Also, you don’t need a financial advisor to invest your money – thank-you to Vanguard, Fidelity, and the other brokerage houses out there that make this possible. With simple google searches like, “what should my investment portfolio look like if I’m not sure about investing?” You can get loads of answers on a good allocation mix for your risk tolerance and your portfolio. I’ve included lots of links to help on your way as well – no affiliate links, just palces to get you started.
Do you do your own investing? Have you had a pleasant run in with a financial advisor? Let me know!