Why We Said Goodbye to Our Financial Advisor

Do you use a financial advisor to help you invest? Are you happy with their services and advice? If you are like me & my wife, you might be ready to start DIY investing but don’t know how. This article will tell you why we said goodbye to our fee-based financial advisor.

What is a Financial Advisor?

Before the Internet, for many years, the only practical way for the average Joe to start investing in the market was with a financial advisor that earned a commission each time you purchased a stock or mutual fund. That meant you went to a local investment office like an Edward Jones, Mutual Fund Store, or one of the local advisors that advertises on your radio station or newspaper.

Now that you can literally trade from your smartphone, your traditional financial advisors are no longer a necessity to trade.

There are two different types of financial advisors:

Commision-Based Advisor: Your broker earns a small commission for each stock or fund you purchase.

As an example, you buy a mutual fund and it has a 5.75% load fee. For every $100 you invest, $5.75 goes to your broker & mutual fund company and the remaining $94.25 purchases shares of the fund.

Fee-Based Advisor: Instead of earning a commission on each trade, they collect a flat fee of your account value (generally 1.35% annually but a small percentage is deducted each month). Most advisors are changing to this method because of the proposed Fiduciary Rule, because commission-based trading can make it more financially lucrative for your broker to buy funds with higher load fees to pad their wallet.

Assuming you invest $100 per month, that translates to $1200 annually. Before you receive any dividends or your investments appreciate in value, you can expect to pay about $16 in fees.

Our Investing Experience

Before I tell you why we stopped using our financial advisor, let me tell you how my wife & I invested.

Me

I have all my investments with an online brokerage that has been around with the 1970s and have never used a financial advisor. I primarily own mutual funds, but, I have recently started buying individual stocks that pay steady dividends. I have also slowly been transitioning from actively managed funds to passive (index) funds.

For the most part, I’m proud of my investing so far. Not including my 401k, my portfolio has returned 12.76% since 1/1/2009. The S&P 500 has returned 14.96% during that same timeframe. I’ve only outperformed the market this past year (2016), but, I don’t think I’ve done that bad because 80% of mutual funds trail the market over a 10-year period. Of course, I’ve purchased several of those same mutual funds.

My Wife

My wife is the one with a commission-based brokerage account, although our broker’s company was gently nudging everybody into the direction of fee-based services because of the fiduciary rule that was recently put on ice.

She opened a Roth IRA & a taxable brokerage account with them shortly be before we met. The Roth IRA had a $40 annual account fee plus brokerage commissions.

I will get into the reasons below why I made the decision to make the switch, but, let’s just say she would have earned more money by keeping her money tucked under her mattress after the fees were factored in because her investments only broke even.

While most people gained money in the past few years, her account was so conservative (it was invested in bank loans to big companies) it had one bad year offset by an equally good year to net a near zero return.

I’m Not Entirely Opposed To Financial Advisors

I don’t speak ill of my wife, but she doesn’t know the first thing about investing. It’s like asking me to plan a party or dress the children for a family photo. It’s not my specialty and I don’t have any interest in being good at it.

Financial advisors are good for people that don’t know the difference between a mutual fund and a stock. They can also be really handy with wealth management when you have million dollar+ portfolio and a sharp market drop can wreak havoc on your retirement plans because you were too aggressive.

Also, relatives on both sides of my family use advisors to manage their investments. They have had positive returns and positive experiences. If it wasn’t for an advisor, they probably wouldn’t have invested anything in the market and only earned a paltry interest rate from a bank savings account.

Why We Said Goodbye

To be forthright, I’m not a saint in this story. We have been married for about 3 years and the first real look I took at her managed account was about two months ago when a new advisor (the original advisor hired an associate advisor) called to do an annual portfolio checkup & see if we wanted to invest more money.

It’s a phone call he probably regrets making.

I was busy & distracted

Between getting married, having our first daughter, moving twice, and taking a year off from work to build a house and change careers, looking at retirement accounts that we pay an advisor for wasn’t a top priority.

I forgot about it

Since it wasn’t my own account that I physically filled out the paperwork to create, we were married almost two years before we added myself as a beneficiary, I forgot we even had the account. I mindlessly paid the $40 fee each December for the upcoming year.

I don’t like fees

I met with the advisor twice before deciding to transfer out the accounts. Mostly to determine if the fees were worth the value of talking to a physical human about investments & I didn’t want to pay the $95 transfer out fee ($190 for both account types) if I didn’t have to.

I just couldn’t justify staying because of the fees. I’m used to investing in mutual funds and ETFs with an expense ratio of .15% or lower. I do own two funds with a .75% expense ratio and have been pleased with their performance.

With our previous advisor, we would have had a 1.35% annual fee for her Roth Retirement account and all the mutual funds have expense ratios of at least 1% because they trade with expensive fund families like American Funds, etc.

Since I’m mostly going to an index fund and dividend fund strategy, I can buy similar mutual funds and ETFs for a fraction of the cost with similar holdings and an investment strategy.

We have 30 years before we can withdraw

We have another 30 years before we are old enough to withdraw from our retirement accounts. That’s a lot of fees to pay between now & then that could be invested and earn interest instead.

We would have been fine sticking with the broker, but, the opportunity cost was too high knowing what I know about the market.

I can do my own research

If I didn’t know or enjoy researching potential investments, I would have stuck with the advisor. But, I’ve been casually investing for almost 15 years and our meetings made me do the most research in 3 years on determining if my investment choices were comparable to what the broker could offer.

I get advice from resources like Kiplinger’s Personal Finance, Rockstar Forums, and investment blogs like Dividends Down Under and Investegies.

There’s so much information available beyond the stocks and funds a brokerage recommends. It’s one reason I made the switch to passive investing.

How Much Money Did We Lose?

In her Roth Account, I sold her two holdings that had a slight postive return of less than 1%. Not including commissions & the $95 transfer fee, we paid $160 to keep her money there for four years and break even.

It could have been a lot worse, no doubt. My wife knew nothing about investments and at least knew she needed to open an account to start saving for the future. Her intention was to have “safe” investments that would earn more than the bank that a retired person would hold.

I came along shortly after she opened the account and completely forgot about it until we decided to meet our new advisor and my eyes were opened.

My one regret is that I didn’t pay attention sooner as I would have made the switch then. I have nothing against our advisor, but, I feel I can do just as good by myself. I liked being able to drive 7 minutes down the road to talk face-to-face about investments, but, not for what it cost.

Plus, I could invest in a “roboadvisor” fund that would have the same approach as a human advisor, but, for a fraction of the cost (0.30% compared 1.35% management fee).

Do you use a financial advisor currently? Have you ever used one in the past & switched to DIY investing.

 

 

 

 

 

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