Fire Your Financial Advisor and Become Rich

To meet any of our goals with money, it helps to make sure that both our big and small expenses are under control. Therefore, many financial websites focus on eliminating small expenses (like getting coffee out), while also working on larger expenses (like buying used cars).

However, one of the largest expenses that most people don’t focus on is the cost of a financial advisor. A financial advisor may charge between $1,000 and $2,500 for the creation of a financial plan or $150-$300 per hour. Although this is a large dollar amount, having to pay $1,000 or $2,000 for a financial plan is not the reason that you should fire your financial advisor.

The reason that you should think about firing your financial advisor is because of the assets under management and mutual fund fees that you are paying him or her each year.

Maybe the value that we receive from a financial advisor is well worth the cost or maybe it isn’t. Either way, it makes sense to know how much we are paying. This will allow us to intelligently decide whether our financial advisor is worth keeping around or if we should fire our financial advisor.

Fees paid to a financial advisor

Assets under management

Many financial advisors will help us to choose mutual funds, stocks, or other investments. They will then charge a fee based on the amount of money invested with them. This fee is called the Assets Under Management (AUM) fee and it can range from 0.59% to 1.18% according to Advisory HQ.

Typically, for smaller amounts of assets, the AUM fee will be higher. As the amount of assets that are invested with our advisor increases, the fee tends to decrease. 

Mutual fund and other brokerage fees

In addition to assets under management fees, we will also pay fees based on the investment chosen. For instance, the average actively managed mutual fund charges an expense ratio of around 1%.

We can lower these fees by choosing passively managed mutual funds, such as index funds. Index funds track a stock index such as the S&P 500 and offer fees of 0.15% or even less.

Total fee amounts

Between paying an Assets Under Management fee and a mutual fund fee, individual investors can often find that they are paying around 1.6-2% to their financial advisor each year. Again, this amount will change based on the investments chosen and the amount invested with an advisor.

Total fees are 1.6-2% per year.

Let’s take a look at what these fees mean for an investor by looking at two case studies.

Case study #1: ($1,000,000 invested)

Annette and Jakob have been doing a great job saving and investing for retirement. With their above-average incomes, they have been able to save $1MM in their retirement funds by the time they each turned 40. Based on advice from their financial advisor, they have invested this money in a series of actively managed mutual funds.

• Amount Invested: $1,000,000
• Assets Under Management Fee: 1.02% ($10,200)
• Mutual Fund Fees: 1.00% ($10,000)
• Total Annual Fees: $20,200

Case study #2: ($400,000 invested)

Terrance and Cynthia have also done a great job with their retirement investments. By the ages of 35, they have saved $400k in their retirement funds. Since they have read a lot about the great performance of index funds, they have invested this money in a few passively managed index funds. Of course, the did this with the help of their financial advisor.

• Amount Invested: $400,000
• Assets Under Management Fee: 1.05% ($4,200)
• Mutual Fund Fees: 0.15% ($600)
• Total Annual Fees: $4,800

The hidden financial advisor fees

If either of the couples in our first two studies received a bill for their financial advisor fees, they would probably rethink the relationship they have with their financial advisors. Especially for Annette and Jakob in case study #1, their $20,200 financial advisor bill is probably bigger than any other bill they have, with the possible exception of taxes or their mortgage.

Could you imagine getting a bill for $20,200 or $1,683 per month?

Annette and Jakob would instantly fire their financial advisor.

However, instead of receiving a monthly or annual fee for services rendered, the fee is included on their brokerage statement. In other words, instead of earning 9% last year, they only earned 7%. Unless our hypothetical couple really sits down and analyzes their financial statements each year, they will probably be happy because their investments earned 7%. They won’t be thinking that they should have earned at least 9%!

Fund performance

When we work with a financial advisor, the advisor often feels that they need to justify their assets under management fee. Therefore, instead of just advising us to invest in passively managed index funds, the advisor will often have their clients invest in actively managed mutual funds.

Unfortunately, this can be bad for two reasons.

Reason #1: As we already saw with our case studies, investing in a passively managed index fund can cost significantly less than an actively managed fund. For instance, the index fund that I use for most of my retirement investing (FSKAX) has an annual expense ratio of 0.01%. Most actively managed funds have expense ratios of around 1%.

Reason #2: Usually when something costs more, it will be better. For instance, if one car costs $5,000 and another costs $10,000, the more expensive car will typically be more reliable.

However, this comparison doesn’t hold true when comparing actively managed and passively managed mutual funds.

Over a one year time span, 64.5% of actively managed funds underperformed their comparable index fund. It gets even worse as you invest for longer.

Over a fifteen year time span, 91.6% of actively managed large-cap mutual funds underperform comparable index funds.

Not only do you have to pay more for an actively managed mutual fund, but it tends to do worse than a passively managed index fund. 

Why you should keep your financial advisor

Even though there can be a lot of good reasons to fire your financial advisor, there can also be certain times when it makes sense to keep (or get) a financial advisor.

One of the best reasons to have a financial advisor is for the education that he or she provides. Not only can a financial advisor help us to learn about money, but they can also help us do projections to lead us towards our goals.

For instance, let’s say that you want to retire at age 50 like I am planning to do. A financial advisor can help you to determine how much money you may need in retirement. They can also help you to figure out how much money you will need to save each month to build up that nest egg.

Another great reason to keep your financial advisor is because of the psychology behind investing. Maybe we are easily swayed by the financial media telling us that the stock market is going to crash. Therefore, we tend to withdraw our money from the stock market at inopportune times. A good financial advisor can encourage us to stay invested in the stock market, even if it seems like stocks are going to decline in value.

Action steps

If you have a financial advisor that you are happy with, I would never suggest for you to fire them right away. However, there are a few steps you should take whether or not you are happy with your advisor.

Step 1: Educate yourself about money

Financial websites, podcasts, and books can be great ways to learn about your money. They can help you to figure out when you can retire, what you should invest in, and how much you should be saving each month. They can even take over many of the functions of a financial advisor.

Step 2: Ask questions of your financial advisor

For anything that you purchase, you should always know how much it costs.

Therefore, it makes sense for you to ask your financial advisor what fees they charge per year. Be sure to ask about the assets under management fee as well as any other fees that you incur like mutual fund expense ratios. After figuring out how much your advisor costs, you should also ask your advisor why they are worth this amount.

Step 3: Look into index funds

As I mentioned before, index funds are a simple, low-cost way to invest. They also typically perform better than actively managed mutual funds. Good places to start are with Vanguard (VTSAX) or Fidelity (FSKAX).

Index funds are also a really simple way to invest. Owning them can take the hassle out of having to choose a good mutual fund. Instead, you can just purchase an index fund that models the S&P 500 or other index of your choice.

Step 4: Look into a fee-based financial advisor

Instead of being like Annette and Jakob in case scenario #1 who pay $20,200 per year to their financial advisor, you can look for a fee-based financial advisor. This type of advisor won’t take a percentage of your assets each year. Instead, they will charge you fees for the services that they perform.

Typically, their fees range from $150 – 300 per hour for basic financial advice or $1,000 – 2,500 for creating a full financial plan. Although this amount of money can seem excessive, it can be cheap when compared to financial advisors who charge a percentage of your assets.

Step 5: Take control of your own money

Whether you decide to fire your financial advisor or not, just knowing about where your money is going can be the difference between a life of prosperity and wealth and a life filled with financial struggles. A financial advisor should never be the only person who knows about your money.

Instead, they should act as a guide and educator and help you to take control of your money.

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So should you fire your financial advisor? Only you can answer this question. But no matter what, you are in charge of making sure that your advisor is worth the money that you pay them.

Let us know in the comments about your experiences with financial advisors.

And thanks for reading!

~Nathan

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Let’s keep living a great life . . . with the help of money. So what’s next?

• You can travel for free by using rewards credit cards.
• You can get motivated and get out of debt.
• You can check out the next post or the previous post and continue to learn.

But no matter what you decide to do, let’s leave the ordinary behind and take action today!