Should you manage your own investments or hire a financial advisor?

You should learn to manage your own investments. Too much can go wrong hiring an advisor.

Naturally for someone who Accidentally Retired, I earned and saved enough money in large chunks to find myself in this position.

But it wasn’t easy along the way. I ran a startup and it was a grind. I can’t tell you how many vacation days were interrupted to handle this issue or that, or how easily fires started that needed putting out.

After years of hard work and grinding, we ended up selling our business, with all of the partners staying on to work for the new ownership group.

We didn’t end up making a ton of money, but it was still more than we’d ever had by far. So we did what we thought was best at the time, my wife and I went out and hired a Financial Advisor.

This advisor was recommended to me by a family member, who had done quite well and was extremely picky, so I felt if this person liked the job the advisor was doing, this was the right person for my wife and I to trust with our money.

We invested 95% of the money that we had made with our new financial advisor, and kept the rest in savings.

We put the money out of sight and out of mind. Both my wife and I simply ignored it’s existence, and we let compounding do its trick.

In general is a great way to become wealthy over time. Simply invest and forget it.

Except there were problems that we were simply unaware of…

You could be invested too conservatively.

We paid so little attention to our money and ignored it’s existence, that we also failed to realize that we weren’t properly allocated.

Not being properly allocated, cost us hundreds of thousands, of dollars, because we were invested as two eighty year old retirees should be invested, NOT two folks in their thirties.

The silver lining was that we were at least invested, but we missed out on a huge bull run, and estimate that we likely missed out on a 50% increase in our net worth, had we simply invested a bit more aggressively.

This was a huge mistake in that we paid so little attention we had no idea what we were actually invested in. Our allocations were misaligned with our goals.

You are paying higher fees than you think

We made a big mistake in that we paid so little attention we had no idea what we were even invested in. No idea. I mean NO IDEA.

But we were not only invested in mutual funds that had high fees and high expense ratios, but we were also paying fees to the Financial Advisor as well.

We knew we were paying fees, but I don’t think we really comprehend how much.

It turns out, it was greater than 1.2% per year.

But it was hidden, because the mutual fund fees were NOT SHOWN on the monthly statement. So we had wrongly assumed we were actually getting a “Family Discount” and our fees were more around 0.6%.

We were wrong.

And the worst part of this is that, fees compound over time. So for the many years we were using this Financial Advisor, we were paying higher fees, and we were losing the benefits of compounding returns by over 1.2%. For more, check out how investment fees over time could cost you millions.

You may not be able to move funds without selling them first and taking capital gains

This is something I would have never thought about that, but portability of those investments matter.

Being able to say “I want to change advisors and move to a different firm” AND being able to actually move those funds, matters so much.

Why?! Because not having portable investments will force you to sell your assets and take capital gains when you least want to.

In our case, we had a huge amount of money tied up in proprietary funds that could not be moved anywhere else. So we were forced into either selling and taking capital gains, OR holding them at the current brokerage until such time it made sense to sell.

Unfortunately for us, we had to do a combination of both. In fact, even after moving 90% of our money, we now still have 10% hung up in proprietary investments that will take another year to sell off.

You need to be more involved with our own investments

Clearly the worst offender of all when dealing with a Financial Advisor, was myself.

Our strategy to invest in the long-term and forget about the money worked, but we made the mistake of not paying attention to the right things when we chose to work with an Advisor.

It is now time for you to fire your Financial Advisor and learn to pick your own investments

So after reading to this point, I hope you realize that you should fire your Financial Advisor right now!

As JL Collins puts it:

If you are a novice investor you have two choices:

You can learn to pick an advisor.

You can learn to pick your investments

JL Collins

And I agree. The best way to work with a Financial Advisor in my opinion, is simply don’t pick one, and focus on learning to pick investments.

Picking investments can be really simple now with low-cost index funds and ETFs.

Yes there are a lot of choices, but once you get brushed up on it, it turns out that it is much better to invest in the entire market (an Index fund), than stock or fund picking.

The best resource for this, that I can recommend is The Little Book of Common Sense Investing by John C. Bogle, the Founder and former Chairman of the Vanguard Group. It is short, and it is brilliant. A must read, before making any decision to invest, period.

When does it make sense to work with a Financial Advisor?

But, if you really must work with a Financial Advisor, then I recommend the following:

  1. Make sure you are not paying more than 0.5% (this is advice straight from Mr. Bogle).
  2. Make sure you are using a fiduciary.
  3. Know what your money is being invested in. Is it in stocks or funds, or ETFs or some combination?
  4. Ensure that no matter what you are invested in, that you can move it elsewhere for no fees and no portability issues.
  5. Make sure that you have the right allocation for your age. You can get an understanding of this, by looking at target date funds for your projected retirement date and ensuring that your allocations are similar.
  6. Sign up for Personal Capital and/or track your investments yourself periodically. You can ignore your money like us, you can be detached from it, but at least ensure that you check on it every now and again.

I can also say after having done a thorough search for a replacement Financial Advisor, that Vanguard’s Personal Advisor Services meets the above spec. There are plenty of robo advisor services popping up, but if you want to work with an actual person, and only pay a small fee of 0.3%, then Vanguard is likely a good fit.

I am sure I could go on here for days, but I won’t.

Do you have any further suggestions or things that I missed? Let me know.

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6 comments

  1. Couldn’t agree more. Took me a decade to realize how much even my tiny 15k Roth IRA had been eaten alive by fees at Edward Jones–including put into American Funds that carried a 5.75% load fee. When I finally started learning about this stuff I legitimately felt like I had been robbed. And I had been!

    1. Yeah I had an investment account that I hardly paid attention to when I was in my early 20’s with $15K or so in it. I am not sure it even grew at all. I think it was so fee heavy that any gains were offset. I wish I had paid more attention, but better late than never!

  2. It’s amazing that financial advisors are actually allowed to charge more than 100 bps for their fees. For underperforming the market.

    So glad that personal finance websites really educate us on the perils of having too many fees in our investments. Just as compound interest works for us, it can work against us.

    1. I think it just comes down to education. Thankfully personal finance blogs are doing a great job of helping to solve that problem. But you have to be out looking for it. If you were like me, you grew up with financial advisors in your life and trusted they knew what was up. It took me a long time to realize that there was no secret sauce. The only secret sauce is getting yourself up to speed!

  3. I’m sorry you went through the experience you did with your advisor, that sounds awful. For the “Average Joe” type the simplest investment may be a target date fund but with just a little bit of self-education, they could improve over the target date fund with a simple index portfolio. Hopefully your story can help others avoid what you went through.

    1. It’s all good. Hopefully, it does help. If I can wake up some other folks who are smart, but busy, to do a bit more digging into their portfolios and advisors it will be a big win.

      I agree that a target date fund that automatically shifts allocations is probably the simplest way to go for most investors. That is part of what convinced me. My 401 (k) was outperforming my taxable portfolio by a large margin. Simplicity over complexity. Every time.

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