Should You Manage Your Own Money?

There is a biblical verse, “No one can serve two masters.”  This analogy can be applied to your investments.  They can work for only one goal, to build your wealth.  When you add traditional money managers or financial advisors and their associated fees you simply lose too much of your return, unless you can save extraordinary amounts over long periods of time to overcome these fees.  This eliminates the option for early retirement for most and even hurts the chances for prosperous retirement for many.  This is the conclusion I’ve drawn after reviewing our investments.  Below we will lay out the reasoning behind this statement as clearly and objectively as possible.  If you are using a financial advisor or are considering one, you may be shocked to see what this is/could be costing you.

In the past year my wife and I began to get serious about gaining financial independence and looking at early retirement options. We realized we needed to understand our investments better.  We had been investing with an advisor through Ameriprise Financial for about 10 years. Most of our investing knowledge was what he had taught us.  Together with him, we determined an asset allocation we were comfortable with. We gave him our trust, allowed him to basically make all of our decisions as to how our money was invested and were for the most part passive in the process.

Initially, we were pleased with the service we were getting and we were definitely building our assets.  We were paying our advisor by commissions through the purchase of loaded mutual funds. We also were being charged an annual planning fee.  Initially, this fee didn’t seem excessive. However, as we invested more money we felt that our advisor was already making a significant sum from the commissions. We believe we were getting little value from the advising fee for two reasons.  First, we wanted a comprehensive financial plan, but our advisor seemed to have little interest in any outside investments such as our work related retirement plans.  Second, we talked regularly about our desire to retire early, but our annual written financial plans and projections never reflected this.  We felt that we were getting cookie cutter advice rather than the personalized plan that we wanted.

This led us to begin doing research on whether we were getting good advice and to see if we could find someone to provide more customized service to our goal of achieving early retirement and financial independence at a relatively young age.

We began to read early retirement blogs and several lead us to the “Stock Series” at jlcollinsnh.com.  This series began to open our eyes as to how superficial our understanding of investing was.  I found his post titled “Why I don’t like investment advisors” particularly interesting and informative on this topic.  We then discovered Todd Tresidder’s  Financial Mentor website.  I looked at the financial coaching services offered to see how the cost and quality of these services compared to the advice we were receiving.  We began working through his articles and listening to his podcasts which were revelations!  One podcast, an interview of Jeff Rose, was of particular interest. They shared some of the financial industry’s secrets regarding how advisors are paid, shedding light on their motivation when selling investments.

After educating ourselves, we began to tear apart our financial statements to see what we were really paying for our investment advice and what quality of advice we were getting.  We hope that we can provide an interesting case study to anyone currently using an advisor or considering using one.  Now that we have begun to educate ourselves we have elected to manage our own investments.  We want to make clear that we are making no accusations of being ripped off or scammed.  We simply didn’t do our homework and for that we take full responsibility.  We got what we’ve since learned is , unfortunately, pretty standard for this industry.  We are doing the only thing that we can at this point and cutting our losses and using this as a learning experience.  Hopefully, sharing our story will help others do the same.  In the next post we will break down in detail what we learned that we were really paying for our investments.  (Spoiler Alert:  It was much more than we thought!)  We will then show you exactly what quality of advice we received for this price.  (Spoiler Alert:  It wasn’t pretty!)

 

Elephant Eater

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8 comments on Should You Manage Your Own Money?

  1. I felt the same way when I started. Thanks to jlcollinsnh’s stock series in addition to many other FI blogs, I felt I had the tools to make my own decisions. Good or bad I would live by my knowledge, I would be responsible for my financial fate and not by an investor that historically has only a 20% chance at beating the stock market! But I agree, I didn’t feel ripped off, I was getting a service that I was paying for (no matter how high I thought the fees were). I just didn’t want that service fee to greater than the investments I’ve worked hard to fund. Good articles so far and I appreciate seeing the biblical references to living your life!

    1. Thanks for the comment Dan. Honestly, when I initially realized how much we were paying our advisor and what we were getting I actually did feel like we were taken advantage of and my initial reaction was anger. However, after looking at things objectively, we realized that these feelings were counterproductive. The only things we could do would be to better educate ourselves in the future and try to do our best to help others do the same. I talked to multiple other people who I respect, feel are responsible with their money and are trying to better their situations and all were making the same mistakes we were. Thus, this blog was born to share our experiences and to promote the work of those who have helped us so much to better ourselves. I’m glad to hear you’re liking it so far and hope you continue to follow.

      Cheers!
      EE

  2. Financial advisors do serve a purpose in my opinion. They are there for those who aren’t educated in handling their own investments. However, even the cost of the mistakes made while educating yourself will likely come nowhere near the fees a FA will charge you. Take charge of your own life. Your FA has different goals and a different agenda. You want wealth, he wants fees.

    Here is one of the main problems I have seen in the advising industry. Most non-sophisticated clients do not leave if you make them 5% a year , even if the market returned 15%. However, if they lose money, even if outperforming the market, they leave. So the financial advisor would rather see a flat or slightly growing account than risk losing that annual fee. However, the difference from an early or solid retirement can be a few percent higher return, which yields huge results over 25+ years. The same happens in the real estate agent realm, where they don’t really care if your house sells for the right price so long as it sells quick and easy. The $10,000 price difference is only a couple hundred bucks to them so it isn’t worth waiting for. Make your own decisions and educate yourself, so even if you do choose to use the “experts,” at least you will know the conflicts of interest.

    The prophet hath spoken!

    1. Thanks for the comments. We welcome everyone, but have never had a prophet here before 😉

      I agree that advisors CAN theoretically serve a purpose. The problem in my mind after spending a lot of time researching the issue is that the price you pay with the traditional models (commission based or asset under management) is far greater than any benefit you would get by using one. The research shows that IF using paper based assets (the only option presented by most financial advisors), the simplest method (using a mix of low cost index funds or ETF’s) is also the most likely to give you the best returns. It will absolutely be the least expensive and most tax efficient option (which is why it is the best bet to give the best returns). This is actually quite simple and can be learned in a week or less by reading a couple of books (or blogs) versus paying hundreds of thousands of dollars in recurring fees to an advisor.

      As for the analogy to the real estate agent, here is where I think it falls apart. Say I sell a $200,000 house at a standard 6% commission totaling $12,000. That will hurt, but you will see it directly in your paperwork, will have agreed to it freely in a written contract and it will make you think about whether to use the benefits an agent brings (advertising, more buyer traffic, faster sales, performing market research, etc.) vs. trying to go it alone. This is much different than advisor fees which are often nearly impossible to decipher and are buried in hundred page long prospectuses, rarely shown on statements and represented as percentages that look small and are therefore often ignored (example .25% 12b-1 fees). Then the much more important factor is the recurrent nature of the fees. An average person lives in the same house for 7 years. Some people stay in one house their whole lives. Therefore, real estate fees for most are minimal over a lifetime. In the posts I’ve written, the $8,000+ fees we paid last year were for basically nothing. We sold nothing off and simply bought according to a pre-set plan. These fees would continue to grow and compound every year leading to staggering numbers over a long investing life-time as I tried to show.

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