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Why I Dropped My Financial Adviser

My financial adviser is smart. She’s ethical. And her special IRS tax certification has come in handy at tax time.

So why did I drop her? Fees.

Every year, her firm extracted 1 percent of my modest retirement account balance. This is less than some advisers charge, but on top of that I pay between 0.8 percent and 1.2 percent in fees to various mutual fund firms for the mostly stock funds she selected for my investments. These aren’t exorbitant fees, either, for actively managed funds. But when you add this up, I was shelling out at least 2 percent of my account every year.

Thanks to fees and my penchant for some international stocks, which were sluggish or declined last year, my retirement portfolio did not grow at all in 2014, despite a booming U.S. stock market that gained nearly 14 percent, based on the Standard & Poor’s 500 index.

I used a simple fee calculator to estimate my savings in fees, and the resulting increase in my investment returns, from letting my adviser go. If I don’t tap my IRA funds until age 70, I would save nearly $40,000. This sum won’t radically improve my retirement. But it’s not chump change either. It would pay for a few really big trips my husband and I hope to take – or a large chunk of a year in a nursing home.

My overdue decision to let her go had been stifled by inertia and not wanting to break the news to my really nice adviser. My action was finally sparked by a realization that, yes, I will retire someday. I’m nearly 58, my husband is 61, and we need to preserve our retirement nest egg.

What am I giving up? Minimal advice. It’s too bad I don’t have another 20 years until retirement – the calculator estimates that my savings would be nearly $90,000, assuming the same starting balance.

Fees are serious business. They’re worth paying attention to.

22 Responses to Why I Dropped My Financial Adviser

  1. Ken Pidcock says:

    Indeed. Looking at the calculator you point to, I realize that I have no idea how to figure out total fees for my accounts. Any general advice?

  2. Kim Blanton says:

    Ken- I had to go through each mutual fund in my portfolio and look up the fund.
    Morningstar.com is a good central location for doing that. Usually, the fee is called the “expense ratio.”
    It’s good to know your fees- hope this helps!
    Kim (blog writer)

  3. Kim Blanton says:

    p.s. As for the fee for you adviser – if you have one – it should be on your adviser’s quarterly or annual statement.
    Kim

  4. Wait a minute. You finish by saying you are giving up “minimal advice”, but earlier you wrote, “her special IRS tax certification has come in handy at tax time.”

    How much was your adviser’s tax advice worth to you? Or do you value your adviser’s worth primarily by the investment return you earn on your portfolio?

    I also don’t know what level of risk or amount of financial loss you can tolerate. Are you prepared to lose as much as the S&P 500 index in the really bad years (minus 38.49 percent in 2008, its worst yearly percentage loss!)?

    If not, then why do you compare your investment returns to those of the S&P 500 in “good” years like 2014? It may not be appropriate that you be invested exactly like the S&P 500.

    I agree that fees are serious business. Fees are one aspect of your personal finances over which you have lots of control.

    But remember not to forget about the *value* of services you receive for what you pay.

    If you switch to a low-cost service but miss out on tax planning strategies that can save you thousands each year, you still may end up with less money in your pocket.

    Now don’t get me wrong. If your adviser offered little more than a basic asset allocation recommendation and minimal tax advice, then the 1% annual fee is a lot to pay for not a lot of value. There are many alternatives, but remember to factor in the value of other services and advice above and beyond how much in returns your portfolio generates year by year.

  5. It is understandable to feel the way you do but I do believe this merits a deeper dive.

    First, let me lay out a pair of facts. Individual investors on average, realize returns on invested assets several percentage points below those that use professional investment managers.
    And portfolio variance (risk) is primarily tied to asset allocation, which normally changes as you pass through different stages of life. Without advice you could easily be taking too much or too little risk. These two reasons alone are enough to warrant using a qualified, accredited advisor.

    Using your scenario, you could easily have $40,000 less at 70 than you would having stayed with your advisor. Individual investors tend to buy and sell at precisely the wrong times.

    This is not to say all advisors are diligent, disciplined, value-added professionals, but many are.

    Might I suggest preserving the relationship by having a discussion about fees, if you are not a large consumer of your advisors services maybe you can negotiate lower fees. Also, you could swap out a few of the actively managed funds for their passive counterparts, this could have a profound impact on fees. By handling the situation this way you significantly increase the odds of meeting or exceeding your goals for retirement.

    • Keith says:

      First, let me lay out a pair of facts. Individual investors on average, realize returns on invested assets several percentage points below those that use professional investment managers.

      Really? Can you justify that statement?

  6. Tom Patterson says:

    I worked at a full service broker for a few years, learned a lot, including that it was not a good career match for me. I shifted my IRA to an advisor at my credit union. I told her I would be a low maintenance client; we’ve met twice in 12 years. I don’t pay an annual fee.

    I’ve invested in a conservative mix of low expense mutual funds and several individual stocks. Since the market bottomed out in 2009, my account value has tripled. I handle all of my trades online, virtually none until this last year when I realized I had enough to retire at age 60 with my savings and a small pension from my last employer.
    My point, I guess, is that it isn’t rocket science. A little research and a lot of patience will result in success.

  7. Fees ARE important, but so is good, sage advice from someone who cares about you, understands the markets, and understands your goals. My firm offers financial advice and we charge fees. We have a bias, to be sure.

    We also understand, and you can fund numerous studies that support this . . . undisciplined investors are their own worst enemies (not all of you, but most). I have talked to people who thought they should go to cash because of the Ebola virus scare; sell out because a Democrat got elected; or go 90% S&P 500 because that index was up 13+% last year.

    Good, reasonably priced, advice helps investors navigate these treacherous waters. We are able to show clients (over time, and no guarantees going forward) where good advice is worth it, especially in volatiles an down markets.

  8. Terry Reilly says:

    Spoken like a true financial adviser … why should anyone get a dime if the value of your portfolio declines??? Advisers collect their typical 1% even in a severe market downtown making it even more difficult to recover.

    Why not a “pay-for-performance” model? If I am averaging 5% returns and a financial adviser takes over my account and delivers a 10% return, I would be glad to pay double the 1% fee.

    Financial advisers are about to become the dinosaurs of the financial world. Every bit of research currently supports creating a diverse portfolio with a low fee financial services firm, like Vanguard, and leaving the money alone.

    The ability to create that diverse portfolio involves little more than reading a brief article in Money Magazine, the WSJ, or any number of publications. It’s quite simple – “a caveman could do it,” assuming he learned to read.

    And if you are seeking a financial adviser to invest in individual stocks, you are a fool. Unless you have a multi-million dollar portfolio and have money to lose, individual stocks are a fools errand. That’s why there are mutual funds.

  9. Dan Serra says:

    You are contradicting your latest post on procrastination hurting savers! A good advisor will help you overcome this by showing you how procrastination can lead you to having less in retirement. And they help you build a portfolio beyond the employer’s default investment options that is more likely with procrastinators. Having a financial coach is often worth it. I’m disappointed this post lacks deep-thought that I’ve come to expect from this blog.

  10. JackK says:

    You indicate that it was your penchant for international stocks and the fact that they underperformed last year as a factor. First, why blame the advisor if it was your preference? But more importantly, why would one year make a difference? Did not international equity contribute over the past 10 years? What was your overall performance net of expense on a risk-adjusted basis over the past 5 and 10 years? Moreover, what if those returns were consistent with a financial plan that she might have prepared? Ultimately, the investments are to support a set of goals, not to beat a benchmark. Going forward, in lieu of firing your advisor, you could invest in lower cost ETFs to get the overall cost down. While you may be saving on a fees, how do you know you won’t be costing yourself more if you don’t maintain a good discipline or lose that tax advice? Granted there are good reasons to leave a poor advisor, but what you share doesn’t seem to justify your decision. Best wishes nonetheless.

  11. howard says:

    Yes, fees are very important. However, even more important, is your investment behavior. Without an adviser [CFA, fee-only] to help you, your bad behavior can also cost you big time. Vanguard breaks down a more detail analysis on the following page: https://advisors.vanguard.com/iwe/pdf/ISGQVAA.pdf?cbdForceDomain=true

  12. Larry M says:

    Fees erode at the base of everyone’s portfolio. I, too, had a broker that did positive investing for me, but after several years, I sat down a figured out what those fees were. Besides having to pay front loads for mutual funds he recommended, there was also his fees for buying them. WOW. 5.25% front load fees, then his take. Enough was enough, I looked around for many months, studied all the large mutual funds brokers, and came to a conclusion that I could do this myself. Dangerous I know, but I have never ventured into the unknown. Most of my portfolio was built when I worked for a large company and could only invest in mutual funds of all sizes (401k) and never touched it until after the plant closed. Then I went to this mutual fund house over at the corner store. I could see paying 1% each year then having the next year to make it up.

    Remember 1% of every $100,000 is $1,000. Every up and every down year, they still will take their money.

    PS – since I have been doing this, I haven’t had a losing fund.

  13. Mark Zoril says:

    As an adviser, I say excellent choice! And thanks for sharing. More consumers should do this. A lot more.

    Not everyone needs an adviser. Some people will do great on their own. But advisers can absolutely provide value. In many cases, much value. They can make a huge difference in the long-term success of their clients. But they should be charging for their time and not as a percentage of assets. Period.

    Many advisers that are fiduciaries like to promote how unbiased they are because they are “fee-only”. But then they charge their clients as a percentage of assets and their financial compensation is entirely tied into convincing their clients to invest in their management program.

    By and large, asset allocation is a commodity and can be purchased at a very small price. There are many sources for that. Where advisers add value is in working with their clients to help them manage their financial lives and plan for their future. But consumers are much better off if they purchase this directly from their adviser instead of paying for it as a percentage of the assets under management.

  14. Gilly says:

    There is a world of difference between traders and investors. Ask Warren Buffet. All the academic research clearly shows that financial advisors (stock/fund pickers) DO NOT ever beat the market indices on the long-term (or even for a few years). I learned this the hard, expensive way. (Ask Bill Gross, considered the best bond funds manager for about this, too.) A financial advisor is not a CPA. For complex taxes, hire a good CPA on fee-paid basis, as needed. For investing options, search for and study the classics on the Internet and at your local library (free!). Then decide if you want to be a trader or an investor. Oh, and always invest in yourself, your skills, and your knowledge first.

  15. PJ says:

    I do not mind if my financial advisor makes money (since that is her livelihood) and I expect her to keep learning and researching tools to help me make money. My personal investment returns have not inspired confidence in my personal ability, and besides who has the time? Sure I like to make money but it is all about sharing.

  16. Chris Grande says:

    I’d have to agree with almost everyone here on various points depending on the case. For many people, higher fees are unnecessary. For some, the advisor fee could replace the mutual fund fee and you’d get full advisory service and the same fees if the advisor invested in index funds. This can especially pay off with advisor annuities where fee reductions in the range of 80-90% per year are common.

    Or you could get more value for the fees and/or better investment performance. Once again, people look at 2 or 3 years performance and fail to look at a full market cycle. If one looks at a full market cycle, multiple years of gains have been wiped out 2 times in the past 15 years.

    Furthermore, in terms of services, our firm typically works with folks with above average assets, but we include tax planning and preparation, insurance reviews, legal reviews and Medicare consulting and advising in our fee – along with money management and full financial planning. So at different net worth points, I think we are worth it (though we may be biased:).

    We tend to offer lower flat fees for smaller clients (which can be one time consults or annual retainers) because for basic cases, the fee can be lower as the workload required is lower. But when it comes to situations where people can benefit from having a seasoned, experienced advisor handling their affairs, especially delegators like our clients who prefer to focus their time on the important stuff (like personal growth, family, passionate pursuits) and not on being financial planners (delegating that to us), paying a fee is worth it.

    That being said, fees are coming down a bit in my opinion. I think it’s a trend in the industry. But good advice will always be worth it.

  17. bob says:

    Don’t listen to these financial advisors, you did the right thing. They make it seem like you need an expert to make sure you pay your taxes right and that they can beat the markets. Its not true, just look at the prose they are using to scare you. “Navigate treacherous waters,” come on now. If you need tax advice, pay a tax professional by the hour, not by % of your portfolio.

    PS – I found this blog from a link at bogleheads.org, which is an investment forum dedicated to low-cost investing.

  18. Elin Zander says:

    I think it makes much more sense to get a check up on your financial plan, progress, and goals from a fee-for-service, fiduciary or financial planner when you feel you need it. You would get the same service and know exactly how much you are paying up front. It never made sense to me that I would be paying my financial advisor MORE as my retirement savings grew. If you have a plan and stick to it, you decrease the chances that you will make bad investment decisions. All the information you need to know to do 95% of the work is readily available, and many DIY investors do just fine. If you find that you are struggling, professional help is always available…

  19. She’s smart and ethical but she puts you into 1% ER funds when 0.05% funds are available and charges you 1% a year when other advisors will work for 0.5% a year (or if your stash is too small) $1,000 a year?

    I think that’s a stretch. Sounds to me like you had a “fee-based” advisor who not only hits you with fees, but also sells you loaded mutual funds.

  20. David Ressner says:

    Non-fiduciary, commissioned brokers and fee-only fiduciary registered investment advisors are as different as night and day. And if you don’t know the difference, you’re not making an educated decision.

  21. “If I don’t tap my IRA funds until age 70, I would save nearly $40,000. This sum won’t radically improve my retirement.” While I think your decision is highly defensible in terms of your overall financial position, the above sentence does not necessarily make sense. I do not know the average compounded interest that you arrived at for the $40,000 figure, but I wonder if you have taken into account a) inflation in general, and b) that we are close to a top in most share indexes and should prepare for another situation like 2007/2008. So I don’t think your calculations will bear you out when you actually reach that magical 70 mark, I am sorry to say. And you are not the only one, the average citizen in the OECD countries is probably in worse “shape.”