The Trouble with Investment Advisors

I get asked a lot about hiring an investment manager. These companies are extremely common, often well respected and seem like a great deal. On the surface, they appear to be experts in their field who will manage your retirement accounts for a small fee or seemingly no fee at all. While I’m not 100% against using this kind of service, here is the caution I give all my friends.

 

There some upsides to this kind of investment planning. Most important: They help you get started! They help you get everything set up. They will encourage you to start investing. They will do some basic planning and run a few numbers. And the initial cost is low. That’s the pro column.

Now let’s talk about some of the potential downsides.

1. Commissioned Sales (but not obviously)

I worked in commissioned sales for years. Years. I have nothing against it. But it’s a certain kind of thing. When you walk onto a car lot, into a furniture store, or into your department at Nordstroms, a commissioned salesperson greets you. They can be extremely helpful, making suggestions and giving you information. But you know, at the end of the day, they want you to buy something. Because they earn money when you do. So you filter their suggestions knowing they have a financial motivation in your choices.

The trouble is, we don’t always know which professionals have financial motivations. We trust them in a different, less discerning way if we don’t understand why and how they are getting paid. Investors present information in a way that seems like they get paid the same no matter how we invest with them, but do we know WHY one investment is recommended over another. With a realtor, it is clear they make more money the more we spend. 

But it’s actually tricker than that. Your realtor might be earning a flat 3%. And you know that. You know she makes more if you buy a $300,000 house rather than a $150,000 house. But…what if she earned 3% if you bought house A, 5% if you bought house B,  8% if you bought house C and 1% of you bought house D? Would she even show you house D? Do you trust her to show you house A, or strongly encourage you that way?

The term “Fiduciary” means they are required to act in your best interests (very few investment advisors are 100% fiduciary). But here is the rub with that….in any given housing market, how many houses are “appropriate” for you? Surely there isn’t just one perfect fit. There might be 6 or 12 you go look at. Your fiduciary advisor has hundreds if not thousands of options to offer you. Dozens might be “in your best interests” but all come with different financial gains for them.

2. It’s inherently biased

We all have information bias. When a new high-price-point item would come in a store I worked at, product reps would talk you up about how wonderful and awesome this item was. It’s great features and extra value. All commission salespeople want to sell high-price-point items, and this new item did seem much better.

It’s easy to drink the Koolaid. It’s hard to not get sold on the benefits of something that is extra profitable for the salesperson. And your advisor is a salesman. My sweet insurance salesmen once tried to explain the great upsides of whole life insurance to me. Ah….honey.  That’s a horrible product, suitable for almost no one. But it’s so profitable, good, honest people will start to delude themselves.

Even if they aren’t earning a commission on your investment purchases, they might be earning a flat 1% each year. Of course, they will love the stock market. They will be inherently biased towards it. Are they really the best person to help you plan your overall financial life. What will they think of a 50% split between stocks and rentals? Well, that means they will earn 50% less. What might they think of stopping your contributions for a few years to grow a business?

No matter how much we try to separate our bias, it’s there. Mattress salesmen think you should sleep on a good bed, gym membership salesmen think you should exercise, car salesmen think you should drive a safe, newer car, and investment salesmen think you should have investments. They aren’t wrong, or evil, just biased.

Full Disclosure: I’m totally biased too! I think you should build a life with more financial freedom, more purpose, and more on target with what matters most to you. Intentionally carving out your best life possible. And everything I do is to that end. I’ll write posts, create courses, mentor, and coach to that end. And if that isn’t your goal, take what I have to say with a grain of salt. 

3. It get’s expensive

It might start out as a good value. 1% of $1000 might be a great value. I absolutely think you should pay for advice, books, and professionals. Information IS valuable. It’s just with a 1% fee the value goes down over time. When you have $300,000 invested, you are paying $3000 a year, rain or shine. When you have $700,000 invested you are paying $7,000 a year.

I’m not even against paying $7,000 a year. But is your advisor actually providing $7,000 of value to you? Is there a fee-based advisor, CPA or coach who would give you more bang for your buck for $7,000 each and every year. Let’s be honest, most people don’t even talk to their advisors more than an hour a year. I’m hard-pressed to see the value of an hour yearly review being worth $7,000.

The problem is that because people aren’t writing a $7,000 check every year, they kind of forget that is actually what this service is costing them.

1% seems like a small fee. Except it is not 1% on what you earned. It’s 1% of your total assets, even if they lost money. In a good year with a 10% return, that’s still 10% of your earnings. Now, most investment advisors will say that they make up for that fee with better returns. Except after you account for the fee that’s almost never the case.

“A year-end study by S&P Dow Jones Indices found that “over the 10-year investment horizon, 82.14 percent of large-cap managers, 87.61 percent of mid-cap managers, and 88.42 percent of small-cap managers failed to outperform (their index benchmarks) on a relative basis.”Apr 14, 2016″

4. You shouldn’t opt out

I know a lot of people use these advisors so they “don’t have to fuss with it.” The problem is you SHOULD fuss with it. There are some things in life we need to be a little hands-on with. Our money is 100% one of those things. Hiring people is great, having professional help is great, but you can’t opt-out entirely!

You still need to know your numbers, where your money is, how much you need to save. Even if you hire help, you need to be involved.

There are some things in life we can pass off entirely to someone else and it will probably be fine. Let someone else buy your clothes or plan your meals, or decorate your vacation home.

I don’t care if you won the lottery, signed a huge football contract or just found your first job. You need to “show up” in your finances.

It’s like if you wanted to build a custom home. Sure, hire an architect, hire a general contractor, use subcontractors. But you need to be involved in the process. You can’t just say, “Build me a house, something nice, medium size.” Then show up 9 months later and actually like the result.

It’s great to pay for advice or have others do some of the heavy lifting, but don’t opt-out.

When in doubt….

ASK. How are you paid? How much do I pay you? How much do you earn on the investments I buy? Is that one time or every year? Is it the same amount no matter what product I buy?

Earning money for providing a service isn’t bad but we should always follow the money. No matter if it’s your realtor, car salesman, TV salesman, investment provider, mortgage broker or online course creator. (When you buy things I create or recommend, I generally earn money.) See, that’s easy, isn’t it? It should be easy for them too.

For Conversation:

Do you hire someone to help you? What do you recommend for family and friends?

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39 thoughts on “The Trouble with Investment Advisors

  1. I have some stocks with a brokerage service that I don’t trust for a list of reasons that I will spare you. Is there a way to move shares of stock from one brokerage service to another without selling them?

    • Hi Dawn, it’s absolutely possible to move shares from one brokerage to another. You would transfer the funds ‘in kind’ as opposed to ‘in cash’, to avoid triggering capital gains. Of course, discuss this with someone from your brokerage firm before making the move, and also, keep in mind that you may be subject to transfer fees, which can be costly. : )

  2. Yes, you’ve got to be careful with advisors, even fiduciaries. Someone close to me worked with one for years. As a couple, they were invested in 28 different mutual funds, many with higher than average expense ratios, and in a haphazard manner that was not tax-efficient. The costs were over $20,000 a year.

    We “broke up” with the advisor and set up an efficient, three-fund portfolio at a cost well under $2,000 per year (expense ratios of the index funds). Full details if you don’t mind me dropping a link here: https://www.physicianonfire.com/28to3/

    Cheers!
    -PoF

    • That is crazy and sad! That’s why I feel so strongly about the fact you can’t “opt-out” of the process. I had a lady I worked with who had a good chunk of money invested that she had inherited. She had no idea 1. what kinds of funds she was invested in 2. How many funds she owned 3. How her advisor was paid 4. What the yearly cost was. 5. If they were ever traded or moved around. No idea. Maybe he was a stand-up guy doing a great job. But who knows!? Hiring an advisor might be a great choice, but people still need to have a firm understanding of their money.

      • I can’t tell you how common this is. Most people want to be completely hands off. To be a “good” advisor, you don’t need to know about financial plans. You need to know how to network, be friendly, and get people to trust you.

        I have my series 7, I’ve considered being an “advisor” but I can’t stand the shady way they all get paid. It feels gross and that’s not who I am. So instead, I help people get access to student loan forgiveness. There’s a fee for the services, and people don’t like it, but you NEED expert advice to navigate finances. People are always out there to make a buck….

  3. Great article for people wanting to learn more about investing. My wife and I started out with a financial adviser in our first year of investing in 2015. Working with an adviser was a good experience at first, because it helped us feel safe as we learned. But as we learned more, and started to become money nerds very quickly watching our investments perform, we realized we could manage our investments on our own without paying the crazy 1% annual management fee, and $5 sales fees to buy in. Luckily we only used the adviser for one year before we broke free and started to blaze our own investment trail. Sure, we probably lost $500+ in unnecessary fees working with an adviser in the first year, but the confidence and knowledge we gained from working with a professional was worth way more than that $500 in the long run. To add to this conversation, here’s the story I wrote about how we decided to use an adviser, and eventually break free from the adviser, once we learned we could do it on our own without the fees: https://www.wealthwelldone.com/master-money-and-investing/

    • I absolutely think that if it’s the only way people will get started, then it’s a great option! If it’s Edward Jones or nothing, I’m just glad to see people start. Because starting is the hardest part! I honestly appreciate the fact that a lot of those companies at least get people into the game. And the first year or so, it’s not terribly expensive.

  4. For the most part, I agree that people get the wool pulled over their eyes by “investment advisors” who are commissioned mutual fund sellers in poor disguise. Hiring our investment advisor was one of the best financial decisions that we made. She’s not with Edward Jones, Sunlife, or any of the “buy all the mutual funds” firms. Thus far, she’s also been able to outperform the indices. We probably talk to her about an hour a month.
    Alas the tax structure here makes directly owned real estate an awful investment for my spouse and I (for other Canadians it can work out). That said, we have exposure via two different REITs, targeting both commercial and residential real estate.

    • An hour a month is amazing! Sometimes it’s hard just to get people to actually open their statement! =) It’s awesome when you have someone who really gets your goals and can put together a plan to get you there. It’s super valuable then.

  5. We met with an advisor a while back just to get a gut check on our plan, and to get some piece of mind about what we were doing on our own. He was great. He worked with us for nearly 2 hours and was genuinely helpful. But we ultimately walked away and didn’t use his services because he was fully committed to a high-fee mutual fund mix that we weren’t interested in. He may have been financially motivated. He may have just really believed in what he was offering. We’ll likely never know. I’m just glad we had done enough homework to know what we were and weren’t willing to do in our financial plan.

    We learned that consulting a professional is a great choice, but being able to walk away when things don’t feel right is also a great choice.

    • That is a great perspective: consulting a professional is a great choice, but being able to walk away when things don’t feel right is also a great choice. If a professional can really help you out, then it’s awesome. But it just doesn’t make sense if it’s not a great fit.

  6. My annoyance: I’m still employed and cannot move or self-direct my 401k. And the ‘advisors’ we can meet with don’t share my philosophy. Which is ‘why have to pick so many funds to diversify when many of those funds incorporate the very same stocks?’…. sigh. ..

  7. You make some excellent points in here. While I’ve never personally used an investment advisor, I know many who have so they don’t have to deal with the “stress” of choosing and managing their own finances. I’ve tried to explain to them how easy it can be! But some are just almost pre-conditioned to be against this.

    That’s the ultimate goal of my blog: to reach as many new people as possible and show them that by changing just a few things it can make a huge difference in their finances and life!

    Blogs like yours already do an excellent job of this. Great post! 😄

    • I get that people don’t want to deal with the stress of it. And for some people, I think hiring help to either get them set up or serve as a partner in their money makes a lot of sense. I help a lot of friends get set up and going with investing. I think it is a lot like building a house. Some people would LOVE to DIY that, and others would prefer to have help. I like blogging in that I hope I give those a bent towards DIY some tools. And for those who want to hire more out, they are able to bring more to the table with their hired help.

  8. This post is fantastic. I’ve always wanted to work helping people with their money and found the industry so broken when I tried to get in that I took my career in a different direction. Now that I’m closer to my financial goals, I’m starting the path to get my CFP soon. My desire to help people make financial decisions has not changed. I plan to set up a flat fee or retainer type business model where my only incentive as an advisor is to help my clients. I wholeheartedly agree that everybody should be hands on with our money. I also believe everybody can benefit from a second set of eyes from a true expert with proper motivations.

    • CFP serve such an important role! Having someone who is only financially motivated to help is the safest and often most effective model. And I totally agree that a second set of eyes is important. I love money stuff and have hired people for advice and reviews frequently. It doesn’t take much adjustment to get a great value.

  9. Dear Jillian, having been a financial advisor myself previously, I was very curious about this latest post of yours. Finding the right financial advisor might just be an equally important choice as to whom you’re getting married, your physician, your fitness coach, your sherpa or architect [as you’ve put it]. First and foremost the chemistry has to match and there needs to be a deep understanding of eachother – dreams, plans, options, possibilities – both sides have to be willing to talk and share sufficient information. With this, some kind of mutual trust should be able to sprout and evolve as the relationship deepens. Once similar minds join forces to work on a larger goal – magic can and will happen.

    • Once similar minds join forces to work on a larger goal – magic can and will happen. I totally agree! In many areas of life to include our money. When we find those relationships they bring out our very best potential. Unfortunately, I think most people set their sights too low when it comes to finding an advisor.

  10. I’m not a big fan of advisors in that sense either. I would rather do things on my own and pay a one-time fee for a particular service when needed (estate planning, retirement withdrawal plan, etc.)

    • I love the fee-based advisors and one time consults! I think more people would be better off getting some sort of education, be it from blogs, books, podcasts, or hiring more personal help. Some people honestly just aren’t that interested, so hiring more help to provide more direct education makes sense. It’s like me and taxes. I’ve read the books, but I hate it. At some point, I might hire someone to be really educated to advise me. I’ll still be hands-on, but reading tax blogs all day sounds like torture, where pf blogs are awesome! =)

  11. Great wisdom here, Jillian. I also want to get specific about “Don’t opt out!”. Let’s add don’t EVER give an advisor the power to make trades for you. AND, make sure you read your statements from the INSTITUTIONS where your funds are deposited — and not just the statements your advisor sends you on his business stationery.

    When we retired, suddenly Mr. Groovy received numerous calls from Fidelity investment advisors. Every call ended with cautioning how this could be the last call and he needed to act now. We never even picked up the phone.

    Why is it that they called so frequently when he retired, but never when he was employed? They feared he’d roll over his 401(k) without them and they would miss out on massive commissions. And they did.

    • Companies like that often don’t have real incentive to serve people well (until those people might leave). They make the same amount of money if they provide you with of complete and detailed financial plan….or not.

      And to add one more piece of advice: OPEN YOUR STATEMENTS! I went to a conference about preventing financial fraud and he said most fraud would be caught right away if people just opened their statements! Such a simple thing to do. Then the same guy admitted he hadn’t talked to his advisor in 7 years! 7 years. And they went to the same gym together. I wanted to cry….

  12. One of our biggest financial mistakes was working with a close friend as our financial adviser. This was back in the early 2000s before we had a good handle on investing. He was with Wells Fargo and basically received a commission for our assets under management. We really didn’t get any value and he put us in numerous high cost funds. By 2008 we completed liquidated our accounts with him, not to mention our relationship on a personal level was also starting to sour.

    • Ugh, it’s so hard when it’s a friend! Sorry to hear that. =( I have only had one experience with someone who worked in that situation (I have paid fee-based planners lots of times) and it wasn’t great. Unfortunately, it was through my work and I couldn’t request a new person.

  13. I like the analogy to a realtor getting different % commissions from different houses. So many people proudly state they aren’t good at finances… But having a basic understanding is so crucial even if you decide to hire a financial advisor. The Boglehead’s guide to investing is a good start for those who are new to investing.

    • It’s SO important to understand how they are getting paid. It’s fine that they are getting paid, but people really need to know how that happens. Is it per total amount invested, yearly fee, by a commission of investments sold or by trades. Or some convoluted mix of all of the above. Then we can filter why a person might be biased a certain way or if there is outright fraud happening.

  14. Ugh! This article hits home with my husband and I. We are currently working with a Dave Ramsey ELP and since finding the FI community have really been scrutinizing our investments. I have made a higher % in my 401k and taxable funds (VTSAX) this year than with the the supposed “expert” financial planner and we have twice as much $$ invested with him. I just want to move everything to Vanguard…but the hubby wants to sit with the CFP and talk about it. I’ve asked for rates and was looking at moving my kid’s ESA’s and the expense ratios were so high. We have a meeting in a month and I have anxiety over everything. I really think I can do better…

    • I tend to prefer paying for advice outright with an impartial 3rd party. Someone who is only selling a total financial plan and information but no products. And if you really want to buy high fee products, almost all of those are available with any trading company. Great planning and information can really be high leverage, but high fees rarely are. =( Best of luck! I would think about why you are hesitant to invest yourself and solve that concern specifically.

  15. I don’t currently work with an advisor, but I have n the past. I don’t regret it, even though it was more expensive and I probably invested in some bad recommendations (that had high fees.) Because I learned a lot. Because it made me more comfortable with the practice, terminology, and ideas of investing. And because, ultimately, I might not have as much now if I hadn’t worked with those guys.

    I do think you can go without an advisor, and starting in 1991 was a different experience than starting now. I suspect a roboadvisor will serve the same purposes for a lot less money. Bit if working with an advisor makes someone into an investor instead if a no investor, that’s a good thing.

    • If nothing else, they help people get in the market and get started! The extra cost is worth it if it gets people start 3-5 earlier than they would otherwise. And really when people first start investing, the cost is really low in terms of actual dollars, even if the percent is high.

  16. An advisor might be worth it if he or she were able to keep me in the market the next time the market crashes. Panic selling is a big investment no-no. But I think my friends in the PF community will help me stiffing my resolve when things look bleak on Wall Street. And my friends won’t charge a dime.

    • That is a great point about keeping people in the game! Although, even with an advisor, I’m sure a lot of people ignore them. And I will totally pat you on the back while you throw up because the market dropped 30%+. =) Or pour you a stiff drink. We can laugh/cry away our misery together. =)

  17. This is such an important conversation, Jillian. I agree wholeheartedly that you have to be SO careful when choosing an advisor. At best, many investment services can be very costly, at worst, greed and dishonesty run rampant.

    The challenge in all of this is that the vast majority of people need help to manage their investments. Most don’t have sufficient knowledge and are not that interested in attaining it. Then there’s the emotional side of it. A good advisor can be that voice of reason when the markets are upside down.

    I think the best bet is to do exactly what you’re doing here, educating people on the costs and the biases that exist in the industry. It’s funny, over the past decade consumers have become much more informed when it comes to the mortgage market, perhaps that will extend to their investments in the future.

    • At best, many investment services can be very costly, at worst, greed and dishonesty run rampant.The challenge in all of this is that the vast majority of people need help to manage their investments.

      YUP! I would say even more than just investment advice, almost everyone needs a bit of help planning their total financial lives. And we need an impartial person to help us through buying homes, college for kids, how much to save, when we can retire, if we can take a gap year, how to fund a business, managing our estate/inheritance and all the things we just didn’t think about. A think a combination of robo advisors and fee-based planners will be the a possible path going forward.

  18. Hey Jillian, great points on hiring investment managers. Those small fees can really add up, especially if they are prone to make the same errors that we would make ourselves.

  19. When you’re dealing with small numbers, it seems less worth it to “fuss with it,” but that’s exactly when you should. As your investments increase, those fees grow exponentially and even waiting an extra year costs a lot. I’m one of those people who started with a financial advisor and I’m kicking myself for it. Not only did they charge a fee, but their “managed” funds did less well than had I just gone with an index fund.