“You don’t operate on yourself or cut your own hair, do you?” retorts a financial advisor. Then he adds, “You should hire a financial advisor to manage your money for you for the same reason.” Is this True? Do you really need a financial advisor to manage your money? I don’t believe so. The reasons why you don’t need a financial advisors are cost, control, and challenge.
Reason Why You Don't Need a Financial Advisor #1: Cost
I manage my own finances but it wasn’t always the case. Financial advisors charge an average of 1%. I listen to Ric Edelman, financial advisor and founder of Edelman Financial so I though about signing on with his firm to manage my portfolio. That is, until I found out how much his advisory charges:
First $400K: 1.75%
Next $350: 1.25%
Next $250k: 1%
If I hired him to manage $400k it would cost me $1750 per quarter or $583 per month. Having his firm manage $1 million would cost $1114 per month. Yikes, for this amount of amount, I decided to keep doing it myself.
My Experience with a Financial Advisor
In 2010, I decided to give a financial advisor a chance and had him manage a portion of my retirement fund from years 2010 to 2018. He charged 1%, which cost me $2,000 per year for him to manage $200,000. See chart below.
Annual Return With The Financial Advisor
| Year | S&P 500 Return | My Return | My Net Return After Fee |
2010 | 15.1% | 13.28 | 12.55 |
2011 | 2.1% | -3.44 | -4.47 |
2012 | 16 | 13.49 | 12.44 |
2013 | 32.4 | 19 | 18.29 |
2014 | 13.7 | 5.18 | 4.18 |
2015 | 1.4 | -0.5 | -1.5 |
2016 | 12 | 6.87 | 5.87 |
2017 | 21.8 | 15.9 | 14.9 |
2018 | -4.4 | -8.6 | -9.6 |
Self Management Result
You can see that the return I received never beat the S&P 500 Index, not even once. The advisory fee also set me back another 1%. This doesn’t include the management fees that each mutual fund charges. I researched the mutual funds he invested on my behalf and they each funds charged an average of 0.5%. This is equivalent to $1000 a year or a daily ration of soy milk cappuccino.
Subsequently, I took back control in 2019 and started managing my money. After firing my advisor, I put all my money into just 2 mutual funds, one was the Fidelity 500 Index Fund (FXAIX) and the other was Fidelity Balanced Fund (FBALX). See below. I didn’t beat the S&P 500 but I did better than the advisor has ever done.
Annual Return with Self Management
Year | S&P 500 | My Return |
2019 | 31.5 | 21.8 |
2020 | 16.26 | 16.24 |
In year 2020, I sold the fund that did well (buy low, sell high) and bought individual stocks for the first time just to try it out. By learning how to do it, I believe I’m getting better.
Reason You Don't Need a Financial Advisor #2: Control
The best thing about managing my own portfolio is that I take responsibility for my financial destiny. Managing my own money forces me to pay attention to my investments and know whether I’m on track to meet my financial goals or retirement planning. If my portfolio doesn’t do as well as I like, I rebalance and invest in something else. The only way you learn is by doing it.
Preserve Wealth or Grow It?
Financial advisors are fiduciary. This means they’re obligated to put their clients’ interest before their own. Their job is to invest your money in mutual funds to balance risk (loss) with reward (gain). The financial advisors are conservative for fear they’ll lose your money. This is conceptually a good thing. However, being too conservative can keep you from growing your nest egg. In addition, if you haven’t accumulated wealth yet, what are you preserving? Warren Buffet didn’t become the wealthiest man by buying bonds and playing safe. Although the financial advisors intention is valid, what this does is keep you in mediocrity and prevents you from becoming rich.
Reason You Don't Need a Financial Advisor #3: Challenge
Become Comfortable
According to the federal report, sixty percent non-retirees who hold retirement accounts such as 401(k) or IRA are not comfortable managing their investments.
There are approximately 3 million nurses in U.S. and over 70% work in a hospital. This means that majority of us have some type of an employer sponsored retirement plan. Yet, most nurses like many adult Americans do not know how to manage their retirement fund. Many nurses I spoke to didn’t even know how much money they had in their 401k/403b.
Financial Literacy
FINRA Investor Education Foundation posed 5 literacy questions. Only 34% American adults answered 4-5 of these questions. The national average was 3. I think we can improve our financial literacy by learning to manage our investments. Click on this link to take the survey yourself.
Challenge Yourself
Unless you’re a millennial or younger, the rest of us didn’t know how to work a computer, use an iPhone or navigate through social media. Yet we learned. Challenge yourself to:
- Spend 30’ per week learning about investing in mutual funds, ETFs and stocks
- Studying the best mutual funds available via your retirement plan
- Drafting a financial goal
- Creating a retirement plan
- Learning what your investment return was
- Where your money is allocated
Make Investing Fun
Set an audacious goal and create a vision board. Make your goal to double your net worth so that you can live in Hawaii with an ocean front view. Create a vision board inspired by your awesome goal. Each time you look at your vision board, motivate yourself to open your retirement account to at least see how much money you have in it. You have to start somewhere.
Why You Don't Need a Financial Advisor #4: Investing is a Piece of Cake
Financial advisors were in vogue before Mr John C. Bogle of Vanguard, created the first index fund. He made it possible for ordinary citizens to duplicate the market’s performance but at a much lower cost than the high-fee mutual funds. There are almost 7,000 ETFs that you can invest in with a low cost without going through a financial advisor. In addition to S&P 500 index funds, there are funds for energy, gold, and everything in between. Financial advisors are what travel agents were in the 80’s.
Buying mutual funds, ETFs or stocks is not difficult. A lot of people claim they don’t know how to manage their finance because no one taught them. We blame the educations system and our parents for not teaching us. As far as I know, they didn’t teach us how to get followers on Instagram either yet 1 billion people learned how to do it.
Managing your investment is easier than you think.
Reasons for Financial Advisor
Having said all this, you should get a financial advisor, if you:
- Are a chicken: you want a bigger return but don’t have the guts to do it
- Would rather swim with the sharks than manage your own investments
- Like living paycheck to paycheck
- Have rich parents or relatives who will leave you an inheritance
- No longer want to put your cash under the mattress
- Are not a control freak like me
- Flunked the literacy questions and don’t want to learn
- Like giving your money away
All jokes aside, the only reason you should get a financial advisor is if you’re likely to panic sell when the market crashes. At least the advisor can invest objectively and prevent you from selling low.
Alternatively, you can email me and I’ll talk you out of selling. Regardless of what you do, invest. Do not put your money under your mattress and let it rot.