Why I Dumped My Financial Advisor

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I was with my broker for over a decade. I trusted him because he was an old university friend and, having worked with him on some business school projects, I also knew he was very intelligent and personable. And he was also up front about his compensation and he didn’t recommend anything he wouldn’t be confident investing in himself. The advice was sound and his fee of $1,000 per year felt fair so I didn’t see any need to make a change. 

Life was good.

Then, he had the nerve to fall in love with an American woman (ah, love), which lead him to move to the U.S. As a result, he sold his practice to another fellow.

Not the same type of guy.

The two of them had met with me together, before telling me of the changeover. Broker #2 seemed aligned with my friend’s values so I was OK to try it out and I was planning to transfer my pension funds to the margin/tax-defferred account as well.

And then it happened.

I'd asked Broker #2 to prepare a suggested investment approach for my overall portfolio, including the pension. I arrived at the meeting and he’d done nothing. During our conversation, he tried to "wing it" by divvying up a pie to show a proposed diversification. I could have done a better job. It was embarrassing, disappointing. I wanted my old broker back. Badly.

Investors pay far too little attention to the costs of investing. It’s especially easy to underrate their importance under today’s three conditions:
when so many costs are hidden from view…
when stock market returns have been high…
when investors focus on short-term returns, ignoring the truly confiscatory impact of cost over an investment lifetime.
— John Bogle, The Little Book of Common Sense Investing (2007), p. 30.

It gets worse.

Then he tells me that, though we’d agreed that the $1,000 fee was what he’d charge, he was more comfortable with a 1% fee.

He obviously didn’t think I could do the math because he was giving himself a 250% raise!!! I was furious but I didn’t let on and just left as soon as possible.

[T]o realize the winning returns generated by businesses over the long term, the intelligent investor will minimize to the bare bones the costs of financial intermediation.
— John Bogle, The Little Book of Common Sense Investing (2007), p. 6.

I went home and, just to see what it looked like on paper, I did the fee comparison of what I’d been paying to what he was asking for over a 20-year period. I didn’t keep the calculations, but I remember the punch line. Based on reasonable return projections, I would be paying an extra $140,000+ in professional fees! That just made me much more upset. WTF!!! Plus, advisors get this fee with no risk, it's based on the total value of the portfolio, not a percentage of the change in value. When you think of it, it's pretty crazy.

Here's an approximate recreation of that original spreadsheet. I don't know where the original went, but I'm pretty close, given the other one added up to $162,000 or so. I've extrapolated to 30 years, just for fun because it really gets insane. It includes both what I had invested with him at the time and the pension funds I was thinking of transferring over. It assumes a 7% rate of return, a 1% advisor fee (also shows the $1,000 flat fee) and that I'd contribute $20,000 per year in additional savings, which is still in line with what would have happened (click to enlarge the sheet).

Get rid of all your Helpers. Then our family will again reap 100% of the pie that Corporate America bakes for us.
— John Bogle, The Little Book of Common Sense Investing (2007), p. 4.

I slept on it for a few days and sent him an email (copying my previous broker, given it would likely affect him as well) stating that I would not be transfering my pension funds.

You will want to ensure that your advisor is choosing your investments purely on their investment merit and not on the basis of how the vehicles reward him. The warning signs here are recommendations of load funds, insurance products, limited partnerships, or separate accounts. The best, and only, way to make sure that you and your adviser are on the same team is to make sure that he is ‘fee-only,’ that is, that he receives no remuneration from any other source besides you…Your adviser’s fees should be reasonable. It is simply not worth paying anybody more than 1% to manage your money. Above $1M, you should be paying no more than 0.75% and above $5M, no more than 0.5%.
— William Bernstein

Now, three years later, not only did he not get my pension funds or any additional savings I've accumulated, but now that my account with him has reached the level where his 1% matched my previous $1,000 fee, I’m transferring my funds to my online brokerage account, which is where I transferred my pension money to keep it safe from his 1%.

What made the decision that much easier was that in three years, he's done nothing for the fees he's received. Not even suggested what to do with the dividend money trickling during this time, which meant that $10,000 as just sitting in cash! In hindsight, I should have done it three years ago!

Fees matter and feeling that your financial advisor has your best interests at heart matters. When it comes to managing our money, we need to look out for ourselves because no one will care about our wealth like we will. 

Going forward, I’ll pay for advice, not for direct management of my investments. And, by keeping my investment portfolio simple by using low fee exchange-traded funds (ETFs), there’s less complexity to manage and that leads to fewer questions. That's the right recipe for me and it's one I'll stick to for years to come. 

If you’re not convinced that brokers and financial management firm fees can fleece you with "legitimate & perfectly legal" fees, don’t take my word for it. John Oliver’s tean at Last Week Tonight covers it beautifully a few weeks ago, which prompted me to share this real life example of the domino effect of advisor fees. Enjoy!


Image credit/copyright: cooldesign/freedigitalphotos.net

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