Silent Wealth Crusher #1 - The Financial Advisor

There are 3 silent wealth crushers that slow down your ability to grow your wealth. In the next couple of posts, we’ll explore each of those in detail. 

1. Financial Advisors

2. Inflation 

3. Taxes

I’m going to be very controversial and start by talking about financial advisors.  

Let me stop you right here. I am NOT saying that you shouldn't get advice. As you’ll notice, my posts and tools are here to help you build a foundation. At the end of the day, I don’t know your specific situation, and you might benefit from talking to someone about the best strategy for you. It’s like all this self-help stuff (that I'm a big fan of): it can take you most of the way there and give you amazing life hacks, but in many instances, it might be beneficial for you to turn to a professional (psychologist, coach, etc).

There are some people who really know their stuff out there, and have much deeper specific knowledge that would apply to your unique situation. I don't have a problem with advice.

My beef is against Financial Advisors who charge a percentage of your assets simply to ‘manage’ them. And that’s where I invite you to be cautious and ask all the questions.

Let me break it down into a potential scenario. 

Amy has $500K in assets. Her financial advisor charges a 1% fee (typical).

• This represents $5000 every year simply to manage Amy’s assets.

• Over 10 years, if she’d instead invested this annual $5K very conservatively, this represents $71K of evaporated wealth.

• Let’s say Amy’s portfolio returns 5% that year ($25,000). The $5K represents 20% of her gains. pffff gone. And that’s just for the advisor fee. 

• If any of these investments have other underlying fees, she would still be paying for them above and beyond the Financial Advisor fee (for example if they purchase a Mutual Fund with a 2% Management Fee on her behalf, she would still be responsible for that fee).

• There are situations where the Financial Advisor might also get a kick back from a fund provider, as they act as a broker. In my opinion this is a misaligned incentive.

The Financial Advisor might buy stocks on your behalf, bonds, GICs, ETFs and other funds to create your portfolio. That said, according to this business insider’s article (and not the only place I’ve seen similar stats), over a 15-year period, nearly 90% of actively managed funds failed to beat the market. So why are you paying 1% of your wealth to get worse returns than the market?

And here’s the cherry on the sunday… I just received an ad from a Canadian Bank (who shall remain nameless for now), with an offer to build an ETF portfolio for me, and only charge me 0.5% of my assets. That got me mad. ETFs are baskets of stocks that you can buy on the market, the same way you buy stock. They were essentially invented to put people like you and me in control. Since there are hundreds or thousands of underlying companies within an ETF, the average investor probably needs max 3-5 ETFs in their portfolio.

So, please please please don't pay someone 0.5% of your portfolio to buy 3 ETFs on your behalf and spend an hour a year looking at it.

Bottom line, 

1. If you seek advice (which again I have nothing against fundamentally), also do your own research, and maybe look at paying someone by the hour.

2. If you do business with a Financial Advisor because you really want to outsource 100% of your money management, at least make sure you understand what you will be paying, and how they make money.  

By all means, if you have FU money (whatever your number is), go for it and make someone else’s living. I personally think that for the average Canadian, paying 1% of your portfolio every year (or 0.5% for an ETF portfolio!!!!!), is a rip off. 

As a closing thought, I know it's very tempting to fall for it. I say this from experience. A few years ago, I had a bit of money to invest. I went to see a financial advisor. Thankfully, when they shared a spreadsheet with a potential portfolio of 20 stocks 'tailored for me', I immediately recognized the top stocks on the S&P 500. I quickly calculated how much I would pay the Advisor vs getting an S&P 500 index fund, and this is where it became clear that I would spend a lot of money for nothing more than an index fund I could buy myself. Had I not done a bit of research, I would've fallen for it.

This is why I am creating this space. Let's learn together, so that we can make informed decisions. It's time to start taking control of your finances.