Do I Need a Financial Advisor?

Everyone wants to be able to retire with financial security and peace-of-mind.

Most people think they need a financial advisor to do so.

In this (what turned out to be a long) post I will lay out the basic formula for retiring with enough, and how some types of financial advisors could leave us with less money — retiring later than we otherwise could.

Problem is that, for most folks, personal finance and retirement saving and investing seems difficult and complex.

I’ve always been interested in personal finance, especially saving and investing for retirement.

I became debt-free a number of years ago. But I was behind on retirement saving and wanted to make sure that I was being as smart as possible, especially about how I was investing.

So over the last few years I immersed myself in the ins and outs of retirement saving and investing.

I’m happy to say I caught up, and then some.

I’ve learned a great deal, some of which has shocked me, and frankly made me angry at times.

More on that later.

More than anything I want help you get out of debt and be ready for retirement.

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Put simply, in terms of preparing for retirement security, there are a few basics:

Owe Nothing: so you earn interest, not pay it.

Save More: so your money compounds more.

Keep More: pay the lowest fees possible, so you end up with more.

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A note about what is to follow: this will be no-nonsense, un-varnished truth; what’s more, there will be no sacred cows, I will call out people that do things that benefit them and hurt you.

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DEBT

At the very least, you should eliminate any debt with an interest rate above what you can – safely – earn in the short-term.

Currently that’s, for the financially savvy, approximately 5.4%.

BTW: that’s the rate of the Brokered CD I just bought. High-Yield Savings Accounts (HYSAs) (aka online savings accounts) are only around 4.25% – 5% (maximum).

Basically, the only debt that makes sense to keep is (historically) low-rate-mortgages (most current mortgages are below 5%, some in the twos and threes (lucky!) (unless you want/need to move… )).

And the argument for not paying off lower interest rate debt in favor of saving/investing is predicated on actually saving and investing that money!

Fact is, most people don’t actually save it. Or, they save it for a bit, and later dip into it for this, that and the other.

If you’re in debt, and/or behind in retirement saving, I’ll bottom-line it:

Do everything you can to eliminate all high-rate (7.5%+) non-mortgage debt:

1. reduce expenses,
2. eliminate expenses,
3. make more money, or
4. all three!

The only exceptions where you save for retirement, while having debt, is:

1. if you get a match from your employer — and your debt isn’t high-interest-rate (7.5%+), or
2. you have one those new income-based student loan repayment arrangements where the interest expense is effectively very low, and it is forgiven in a reasonable amount of time.

The other truth (that few “experts” talk about) is that – as important as paying down debt is – un-covering and healing/fixing the underlying beliefs, habits and practices that got you into debt is absolutely necessary. Otherwise, you’ll just accumulate the debt, again.

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SAVE MORE

So many people focus on the “Projected Rate of Return” their investments will yield.

The main problem with this is, especially nowadays, it’s not as high as it used to be (due to fundamental macroeconomic shifts: higher interest rates, demographic shifts and government debt)

Some folks will try to make up for long-term shortfalls with more aggressive investments — quite simply a recipe for disaster.

What you can control, and increase significantly, is how much you save.

It will require some serious examination of how much you spend.

It will require you dig deep and get clear about your values.

It will require you to think about and truly honor your Future Self.

And then you have to make some hard – but necessary – choices about where your money is going.

One other thing you can do is: Earn. More. Money.

And yes, that will require doing something that all humans are programmed to avoid: self-initiated change.

The only thing more difficult than change that’s imposed upon people is change they choose themselves.

(I told you this post was going to be no-nonsense, no punches-pulled… )

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KEEP MORE

First, let me introduce you to an insider term: “bips.”

Bips is a ‘word’ financial professionals use as a shorthand for percentage. “Bips” (and that’s how they say it) is short for ‘basis points.’ It’s often written as “bps.” There are 100 bips in 1%. So, 50 bips is 0.5% and 25 bips is 0.25%. 125 bips is 1.25% (that will matter, and hopefully shock you, later).

Okay, now back our regularly scheduled programming.

Every investment has a cost.

No investment is free.

Got it? There’s no free lunch, no free ride, no free anything.

Even if you’re not pulling out your credit card (or check book, if you’re old school), you’re paying for everything you invest in.

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Mutual funds and ETFs (ETF = exchange traded funds; like mutual funds, but with differences) are the building blocks of any retirement portfolio.

And they are not all created equally. Hardly.

Each one has an Expense Ratio (ER).

The ER is the fee the fund manager charges everyone who invests in the fund.

Many mutual funds have other fees likes “sales charges” and “loads” — they are all evil and should be avoided at all costs (pun not intended, but funny nonetheless… ).

And some ETFs have high ERs.

Annuities have fees as well, and while I used to 100%-Anti-Annuities, my position has softened. I’m only 95%-Anti-Annuities now. They have their use-cases, but they are few. Usually the best option is a proper investment portfolio (and sound personal finances).

A brief note on life insurance: if you have people that depend on your income for their survival, get Term Life Insurance.

Otherwise, for the vast, overwhelming majority of folks, life (e.g. “Whole” or “Permanent”) insurance is a scam and a crutch. (More on that in another post… )

Now, and this is the sacred cow I mentioned earlier: financial advisors.

They come in three main types:

• Commission-Based
• Assets Under Management
• Flat Fee

I could rant for hours on this, but I will be brief (and happy to dig into this more if you have questions/retorts; just use the Contact form).

COMMISSION-BASED ADVISORS

Commission-based (CB) advisors are the worst.

They are compensated by the companies that provide the investment products they sell you — wait, sorry, I mean: “the investment options they carefully select for you based on your unique needs.”

These people are salesmen. They get paid by financial services companies: usually mutual fund and insurance companies.

Furthermore, the products they put people in are expensive and often very difficult and/or expensive to exit.

CB advisors should be avoided at all costs (the financial puns are just too easy here… ).

AUM ADVISORS

Next we have Assets Under Management (AUM) advisors. These aren’t sleazy ‘boiler-room’ salespeople like CB, but some of them are close.

I believe most AUM advisors are good people in a sh*tty system. They are financial geeks of some sort and just wanted to work in the financial services industry. The AUM industry is large and thus many of them end up there.

But, as with anything human-based, to understand the truth you have examine incentives: people do what they do, largely (and sometimes, exclusively) based on how they are incentivized.

How do AUM advisors work?

They often offer a free “financial checkup” and run your basic “numbers” through their financial planning software. They will look at your current situation/practices and (likely) point out what you’re missing/doing-wrong. They go on to say they can fix your problems and provide you with “comprehensive wealth management services: everything from investment management to tax and estate planning.”

And, that’s accurate, I guess, but there’s some real pitfalls: Real. Expensive. Pitfalls.

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Psst, over here… I have a secret you need to hear: there are better ways to get things like tax and estate planning.

Using an AUM “wealth advisor,” for investment management or other even more occasional things like tax or estate planning, is like having an lawyer on retainer. Most everyone doesn’t need a lawyer on retainer. Sometimes, some people need a lawyer, so they hire one, handle their business and that’s it.

Another analogy is a (seller’s) real estate agent. Would you pay someone 1% of the value of your home each year, to “keep on any eye things” in case you wanted to sell? Heck no you wouldn’t!

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One pitfall is “lock in.”

To work with an AUM advisor, you transfer assets to the ‘holding’ company they use.

Let’s say you have a Traditional IRA at Vanguard. You have to transfer the money in that Vanguard account to the company the AUM advisor’s firm uses — they don’t manage your money where it is, you have to move it to them.

So, that creates “lock in” or stickiness.

The other thing many AUM advisors do, and this is particularly pernicious in regards to taxable brokerage accounts, is they put you in many funds.

This is unnecessary and, for taxable brokerage accounts, can have huge (negative) tax implications if you want to move your money later (like when you find out how expensive the funds are and the AUM model is).

Most AUM advisors put you in many funds because it makes them look smart and sophisticated, and makes it look like something you could never manage.

Fact is, any money you can move to an AUM firm can be self-managed, in a few very-low-cost-ETFs, with little-to-no changes year over year.

Now, the big problem: the fee.

“But, but – AUM advisors will jump to protest – we don’t ‘charge’ you anything, we just assess a tiny percentage, just 1%, each quarter, to cover our management expenses. You just move your money over and we take care of the rest!”

I’ve gone into detail on the – real impact – of AUM advisory fees in other posts. (Here’s one.)

Suffice it say, even assuming the low end of the AUM fee range: 1%, advisor costs result in significant fees over time (and significant “portfolio drag”).

And money you pay is money that doesn’t compound — and that means you have even less over time.

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FLAT FEE ADVISORS

“Okay, okay, enough of the AUM advisor bashing Matt… what is the third type of advisor?”

Flat-Fee Advisors (FFA) charge you – up-front – to create a comprehensive financial plan.

One iteration is a one-time, project-type, engagement where you take and implement that plan yourself.

You put your money where the plan indicates and you setup auto-investing for any new-money/recurring investments — maybe you rebalance (some of) the accounts each year.

Usually in such instances, if you have a question, say if am unforeseen life circumstance changes, you call the FFA and they help you for a reasonable hourly fee.

The other, main, flavor is you pay the FFA a flat fee each year and they review your plan, investments and progress and update the plan if necessary (usually not necessary).

Finally, there are FFAs that just charge by the hour — for almost everyone with less than $750,000, this is all they need. (See a below section… )

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WHAT ARE WE TALKING HERE?

But what are the actual numbers?

First, let’s look at someone with $1M in assets to be managed.

And I’ll be generous here and assume (for the AUM-Universe) low-ish-fee, relatively-tax-efficient, fund choices…

The net – yearly – cost of the AUM advisor is $12,500.

This is the 1% AUM fee and funds that come out to about 25 bips — about 125 bips (told you I’d get back to that… ).

The FFA charges $5,000 and, usually, spends much more time with you creating the plan.

AND the FFA plan is durable and will last for a number of years.

Again, you can often self-manage your portfolio with the plan the FFA creates.

How? Because there’s usually: Not. Much. To. Do!

So, every year, your AUM advisor, your “I-have-a-guy” guy is costing you $7,500.

The REAL problem is every quarter your AUM advisor debits your account for the fee and you have less money working for you over the long term.

And they take their vig every quarter, whether the markets are up, or down.

It’s the opposite of the “compound effect.” Your money is, at least partially, DE-compounding.

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DIY, WITH A LITTLE HELP?

And what about the folks with $750,000 or less?

That’s easy, do the simple, easy, version of what I did:

1. read a few books,
2. understand the basics,
3. assemble all your details,
4. create a draft plan (way easier than you think),
5. find a FFA that charges by the hour,
6. review the plan with the FFA,
7. make sure your money is where it should be,
8. set up automatic investments, and
9. review and rebalance once a year.

Quite simply, and plainly, it doesn’t need to be hard, or complicated, or scary or need lots of tending/attention.

THE THREE PHASES

There are three phases to Retirement Saving/Investing:

Accumulation: the years up to Approach
Approach: the five-to-seven years before Retirement
Draw-Down: i.e. Retirement, when you start accessing your Savings

All you need to do in Accumulation is save all you can and invest it smartly.

Smartly means low cost funds, recurring/automatic investments and sticking to The Plan.

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Okay, this post is already long enough.

I invite you to contact me if you have questions about or challenges to anything I wrote. I’ve thought about this deeply and carefully for years and this is my best thinking.

I will create a post about the other side of this, this emotional clarity and capacity we need to see clearly and act according to what truly works in creating real retirement confidence and security.

The emotional clarity and capacity piece is what the finance gurus and the advisors don’t/can’t provide.

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WHO ARE YOU ANYWAY?

At my core I’m a coach.

I also share what I’ve learned and teach.

But mainly I coach. I seek to draw out the capacity and answers each person has, inside them, already.

Every coaching engagement is customized to the person — no boiler-plate or cookie-cutter plans here.

And my only agenda is helping you understand the issues and yourself (so you can make wise decisions and take consistent action).

My fees are clear and reasonable.

I am by no means a financial advisor. I’m obligated to say none of the above can be taken as “financial advice.”

I’m a trained Coach that has dug deep into my personal finances and am sharing what I’ve learned — and offering help to others.