Now that I’m in my mid-20s, I occasionally hear friends talking about their financial advisor. Often, this comes with a note of awe, “Billy Joe Bob is such an adult, he has a financial advisor.”
I can get how it’s tempting. You have to worry about saving for retirement and whether you ought to buy a house and if you need an IRA and if you can afford that new car you’re eyeing and how taxes work and it would be really, really nice if someone could just tell you what to do and guarantee you’ll be fine, financially.
But a financial advisor is not the person to go to for that. First of all, and I was shocked to learn this, many financial advisors don’t have a fiduciary duty to their clients. That means they don’t have to act in your best interest. This is probably especially true for advisers that work for financial institutions and are compensated based on commission from the products they sell you. They may move you into high-fee investments, chipping away at your money for as long as it’s in the fund.
Many financial advisor’s fees are based on a percentage of your account. A one percent fee might sound small, but the average market growth is 7 percent a year. (Oh, and most managed funds make less than that). Confused about the stock market and totally freaked out since it’s dropped like ten percent in the last two weeks? Start here (a quick overview on my blog) and then go here (way more in-depth info on someone else’s blog).
Plus, most advisers will put your money in a mutual fund, not an index fund. What’s the difference? An index fund buys a group of stocks and holds them long-term, while a mutual fund involves a manager buying and selling when they decide to, and charges you a fee for the privilege. Seeing as the most successful investors are dead (or forgetful), mutual funds tend to underperform the market, before you even account for the added fee that goes to paying for the management.
So let’s say the average fund that your advisor sells you performs at an average of 6 percent. Then they charge a 1 percent fee. Then the fund charges a 1 percent fee. Then inflation eats 3 percent. Instead of a 4 percent real return, you’re looking at 1 percent.
Whatever, a 3 percent difference isn’t that big, right? Let’s run some numbers.
An investment that you add $5,000 to every year for 30 years that grows at 1 percent will be worth $181,673.10.
That same investment at 4 percent will be worth $306,582.18. You double your money just by avoiding fees.
Okay, so maybe a financial adviser isn’t great for investment help. But what about all that other complicated stuff I listed at the top?
It’s not complicated!
There’s something about putting a dollar sign in front of numbers that makes people think they need someone to tell them what to do when it’s actually fairly simple.
Save your money. As much as you can. In tax-advantaged accounts whenever possible. Don’t just assume that buying is better than renting. Buy used cars. Taxes are fairly simple for most people. Pay off your debt. If you have a complicated financial situation, research it yourself first, you can probably figure it out.
And, if there are things you can’t seem to get straight, then go to a professional. But pay them for their advice, don’t hand them the keys to your bank account.