How Expensive Is A Financial Advisor?

Having someone else manage your finances is expensive

Have you considered exactly how costly it is to have someone else managing your wealth? How many more years do you have to work to retire due to the financial advisor cost because you are not financially literate? I will use a high school teacher, Jenny, in three example scenarios:

  1. She does her own finances;
  2. She uses a good financial advisor,
  3. She uses the same advisor my wife had for eight years.

Let’s assume this teacher lives a frugal lifestyle and is inspired to save well for her retirement. We will make the assumption that Jenny only invested with her post tax money (i.e. take-home pay) to simplify our calculations. (It is far more efficient for her to invest with her pre-tax money in case you are curious.)

Jenny’s Salary $55,000
Federal marginal tax bracket (Single) 25%
Effective tax rate 12.45%
State tax (I am using North Carolina as an example) 5.75%
FICA (i.e. Social Security) 7.65%
Post tax income $41,517
Rent $10,800
Food/car/fun $18,600
Money in checking account at the end of year $12,117
Jenny’s annual investments $12,000

Scenario 1: 

Jenny is not a professional, but let’s imagine that she has done her homework to become financially literate and manages her finances on her own. We will assume market returns of 7% per year (a rather conservative estimate considering US stock market real returns after adjusting for inflation in the last 50 years) during her career. How does she do in the end?

Jenny’s nest egg after 20 years $520,927
Jenny’s nest egg after 40 years $2,624,813

After 20 years of hard work, she has over half a million in her investment account. If she works another 20 years and continues to invest at the same rate, she will have $2.6 million when she retires. That is a very comfortable retirement.

Scenario 2: 

What if she hired a good financial advisor to manage her personal finances? An average financial advisor charges about 2% of asset under management (AUM). 2% may not seem like much, but it adds up over time. Using the same budget and saving rate as above, here are the results of her investment after 20 years and 40 years, respectively.

Jenny’s nest egg after 20 years $411,034
Jenny’s nest egg after 40 years $1,526,020

Not bad, Jenny! Not quite as good as our first example. In fact, she will have lost over $1.1 million dollars over her career to her good financial advisor. If you are interested in check my math, you will quickly realize that the more you invest the more you lose to your financial advisor. Additionally, your net worth will increase with more years you accumulate your wealth which means you are being charged more as you age. Is that justified? Absolutely not.

Scenario 3: 

Not all financial advisors are good, faithful, and mindful of their clients’ financial interests. Unfortunately, most of financial advisors on the market are not that great. Remember they make a living by leeching off your investment. In other words, their gain is your loss.

My wife had a financial advisor for the first eight years of her career. She, like Jenny, was working as a teacher and had a very frugal lifestyle. She invested religiously starting in 2007– around the time of a market trough (i.e. if timing the market is possible, she had timed the market perfectly. Btw, it’s not possible.) Unfortunately, she did not have a good financial advisor. My wife’s financial advisor charged a fee for AUM, charged a load for each mutual fund he traded– and he traded often (A common practice by financial institutions.) After eight years of investing through probably some of the best market conditions, my wife had net return of 1% of her investment! If Jenny had used this financial advisor, she would have less than $600k to show for after 40 years of hard work and a frugal lifestyle.

Jenny’s nest egg after 20 years $265,561
Jenny’s nest egg after 40 years $589,891

What’s the difference after 40 years? 

Scenario 1: Self Managed Finances: $2,624,813

Scenario 2: With A Good Financial Advisor: $1,526,020

Scenario 3: With Most Financial Advisor On the Market: $589,891

As you can probably tell, I don’t trust financial advisers and I don’t think it’s necessary to have one. Here are four more good reasons to manage your own finances. Keep following my financial posts and I will show you how you can manage your own finances. It’s not that complicated and can save you a ton of money.

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4 comments

  1. Good points here. I believe that there are good financial advisors out there. A hallmark of one is somebody that will try to establish a relationship with you while you are emerging from training, as has been my experience, without charging you anything initially.

    I believe a good financial advisor will sit down with you and talk you through different outcomes of different investment and loan repayment strategies, for example, generating a spreadsheets with estimates of values and nest eggs as MAL has provided above. In some cases, recommendations made from a financial advisor can save a significant amount of money in interest for specific types of loans, and it is nice to put a dollar amount saved to the amount that you’re actually spending on a financial advisor.

    Some financial advisors will charge a flat fee per month, and will offer recommendations for Investments rather than managing an Investment Portfolio and charging you any percentage of it. They will provide you resources and 24/7 advice about things ranging from automated investment strategies for firms like Charles Schwab, to IRA/retirement planning without biases.

    Liked by 1 person

    1. Thank you for the great comment, ACS MD. There surely are good financial advisors out there for people who do not have the time or discipline to invest on their own. It does take some efforts to weed out the bad ones, however. It will cost you many more years of labor as illustrated in my post. I am also a big fan of the flat fee approach especially as your investment size gets bigger. It should not cost more money to manage a larger individual portfolio. I should write a post on that in the future.

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  2. Dude, worse advice to give someone is to manage their own money if they are bad at managing money. You are using a percentage model for derived income for the advisor as if this is the only way they are paid but some advisors charge per trade and not by a percent of your investment with them. It sounds like you didn’t know what you were doing when you signed on with an advisor and were taken advantage of. At the same time even a good financial advisor can lose you money because investments involve RISK.

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    1. “Dude, worse advice to give someone is to manage their own money if they are bad at managing money.”
      – I disagree with that statement. I think the system has long assumed and convince our population that we don’t know how to many our money which I think is ludicrous. It does take discipline and self-education which are the difficult part. Do I believe there is still a place for financial advisors? yes, I do, but I also try to make it clear the downside of having one in this article.

      “You are using a percentage model for derived income for the advisor as if this is the only way they are paid but some advisors charge per trade and not by a percent of your investment with them.”
      – I think I made it clear that there are many other ways FA takes advantage of clients, e.g. paying a load per each trade and trading often, that a client may never realize the financial loss from using a FA. Using a percentage model here is to simplify the explanation. Perhaps it warrants a separate article to list all the ways a FA can take advantage of a client.

      “It sounds like you didn’t know what you were doing when you signed on with an advisor and were taken advantage of.”
      – true, and I hope to educate people so they don’t make the same mistakes.

      “At the same time even a good financial advisor can lose you money because investments involve RISK.”
      – Risk is present regardless if a FA invest for you or if you invest on your own. It’s part of the market if you put your money in it. It’s more important that people understand what kind risks is involved and learn to invest with adequate asset allocation and discipline.

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