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:
- She does her own finances;
- She uses a good financial advisor,
- 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.)
|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|
|Money in checking account at the end of year||$12,117|
|Jenny’s annual investments||$12,000|
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.
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.
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?
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.