Back in 2014, Mrs. Broke Architect and I began questioning why we had a financial advisor. We met with him once a year, if that, to review our financial situation. Most of the time he would just tell us: “You guys are doing great; I’ll see you next year.” After hearing that for a few years, we begin to question what we were getting for the money we were paying.
I personally have an issue with the typical financial advisement business model. Most advisors are paid a percentage of assets under their management. That means they are highly motivated to work with and seek out high net worth individuals with lots of liquid assets. I have spoken to multiple advisors who will not talk to you until you have at least $100k in liquid assets, and that is considered the low end. Think about it this way, most advisors are paid 1%-2% of assets under management. That is $1,000-$2,000 per year in fees if they are managing $100k of your money. And since most of us never pay attention to the money our advisors are managing, we never notice the fees we are being charged for their services. And if they consider $100k as their low-end clients, imagine the lack of service you will receive if you have less than $100k.
Back to our story. Our former advisor was a nice person, Mrs. Broke Architect and I really liked him. But we felt that he was not advising us. We did not need him to be a mediator because the Mrs. and I were on the same financial page. We did not need him to advise us on how to pay down debt. We were not investing beyond our 401ks. He never talked to us about tax planning and he never mentioned estate planning or discussed the need for life insurance. These were all things we figured out on our own. Which brings me back to my original question; what were we getting for our money? We began to feel has if we were spending money for a service we were not using or really being offered.
Additionally, we began to pay attention to the fees our advisor was charging and this is what we found:
- Financial Advisor – 1.5% of asset under management
- Broker’s Fee
- This fee is charged by the investment company my advisor uses to make trades. So, when our advisor moved our money around we where charged a fee. Which does not sound too bad but when you consider there are two fees for moving around money—a fee to remove money from a fund and a fee to invest in a new fund. Considering that we were invested in 5 to 10 different funds, that left the potential for fees to added up quickly.
- Total Advisement Fee 2% to 3% of assets under management per year
- Considering that advisors tell you to expect to get an average yearly return of 7%-8% over the long term, if you subtract the 2% -3% fee cost, that gives you at real return of 4%-5%. Over a 30-year period, that can add up to hundreds of thousands of dollars.
So, after thinking about if for over a year, in 2016 we decide to let go of our financial advisor and take control of our saving and investing accounts. In doing so we lowered the fees we were paying and removed an unnecessary yearly financial meeting. We moved all our invested assets into Vanguard index funds. We then proceeded to look into how we can taking full advantage of our employer sponsored benefits as a way to save money:
- Maxing out our 401k contributions
- Doing this not only increased our retirement saving, it is also a part of our tax reduction strategy
- We are saving over $4,500 per year in taxes for using this account
- Maxing out our HSA contributions
- Doing this not only increased our medical savings, it is also a part of our tax reduction strategy
- We are saving over $2,300 per year in taxes for using this account
- Taking advantage of employer medical, vision dental and mental healthcare benefits
- Although this is something that is not managed by a financial advisor, a good advisor should push you to use all of the health care benefits your employer provides including wellness programs.
- Listed below are other employer sponsored benefits that we explored but did not take advantage of for one reason or another:
- Flexible Spending Account (FSA)
- These funds can be used for day care, and out of pocket medical and dental cost
- There is a possible taxing saving of over $900 per year for using this account
- Employer Provided Financial Advisor
- After exploring this option, we realized that this person also charged a fee to manage funds under management. So, we decided not to use their services.
- Flexible Spending Account (FSA)
Checkout your employer benefits options. Some employers offer things such as:
- Life and Disability Insurance
- Legal Assistance
- Commuter Assistance Program
- Employer Stock Purchase Program
- Tuition Assistance Program
- Group Discounts
To be honest, going without a financial advisor is not for everyone. Some married couples need a third-party meditator to help settle differences of opinion. And some individuals (most) just want someone else to take care of this part of their life. But everyone should always remember NOBODY CARES MORE ABOUT YOUR MONEY THAN YOU DO. (Check out Liz Davidson’s book “What Your Financial Advisor Isn’t Telling You – The 10 essential truths you need to know about your money”). As a general rule, I believe that most people do not need a financial advisor until they are taking full advantage of their employer sponsored benefits.
If you are maxing out your 401k, HSA and/or FSA you are doing the most you can do on you own to save for tomorrow and lower your taxable income today, without having to pay someone. After taking full advantage of your employer sponsored benefits program and you still have additional disposable income that you want to invest, then you may want to call a financial advisor. Or maybe you will become a believer in investing in index funds and forgo the need for an advisor.
The bottom line is that I believe that most people have a financial advisor because sounds it really cool, but is not a necessity. Most people have fairly simple financial situation and the fees incurred by having an advisor is a drag on their wealth building. To be truthful, advisement fees are just one part of the equation when it comes to building wealth, the most important factor is the amount of money you put towards building wealth.
Let me know your thoughts on having a financial advisor. Have you put any real thought into why you have one?
Remember, no one will care about your money more than you, not even your financial advisor.
The Broke Architect