As you will know I am an advocate for you taking charge of your money.
In a controversial step, I am going to suggest and demonstrate why I think using a financial advisor is not a good way to take charge of your money…
And it could also be an expensive way to try to make your wealth goals a reality.
Now this is likely to cause some backlash…
But let me say from the outset that I have nothing against financial advisors. There is a place for them in the market, just not for those looking to take charge of their money. And particularly not if you are just starting out.
My goal is to show you how you can be the one in control of your money and still make the returns you need to achieve your money goals.
The message is, you don’t have to be a financial guru. And you certainly don’t need fancy qualifications to achieve your goals.
The product disclosure documents for some of the products that advisors will try to put you in require a legal team to decipher… and who has the time or money for that, right?
So let’s look at the alternative view.
The Decision Maker
An important component of taking charge of your money is being the decision maker.
I am a strong believer that in order to have charge of your money and to know what is happening on a day to day basis. You need to be the decision maker.
Handing your financial future over to a financial advisor is not taking charge of your money, in my opinion.
You will know that mindset plays a crucial role in your success in life and of course with money.
By handing over all or a significant part of your financial activity to an advisor, you create an excuse before anything happens…
It’s sneaky, but it is there.
What I mean, is if things go wrong, you will have someone else to blame. Now think about that for a minute.
If it isn’t your fault if something goes wrong, how will you react? How will you learn from the experience?
The likely answer is that you will have feelings of anger that the financial advisor let you down, cost you money, and derailed your money goals.
And you certainly won’t learn anything in terms of how to grow your wealth from the experience. You won’t be a part of understanding the ebbs and flows of the investments. You won’t know how to manage your emotions for good financial decision making.
I’ve mentioned before the statistic that more than 75% of lottery winners who win a major prize are worse off five years after winning the money than they were beforehand. This is because they don’t have the mindset to manage large amounts of money.
And this is the mindset that you need to develop as your investments grow over time…
…if you have handed control of your money over to a financial advisor you won’t get the lessons that managing your money, decision making and control provide.
That’s a pretty good reason right there, but let’s keep going!
Know the Details
You also need to know the detail of the investments you make, and to understand them.
So an investment that requires a legal team to explain is not likely to pass this test…
Investing doesn’t have to be complicated, and when you are starting out you want to keep it as simple as possible.
Use the KISS principle – keep it simple stupid.
Complicated normally equates to risky. And although you need some risk to make returns, it doesn’t have to be complicated risk.
The favourite investment type of most financial advisors is the managed fund. Now I don’t know about you, but I have seen my fair share of managed fund documents, and they are not designed with the KISS principle in mind.
In fact, they tend to have a disclaimer in them that suggests before investing in the product you should seek legal advice. Again, investing does not need to be complicated, so there is your first warning sign right there.
Financial Advisors – The Costs
The next consideration when it comes to financial advisors are the costs.
This is where things start to get really interesting, and even more complicated.
When it comes to financial advisors, there are multiple layers of fees to understand.
First, you will need to be paying the financial advisor a fee for their services.
This can be either a retainer type fee, paid on a monthly basis, or it can be a percentage of the funds you have invested through them.
The percentage will vary, but for simplicity purposes it will range from 1% to 10% depending on the services provided and the amount of money you have invested.
Then, there are the costs of the managed funds that are typically recommended.
There are multiple layers of fees in these managed fund investments…
…and the crazy thing is even the disclosure documents, the one the legal team has to explain to you, will suggest that all the fees are not able to be calculated in advance due to the uncertainty of future returns.
So there is another warning sign, if you can’t determine what the investment is going to cost you in fees up front, that is a layer of complexity you don’t need.
The Types of Fees You Will Pay
The type of fees you will see include an admin fee, normally 0.02 -0.04% of the net asset value of the fund, apportioned to your investment.
Then there is a management fee, normally between 1% and 2% of the net asset value of the fund.
And then there is a performance fee, designed to reward the manager for outperforming a benchmark return. These can be as high as 20% of the outperformance above the designated benchmark return.
These performance fees can add another 0.3% to 1% to your costs.
So when you add that all up, it becomes a significant cost you need to meet before you are making any returns for yourself.
Again, just to illustrate the point, that’s somewhere between 3% and 10% in costs, most of which you pay irrespective of what happens with your money, that is, even if markets fall.
If you look at average returns over history, it is common to reference returns from stocks of between 7% and 15% per annum, unless you are Warren Buffet who has average greater than 20% for most years over the last few decades.
If you are paying as much as 10% for someone to get you maybe 15%, you can see the impact that is going to have on your outcomes. That’s a whopping 66% of your return being paid to the advisor. Hard for you to make money when your losing that much in fees.
Refresh your memory of what is possible by referring to this post and the table of returns I provided.
That’s a scary impact isn’t it, and one that you should consider carefully before proceeding down the financial advisor path.
Conclusion – The Alternative View
As mentioned, to take charge of your money I am a firm believer that you need to be the one behind the wheel, making the decisions and steering your financial outcomes.
This may mean you need to get some coaching, or do some research yourself, to upgrade your skills…
The time and investment will be worth every dollar over the long term.
Knowing what you are doing, and having the flexibility to decide where your money is invested is a very empowering feeling.
Be the champion of your financial future as you steer your money toward your financial goals. Build your wealth and achieve your financial freedom.
Share your thoughts, let me know if you agree or disagree. I would love to start a conversation with you on this topic.