The Personal Finance Podcast - Should You Hire a Financial Advisor? (Plus The Major Impact of Fees!)

Episode Date: June 2, 2021

056 Should You Hire a Financial Advisor? (Plus The Major Impact of Fees!) Got questions? Ask me on Instagram Here. @mastermoneyco This is the fastest way to get a response from me.  Sponsors Thanks to Fundrise for sponsoring this episode of the podcast! Check them out at www.fundrise.com/personalfinance Thanks to Ladder for sponsoring this episode of the podcast! Check them out at www.ladderlife.com/pfp,  Thanks to our sponsor Manscaped (Manscaped.com) for sponsoring this episode of the podcast. Use code PFP20 at checkout for 20% off + Free Shipping! Want to Support the Show? Follow on Spotify or Follow and Leave a 5-Star Review on Apple Podcasts! Today We Discuss:  What is a Financial Advisor?  The Impact fees have on your wealth  How much would you pay in fees by amount invested  What to ask your financial advisor The types of advisors  More Episodes You Will Love:  How to Choose the Right Budget for You How to Prevent Lifestyle Creep  Big 3 Expenses  How you Can Have a Free Car for Life! Nerd Wallet Calculator Check out all the Stuff I Recommend!  M1 Finance Open a Roth IRA Personal Capital Free Wealth Management and Budget App and Fee analyzer!  CIT BANK (Best Savings Account) Best Personal Finance Books  The Simple Path to Wealth - J L Collins  The Millionaire Next Door - Thomas Stanley I Will Teach You To Be Rich - Ramit Sethi  Rich Dad Poor Dad - Robert Kiyosaki ** Some links may be affiliate links and we earn a small commission at no extra cost to you. We only recommend products we truly believe in.  Check us out on social fam!  Twitter Dollar After Dollar Instagram www.thepersonalfinancepodcast.com www.dollarafterdollar.com Learn more about your ad choices. Visit megaphone.fm/adchoices

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Find your advisor at IG Private Wealth.com. On this episode of the Personal Finance Podcast, we're going to answer the question, should you hire a financial advisor? What's up, everybody, and welcome to the Personal Finance Podcast. I'm your host, Andrew, founder of dollar after dollar.com. And today on the Personal Finance Podcast, we're going to be talking about should you hire a financial advisor. If you have any questions at all about this episode, hit me up on Instagram at dollar a F-T-R-dollar. And follow us on Spotify, Apple Podcast, or whatever podcast player you love listening to this podcast to. And please, if you want to help out the show, leave a five-star rating and review on Apple Podcasts.

So one of the biggest questions that I'm constantly getting is should somebody hire a financial advisor? And there could be a number of reasons why these questions come into your mind. Maybe you feel completely lost with your finances. Maybe you just feel completely stuck. You don't know where to start investing. Or a lot of situations, people's parents had financial advisors, so they recommend to their children to have a financial advisor as well. Or you have a big family event that happened, maybe a death in the family, and you've gotten a lump sum of money and inheritance or something like that, and you don't know what to do with the money.

You don't know how to handle this money. There is a number of reasons why you would want to have a financial advisor or why this question would enter your mind. So what we're going to do today is help you navigate these waters, because this is an extremely important to sit. And it's a very expensive decision if you do this wrong. So I'm going to explain a number of things about financial advisors. I'm going to explain how their fees are structured. I'm going to explain how they can help you. And I'm also going to explain which situation you should be in to hire a financial advisor.

Because the majority of you who are listening to this podcast, the majority of you are trying to further your financial education. And if that's you, then most of you may be able to do this on your own. But understanding what we talk about all the time, that personal finance is extremely personal. So this decision is very situational, but I'm going to at least lay out the groundwork so you can decide what is best for you. That's what you have to understand. You have to decide what is best for you. For example, if you sleep better knowing somebody else is managing your money, then maybe those fees that financial advisors charge are worth it for you. Because if

you're losing sleep over your money, then you maybe would want to have a financial advisor. But you got to make the best decision for you. Now as we go through this, I'm going to have some comments about financial advisors as well because there's a lot of them out there that are not good. See, financial advisors are trained more in sales than they are trained in actually helping you out, creating value for you, giving back to their clients. But there are good financial advisors out there. If you just read the book, how to become a financial advisor, you will see this. All it talks about is sales. So when someone's trying to sell you something, a lot of times they're thinking about their interests instead of your interest. You have to keep that in the back of your mind as you go

through this process. But like I said, it does not mean all financial advisors are bad. But to find the right financial advisor, it may be a longer process than you think it is. You can't just walk into your local office and say, hey, I want your financial advisor please and then you expect to have the perfect person there. Maybe that'll happen, but it most likely will. not. So what is a financial advisor? If you don't know what a financial advisor is, let's go through and figure out what exactly a financial advisor is, because they offer assistance for people, and in some cases complete management of your finances. So there's actually three different types of financial advisors we can go through here. There's robo advisors. So this is a newer

age financial advisor, but if you're looking to invest in retirement and you already have a specific goal, a robo advisor might be a great solution. Now these are companies like betterment, wealth front, personal capital has robo advisors as well. And these are great for people if you are ready to save for retirement, but are you not sure exactly where to begin, or you have a lump sum you want to invest and you just want it to be automated, or you want to benefit it from stock market returns and not really have to think about it. See, what robo advisors do is they take your money,

and each year they rebalance your portfolio for you. So what does rebalancing mean? If you want an allocation of, say, 50% stocks and 50% bonds, and stocks go way up one year and bonds stay the same, what happens there is eventually by the end of the year you're going to have 70% stocks and 30% bonds. So what Robo advisors do is they automatically sell the stocks to keep it balanced and bring it back down to a 50-50 split. So a lot of times when you work with Robo advisors, you're not going to be talking to anybody

and you're going to be filling out a survey exactly how you want your asset allocation to be. And then the Robo advisors will actually just put in their algorithm your setup. And then boom, that's all you have to do. Now, they usually charge like a half a percent fee for this, which can be good. and can be bad. It just depends on your specific situation. Then there's online financial advisors. Now, online financial advisors, you don't go in to see. They work online on the internet. Maybe you go on Zoom calls or different things like that. But you don't go into an office to go see them, which for most people nowadays, that's not a big deal. But for some people, they still want that face-to-face meeting,

which is three, the traditional financial advisor. And there's a lot of different traditional financial advisors. There's the CFP, which provides financial planning advice or the certified financial planner. There's the broker or the stock broker which buys and sells financial products. There's the registered investment advisor who provides advice and recommendations for a fee. And then there's wealth managers who usually deal with high net worth individuals. These are the three types of financial advisors that are typically out there. There may be others that are starting to innovate now. But these are the three major that you will see. In understanding if you are going to hire a financial advisor, which type of advisor you want

is going to take you a long way because the fee structure for each of these is very different. The robo advisors would be the cheapest. The online financial advisor would be the second cheapest. And the most expensive would be the traditional financial advisors. So as we go through this, the biggest thing we're going to be talking about today is the impact of fees, because fees will kill your wealth building ability. So that's what we're going to talk about now. Let's get into the major impact fees have. So fees have a major impact on your wealth building ability. And we're going to go into the types of fees today. And I'm going to give you a bunch of examples on how much you'll be paying in fees

if you have a specific percentage or a specific net worth. So the first thing to understand what we're looking at fees is there's a number of fee types. There's assets under management, which is usually how robo advisors charges. So it's between, you know, 0.25% and 0.5% annually for a robo advisor, or 1% for a traditional in-person advisor. There's flat annual fees, so some advisors just charge a flat fee of $2,000 to $7,000 a year. There's hourly fees where some advisors will charge $200 to $400 per hour,

and some are much more than that that I've seen. There's per plan fees, which if they put a plan together for you, they'll charge you $1,000 to $3,000. And then there's monthly fees. Like companies like the financial gym helped trailblaze this new system where you can pay 20, 30, 40, 50 bucks for a monthly fee, and they put a financial plan together and just make sure you're on track. I remember when I needed to hire someone fast, but finding the right person quickly felt

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Save the everyday with Amazon. Now I'm going to get into some examples here of how much you would actually pay, but I'm asked on a daily basis if I would ever hire a financial advisor. I personally would not hire a financial advisor. The reason why is the fees. And I'm going to explain to you how important these fees can actually impact your wealth building ability. Because fees impact are massive. You have to understand this.

A lot of people think a 1% fee is nothing. Well, I'm going to show you exactly why that is absolutely not true. Fees are wealth killers. Now, if a financial advisor is going to create an opportunity for you to invest where you wouldn't invest on your own, then you need to at least have a financial advisor. because you need to invest something to keep up with inflation. We've talked about that a number of times in the past. Investing something with a fee is much better than investing nothing because you're too scared.

So if you're too worried about investments, you're too worried about the market, you need someone to handhold, then maybe an advisor is best for you because at least you're investing something. But if you have a grasp on money, if you listen to this podcast on the reg, if you listen to this podcast and go through each episode and you're starting to understand, well, maybe I can invest passively in index funds. Maybe I want to invest some money in dividend stocks. Maybe I want to go into real estate. And some of these ideas are making sense to me. I see the value in having investments. Over time, compound interest is going to work in my favor. If that's you, then you may not need

an advisor because not everybody does. And my goal is to educate you enough to where you wouldn't because you're going to see how big of an impact these fees have. Now this is nothing against advisors. there's a place for advisors. Absolutely. But a lot of advisors are going to try to sell you things that are not the best for you. And you're going to see exactly why.

So to understand fees, to truly understand fees, they have two layers when you have an advisor. And most people don't understand that there's actually two layers. So even with a 1% fee over a lifetime of investing,

it can significantly reduce the value of a portfolio. So I took some Vanguard data from 1926 to 2019. And an 80% stock and 20% bond portfolio in that time frame returned 9.7% a year. So for example, let's say we invested $1,000 a month over a 40 year career. So you worked for 40 years and you invested $1,000 a month. That's a fantastic way to start investing, to try to invest as much as possible. And $1,000 a month should be your first target to try to hit.

Because if you invest $1,000 a month, and if $1,000 a month seems like a lot for you, Here at the Personal Finance podcast, we always recommend that you at least invest 20% of your income at the bare minimum. 20% at the bare minimum. So if you make 5K a month, then $1,000 is 20% of your income. So sometimes people get scared when we get to four digits here, but you really need to get to that level so you can really start building wealth. And if you make $5 grand a month, then that's 20% of your income. Maybe you and your spouse make $5.000 a month. Maybe you and your spouse make $10,000 a month. And you'd be investing $2,000 a month. But using that Vanguard data and then using my savings calculator, we know that the portfolio

will grow to $5.8 million. So $1,000 a month over the course of 40 years with that 9.7% return, the portfolio will grow to $5.8 million. Yes, compounding is beautiful. $5.8 million for just putting in $1,000 a month. Now, let's assume we paid an advisor 1%, which is a very standard percentage for a lot of advisors to manage our investments and for their services. Now you can find less expensive advisors, you can find more expensive advisors, but let's just say

1% for easy math. The result on this is after the fee basis, our results dropped from 9.7% to 8.7% right? Because they're charging a 1% fee. The result is we have a portfolio of just 4.3 million. That 1% fee cost us $1.5 million or 25% of our wealth. Would you like to understand how how to invest for $1.5 million? Because I think that's worth it. I think it's worth it to get a financial education. So you save yourself $1.5 million. Fees matter.

But the thing to understand is that's not all. Because maybe the advisor charges you 1%, but now we have to get into the second layer of fees. Because in the example, we didn't consider mutual fund fees. And a lot of advisors put you in actively manage mutual fund. advisor invested our money into a mutual fund that also charged a 1% expense ratio, our wealth would fall even farther down to 3.2 million. So we'd go from 5.8 million if we did it ourselves to 3.2 million dollars. That's over $2 million. $2.5 million. I think it's worth it to understand how to invest

and understand what funds you can put your money in because fees will kill your wealth building ability. And over time, if you had an additional $2.5 million in your portfolio, that's going to rapidly compound over time. Because I've talked about in the past, your first $100K is mostly your savings rate. But after you get past $100K, then all of a sudden compound interest takes over. After you get to a million, you're making six figures a year on compound interest. So if you have $2.5 million, you're looking at a quarter of a million dollars a year at least. That is the power of compounding. And losing a quarter of a million dollars of compound interest, every single year plus an additional 2.5 million, that is out of the question. Making sure you

rein in your fees and making sure you understand how fees work is extremely important. This is the problem with people who don't have a financial education. They lose out on so much opportunity and so much money because they don't understand how this works. Investment costs are a huge deal. And the thing is, they compound along with your wealth. So they compound against you. You don't only lose the tiny amount of fees that you pay, you also lose the compounding growth of those fees. That's what you have to understand. So imagine if you had $100,000 invested. If the account earned 6% a year for the next 25 years had no costs or fees, you'd end up with $430,000. But if you had 2% cost every single year, after 25 years, you'd only have $260,000. What that shows is 2%

every single year in fees wipes out 40% of your final account value. percent. So when you hear somebody say 2% isn't that much in fees, it wipes out 40% of your portfolio value over time because it compounds. Now, one cool tool, if you want to look at how much you're paying in fees right now, if you think, I don't know how much I'm actually paying in fees, is personal capital actually has a fee analyzer tool. So I'm going to leave a link to that in the show notes. I'll leave a link to personal capital because it's a tool that I use all the time because having that fee analyzer tool will actually just tell you how much you're spending and how much you will actually spend over time.

Now let's get into how much you would have to pay at different wealth levels. So I want to just show you guys how much you would have to pay at different wealth levels. And the way I did this was I took the calculator at NerdWallet. So nerdwollet.com, they recommend all different kinds of credit cards. They have some great articles on their website as well. But they have a calculator that shows you

if you have X amount of dollars invested with a financial advisor, how much would you pay? I'll leave a link to it in the show. notes. So if you had 1% total fees and you had $100,000, you pay $1,000 a year. So imagine losing a thousand dollars a year with just $100,000 over time. You're losing the compound interest, you're losing all that. If you had $200,000, you pay $2,000 a year. 300 grand, $3,000. $500,000 a year. $1 million invested, you pay $10,000 a year. All of us listening to this podcast have a goal of getting to a million dollar net worth. Do you want to pay $10,000?

to have that money managed, that's just with one percent fees. $2 million is $20,000. $5 million is $50 grand a year. And $10 million is $100,000 a year. But now let's say that you're paying 1% to your advisor, and then you're also paying a half a percent in mutual fund costs as well. Well, at 1.5%, at $100,000, you'd be paying $1,500 a year. At $200,000, you'd be paying $1,000 a year.

At $300,000, $500,000, at $500,000,000, at $500,000, $7,500 a year. At a million bucks, $15,000 a year. At $2,000, $30,000 a year. So at $2 million, you're already spending per year what someone's full year salary is. $5 million is $75,000 a year. And $10 million is $150,000 a year. But let's say maybe your mutual fund costs are higher or your advisor fees are higher and you go to 2%. At $200,000, $100,000 a year, $300,000 a year. $300,000, $6,000 a year. A million, $20,000 a year, $2,000, $40,000 a year, $5,000, $100,000 a year. Now, you're not just losing this money every single year, you're also losing the opportunity to allow that money to grow with compound interest.

That is out of the question for me. That is something I will never, ever be able to get over. And that is the problem with paying too high of fees. When searching for an advisor, if you've decided, hey, I want an answer. advisor, I don't care what you just said, I still want an advisor, I need handholding, that type of thing. Then finding an advisor with the lowest possible fees and investing your money in the low cost to zero cost, stocks, bonds, whatever, is the routes you have to go. Because as you can see, this is eating away at your wealth every single year. Every single year, you have $2 million at a 2% fee and you're paying

$40,000 a year. You know what that is? That's half of the money that you can draw down every year. So if you're paying an advisor to manage your money, $2 million a year with the 4% rule that we've talked about a number of times, means that you can draw down $80,000 a year. But your advisor is taking away half of that. So with $2 million, you can only draw down $40,000 a year. I didn't work my entire life to be able to only draw down $40,000 a year when I accumulated $2 million and did this amazing, amazing thing. It's not worth it for you to lose that amount of money with high fees like 2%, 1%, 1%, 1%, 1, 1, 1, 1, 1, 1, 1 and a half percent. Anything above 1% is too high.

So understand that going into this process. Now, let's get into when you would actually need a financial advisor. Now, there may be some situations where you still need a financial advisor and you can take the hit on the fees because at least you're investing your money in some way, shape, or form instead of letting it sit in a bank account and letting inflation eat it away. So when would you need an advisor? There's a number of ways that we went through and kind of laid these out. And maybe you're undergoing a big life change.

So maybe there was a death in the family. You've accumulated a lot of money. You have no idea what to do with that money. Then that might be a situation where you need a financial advisor to get you on track. Or if your financial life has gained complexity. If your financial life has gained extreme complexity, you're making a ton of money and you really just want to pursue your goals, especially career-wise or anything like that. You don't want to have to watch your investments at all.

Then maybe you'd be interested in a financial advisor. I would still say go with index funds. But maybe you'd be interested in a financial advisor in that situation. Or if you want handholding, you just can't do it without somebody helping you, then maybe that's a situation you'd want an advisor. Or if you have an extremely high income, you just want the security. You don't care how much you have to pay. You just want the security to be able to say,

somebody else is watching my money for me. I don't want to watch it. Then that might be a situation. Or if you have extreme anxiety over your finances, it just brings you anxiety. Maybe you're still good with finances and you're investing your money, but it just brings you so much anxiety you can't handle it. Then maybe you'd want an advisor. Or if you completely trust the person who's handling your money,

maybe it's a family member or a very close friend, then that might be a situation where you're okay having an advisor if they charge low enough fees. But reasons that are not okay is if you understand how this works and you're still paying an advisor anyway because somebody else just told you to. Because a lot of times that happens.

Someone in your family, maybe a wealthy uncle or a friend, recommends that you have a financial advisor just because they told you to you go get an advisor. That's not a reason. Because as you see, how much fees will kill your wealth you need to at least consider seeing if you can do it yourself. And if you can't, fine, go get an advisor because any investment is better than no investment.

Now, what should you ask a financial advisor as you're interviewing them? If you decided, hey, I still want an advisor, what should you ask them? Well, the first big question is fees and services. So how much do they charge you and what services do you get with that fees? See, the service and fee schedule should be clearly outlined. You don't want it to be like the cable company where all of a sudden you get these magically crazy fees on the back end and your cable bill that was promised to be $80 is now $150. That's not what you want.

So everything needs to be clearly outlined up front. And then investment fees. What is the fee for underlying investments? Like do they put you in actively manage mutual funds? That's the second layer. So you need to make sure that you understand both layers and how much you're going to be paying in fees and then combine those together.

So if you're paying half a percent in mutual fund fees and 1% to your advisor, you're paying 1.5% in fees. Asking them, are they a fiduciary? If your advisor is not illegal or written fiduciary in all matters, you have to be aware because they may not have the flexibility to apply fiduciary standards in serving you. Then ask them, are you in experts? Or do you have credentials or advanced degrees? Now, credentials in advanced degrees does not mean they're going to be a good advisor. All that means is they went through the training to understand some financial principles for these investments.

And a lot of times the training, like we stated, goes through different situations of selling. And lastly, you want to get some recommendations. because getting the correct recommendations from people will help you decide, is this person legit? Are they going to handle my money in a safe manner that actually has growth that beats the market? Because the only way it makes sense is to beat the market

because you can invest in a low-cost index fund for free now and it just mirrors the market. So to have an advisor, they would have to beat the market to make sense. Those are the questions to ask and those are the questions to understand. But what's most important is that you just begin investing. And if lack of investing knowledge is holding you back, listen to this podcast as much as possible. And if you need to reach out to an advisor, go ahead and do so.

But over time, let's say you continue listening to this podcast and all of a sudden you've got to grips on what's going on. You don't have to keep that advisor forever as well. But if you want to get started with an advisor, because you don't know where to start, it's better to start today than not start at all. So don't think that I'm knocking advisors. I'm not.

I'm knocking fees. I have a beef with fees. Fees are my problem. So if you're paying too high of fees, then that's killing your wealth building ability. But if you can find an advisor with low fees that has great investment options and you really want the handholding

or you really just need that help, then go for it. Don't let me tell you what to do. All I'm doing is laying out the case on the impact of fees and what can happen there. If you have any questions at all about this episode, hit me up on Instagram at dollar, A-F-T-R dollar. Follow us on Spotify, Apple,

podcast or whatever podcast player you love listening to this podcast to. And please, if you want to help out the show, leave a five-star rating and review on Apple podcast. And if you want to listen to more episodes just like this, I'll leave a list of relevant episodes in the show notes as well. Thank you guys so much for listening to this episode, and we'll catch you on the next one. Thank you guys so much for listening. And if this is your first time listening, consider subscribing so you never miss an episode.

And share this episode with a friend. And don't forget to leave a rating and review on iTunes as well, because our goal is to bring as much value to you as possible. And we're trying to spread this message that money can buy freedom. That's what money is there to do, is to buy more freedom. So thank you again so much for listening, and I hope you have a great day. When a country's productivity cycle is broken, people feel it in their paychecks, their communities, their futures. What does this mean for individuals, communities, and businesses across the country? Join business leaders, policymakers, and influencers for CGs' national series on the Canadian Standard of Living, productivity, and innovation.

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