Time to fire your financial adviser?
I’m going to turn down a new job tomorrow.
People keep telling me that I’ll need to get another job…for mental stimulation even if not for the money. They may be right about that, but this particular job is not for me.
Its not because I can’t do the job. Its a wealth management role that I reckon I could do in my sleep.
It’s not because it would mean grinding out 9 to 5+ in an office; you choose your own hours and work from home or at clients.
And its not because of the money. Once you have built a client list, the money is almost embarrassingly good. Apparently, the average person doing this role spends 2 months a year on foreign holidays. This is a clue it’s a “stealing candy from kids” scenario.
Its not because I’m lazy either. I spent many years as a workaholic and these tendencies remain. When I was in my early 20s, I used to tell myself that I’d ease back after my net worth reached £X. That was a long time ago and I just kept on going past a series of money milestones – like a marathon with no finishing line at 26 miles. If anything, the temptations to work hard have gotten greater over time.
The reason I’m turning it down is that it means selling expensive investment products to people who don’t need them.
This conflicts with my core beliefs and values, which are:
1. I want to help other people (as well as myself) get rich
2. I’d never advise people to buy products that I wouldn’t buy myself.
3. Everyone can learn enough to make their own choices and manage their own investments. This means keeping things simple.
4. The (active) fund management industry offers products which are expensive and underperform low cost index trackers.
5. Reducing costs is an important part of delivering better investment returns.
Now that I’m financially independent, I have no need to make money in a way that conflicts with these beliefs.
The selection process for the role has involved a number of interviews and given me a window into the crazy economics of the wealth management industry.
Here is all you need to know. This wealth management firm provides a service for which clients pay, on average, 2.4% per year of their funds under management (split roughly 50:50 between the wealth manager and the fund managers). So a client with a pension pot of £1m is paying £24,000 in one year in total fees.
Am I alone in thinking that, from the client’s perspective, this is fucking insane…? If we wanted, our family (of 5) could live on less than £24,000 per year. For everything.
Now 2.4% per year may sound like an innocuous little number but you need to think about this compared to your likely investment returns. If the market delivers 4.8% per year (real) then you are paying away a staggering 50% of your returns in fees. So you bear 100% of the downside risk and the managers take 50% of your expected upside. On what planet is that fair?
If the value of your portfolio falls or just grows by less than 2.4%, you will pay more than 100% of your returns to intermediaries. If you, as the client, think that your interests are aligned with the managers, think again.
This is bizarre when you realise you can easily put together a simple portfolio of Vanguard tracker funds for 0.15% per year. That’s a saving of more than 90%!!!
Investing is different from other parts of life. Usually, the more you pay, the more you get. So if you pay more for a house, you tend to get more house (e.g. bigger, better location). But when investing, you get what you don’t pay for.
The Escape Artist is Right and will show his workings. Below is a spreadsheet that I prepared for a friend. He is an intelligent and hard working professional aged about 40 with approx. £750,000 in an actively mismanaged portfolio paying 2.4% per year of costs.
The value of switching to low cost tracker funds for this guy is just under £3 million over 40 years. No, that is not a typo.
If you have an easier way to make £3 million, please email me and, if its legit, I’ll share it with the readers. I won’t hold my breath.
His response was something like:
Yeah, interesting – good point – I really should make that change, but work is quite busy at the moment.
This is a bit like seeing a cheque for £3m made out to you lying on the pavement and walking by because stopping might make you late for a check up at the dentist.
The Escape Artist says:
Pick up the cheque and take it to the bank NOW…do not pass Go, do not eat or do anything else until you have done this.
I have spoken to colleagues, friends and family about this recently. A few points became clear during those conversations:
1. People typically have no idea how much they are actually paying in fees. One person guessed “a couple of hundred pounds” when it was actually approx. twenty thousand pounds (£20,000) per year. So they were out by a factor of about 100x.
2. The reason people don’t wise up on fees is that they are effectively hidden. The client is never asked to write a cheque or hand over cash. Units are deducted silently, remorselessly, almost invisibly. We don’t miss what we never had. Yes, the terms are disclosed in small print and the funds comply with the letter of the law. But the actual £ amount of total fees deducted is never shown and can only be estimated.
3. Many people are a bit embarrassed talking about money, so they don’t compare notes (and fees) with friends. The Escape Artist has no such hang-up.
4. Even when you show the victims the numbers and explain that they are being raped, they often do nothing. Private client funds under management are “sticky” and are a wonderful source of recurring annuity style revenues. Wonderful for the financial advisers / fund managers. For the the customers? Not so much.
5. People value face to face contact with their financial adviser. There is a huge emotional comfort blanket in having someone to talk to and to share the responsibility with. This leads to (misplaced) loyalty…even when the adviser is grossly over-charging them.
Bizarrely, even when I have shown people that their “adviser” (they are really just salesmen not advisers) is effectively screwing them, the victim usually says something like:
Yes, but they are nice and I like them.
This is like paying a sociopath with a tie £20,000 a year to turn up to your house to be nice to you. While you are in the kitchen making him a cup of tea, he then steals your wallet and kicks your kitten. Not cool.
These same people would tell you that prostitution is morally wrong. From an ethical perspective, I’m not sure the 2 are that different.
The crazy thing about all this is that its just as easy to invest your own money (including your pension) as it is to run an online bank account. So if you’re capable of doing that, you’re capable of choosing a platform and a simple Vanguard tracker fund. Even if you know nothing about investing.
Just to be clear: I’m all for financial advisers and financial planners providing a valuable service to clients. Encouraging people to save, coaching them and educating them are all noble things. But clients should be paying fixed fees that are clear & agreed upfront. If you’re the client and you don’t know how much the advice is costing you, then you’re probably being screwed.
Back to the job. One thing I have learnt recently is that when you align your principles, morals and actions you become happier (as well as way more productive). So the wealth management job must be ditched. I won’t lie – the prospect of decent money and flexible hours is tempting – but I think I can do better from a moral perspective. I may be giving up easy money but, hey, I probably won’t starve.
This makes me think there’s a genuine need for face-to-face financial tuition to teach people what they need to know (rather than selling them expensive shit on commission).
Imagine having a cross between a personal fitness trainer and a Frasier style (“I’m listening”) therapist…but for your financial health. This type of financial coaching could give people need the skills and confidence they need to manage their own investments and stop getting their financial sweets stolen from them by playground bullies.
Here comes the science bit….how to avoid losing £3m of YOUR money:
The Escape Artist 
Great article and gobsmacking facts about the fees that people are prepared to pay. I would, however, take slight issue with your comparison between the ethical stance of the financial advisor (salesman) and the prostitute. Surely she(he) is actually providing a straightforward service with transparent, upfront charges? 🙂
Cerridwen – Thank you, I love your comment.
However, if you go back and re-read the section carefully, you’ll see that my comparison is not restricted to the “adviser” and the prostitute.
The more interesting comparison is between the clients – the clients of the “adviser” and the clients of the prostitute. Both are isolated and are paying too much money for something of questionable value from someone that does not respect them. They could get it better elsewhere – if only they knew how to find and build relationships with the right people.
Touche. 🙂
Unfortunately a lot of wealthy people think that if they are paying more than the rest of us then they are getting something better (another meaning for “financial lifestyling”?).
However, I greatly admire your own ethical stance in all this. How we feel about what we do is where its worth largely lies.
Maybe you can advise how best to say good bye to your wealth manager. Seems with complex portfolios it’s hard to move these assists. My case 1.7 million across SIPP, ISAs and share portfolios
https://theescapeartist.me/2014/10/31/how-to-break-up-with-your-wealth-manager/
Great article, loving the site!
I was looking for your subscribe link earlier, but missed the “follow” section – I’ll sign up now 🙂
Found your site via a Rockstar Finance post or two and was intrigued by the whole prison camp thing which made me check out more of your site and now I’m going through your archives to catch up.
So far, some great stuff!
As to this post and your touching on the psychology of how people almost need someone to hand hold them, I wonder if there isn’t a market for someone of your skills to rather than tell people how easy it is to do themselves, just charge them some small 0.1% fee or something to do it for them? Either as an ongoing fee for those who need someone all the time or just a one time fee for those that need a little bit of help to just get them into Vanguard funds?
This way you give them the face to face contact they “need” and by charging them something it somehow validates your advice?
Anyway, good stuff!
Thanks Sundeep! – I agree. See my new coaching page
Fascinating article – and you are right a lot of people dont realise what they are paying. I do a combination of an FA and DIY, however I am tracking the returns in the same way for all of the investments so I can do a comparison. If after about 5 years he is still beating my returns (and the market returns) – then I will keep him, if not….. much as I like him, I dont want to have to work! 🙂
Thanks for the comment and welcome to the site. But why waste 5 more years getting screwed? The evidence is already in. Read Winning the Loser’s Game if you want to see that evidence.
If I get an infection, I don’t wait 5 years to run my own amateur trial on penicillin (and I certainly don’t rely on a sample size of 1!). I realise that hard scientific data has been around for decades and is already crystal clear.
A fair and valid challenge. I only really started tracking the performance a couple of years ago. To date he has returned a post fees average of 16% versus my 10% so for now he is doing well – i also have a pension and isa separate so i can track. If he can consistently beat me i wont complain! I only just started tracking every penny of expenses so hopefully that will give me some more money to knock off the mortgage!
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Thanks for your work EA. What I’ve found speaking with a few different financial advisers is that these frontline people don’t even understand the detrimental impact of what they’re selling. I’m sure some do, and that is evil, but others genuinely believe they are helping their clients. IMO that’s what makes this so scary. It’s like a doctor that is eager to prescribe the latest medicine because they really want to help others, but in fact have no idea of the side effects that will emerge later. I too “interviewed” a financial adviser since I had an opportunity to have behind the scenes look at what working for wealth management firm would be like. Sometime during my hardline questioning, my friend told me that I should withhold judgement until I receive my “education” – or as I heard it, indoctrination. I am interested in helping others helps themselves, but since I am not completely FI, I am struggling to find a a business equation that allows for some sort of recurring business – without resorting to annual AUM fees. Any experience you would like to share would be appreciated.
I’m always interested (and a little disappointed) by the widespread hatred of financial advisors in the FIRE community. Simply put, it’s a service. Whether or not you or I think it’s worth it is irrelevant to the client, it’s whether the client/customer/buyer does. And I know, we all think “if only they knew!”, but the fact is most people not only not know, but they don’t WANT to know. That’s a hard pill to swallow, but it’s very true.
I was an advisor for six years here in the US, and I assure you for many of my clients it wasn’t a choice between using me or index funds – it was more often me or a bunch of random Certificates of Deposit. I even explained what index funds were during the first appointment, and the vast majority had no interest in them because by default they’re DIY, and that made them non-starters.
I also want to add the vast majority of advisors I knew and still know are good people who work hard putting their clients needs first. Of course there were some turds out there (there always are) but I can tell you I steered many clients away from ideas that would have earned me plenty. And the ones I -did- recommend typically did beat the index (after expenses), contrary to the belief those investments don’t exist! But that’s not what the clients wanted (we’d ask) – they just wanted someone else to take care of it for them. Your friend represents the majority, even if it seems incomprehensible to you and I that someone wouldn’t want to take the reigns themselves!
Almost 1 1/2 years ago, completely on a whim, I decided to go line by line on my investment management statements on my investment account and two retirement accounts. Deep in the statement, I found a withdrawal that seemed high. Funny how I found same type of withdrawal each quarter. I went through 3 quarters of 2016 with fees to my Financial at $7,000 already for the year. He had called me once during the year to tell me all was good. Moved everything to Vanguard Total Stock fund. The advisor made several phone calls to me kicking and screaming in used car salesman way but knowing I would instantly be making money by plugging the hole in my investment boat kept me firm. I’m now in a much better product and my accounts are so much healthier!
[…] Unless you have some very specific investment requirements, you more than likely don’t need and shouldn’t get a financial advisor to do any investing on your behalf. the type of investing here is not difficult to set up, it’s as easy as opening a bank account. An adviser’s goals are not aligned with yours. They want you buy the investments that make them the most money, and they’re expensive. See this article named Is Your Investment Adviser Screwing You? […]