Is your financial adviser screwing you?

The Escape Artist Financial Independence

Its easier when they’re unarmed…

I’m going to turn down a new job opportunity tomorrow.

People keep telling me that I’ll need to get another job, for mental stimulation even if not for the money. There may be some truth in that, but this particular job is not right for me.

Its not because I can’t do the job. Its a wealth management financial advisory role that I could do in my sleep. It’s not because it would mean grinding out 9 to 5 in an office, its a role where you choose your own hours and work from home or at clients. 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 got greater as I developed my knowledge of investing and personal finance.

The reason I’m turning it down is that it means selling investment products which conflict with my core beliefs. These are:

1. I want to help other people (as well as myself) get rich and will never advise people to buy products that I would never buy myself.

2. I think everyone can and should learn enough about finance to make their own choices and manage their own investments. This means keeping things simple.

3. The (active) fund management industry offers products which are expensive and underperform low cost index trackers.

4. The financial services industry is riddled with conflicts of interest.

5. Reducing costs is an important part of delivering better investment returns.

Now that I am 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 fabulous 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 equity 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 investment risk and the managers take 50% of your expected upside. On what planet does that make any sense? 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 tracker funds from Vanguard (who have no incentive to screw you) for less than 0.2% per annum.  So that’s a saving of more than 90%!!!

The Escape Artist believes in proving this stuff using simple sums and showing his workings. Below is a spreadsheet that I prepared for someone I know. He is an intelligent and hard working professional aged about 40 with approx. £750,000 in a portfolio “actively” managed with a 2.4% p.a. total cost.

The value of switching to low cost tracker funds can be conservatively estimated (see calculation below) for this guy at £1 million ($1.6m) over a 40 year horizon. No, that is not a typo.  If you have an easier way to make or save £1 million, please feel free to 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 £1m made out to you lying on the pavement and walking by because stopping might make you late for a check up at the dentist. I say: “Screw the dentist…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 a number of colleagues, friends and family about this recently. A few points have become 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 (£20k / $35k) per year. 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, awful for the customers and for ordinary people.

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 well-spoken sociopath with a tie £20k 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.  These same people would tell you that prostitution is morally wrong. From an ethical perspective, I’m not sure the 2 phenomena are that different.

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 financial adviser 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.

It also makes me think there is a genuine need for face-to-face personal finance and investment coaching. Imagine having a cross between a personal fitness trainer and a Frasier style (“I’m listening”) therapist…but for your financial health.

Maybe this type of financial mentoring could give people need the skills and confidence they need to choose their own investments and stop getting shaken down for their financial sweets by playground bullies.

Here comes the science bit….how to save £1m in fees:

16 comments

  1. 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? 🙂

  2. 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.

  3. amandajc59 · · Reply

    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.

  4. Royal Pip · · Reply

    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

  5. Royal Pip

    1. Well done on having £1.7m – based on the 4% rule, if your spending is less than £68k a year, you are free and FI. (and if your spending > £68k, you could easily cut it!).

    2. Its EASY to fire your wealth manager and move your assets. I have moved all my SIPPs / ISAs etc within the last 2 years. You have all the power here – you just have to use it. Its just paperwork.

    3. Start by getting the facts (including any exit fees and the relevant forms) from your provider(s). They have to give you this info.

    4. Remember, if you are in the UK, you have recourse to the Financial Ombudsman / FCA. Providers are terrified of this – only use this threat sparingly and wisely.

    If you need more help you can contact me via the Contact page. It would be great to hear how you get on.

    This feels like a subject to return to & share learning points with other readers in future posts.

    T.E.A.

  6. Keen Newbie · · Reply

    Great article, loving the site! Possibly I’m being dim, but could you explain the risk free discount rate please? It’s not a term I’ve come across before. Ta 🙂

  7. Think of it as an interest rate, like on a loan.

    We need to reflect the time value of money in our calculation. If I offer you a choice between £1 now or £1 in a years time, you are always gonna take the £1 now.

    With a 2.5% interest (or discount) rate, £1.025 in a years time is worth the same as £1.00 today. The further into the future the expected cash flow, the more you have to discount it to reflect today’s value.

    Thanks for the feedback…if you like the site please show it to your friends and click Follow.

  8. Keen Newbie · · Reply

    Ah ok, that makes sense, thanks. So the assumption is that any money you have now can make 2.5% risk free interest, hence the name? Fairly similar to adjusting for inflation I guess?

    I was looking for your subscribe link earlier, but missed the “follow” section – I’ll sign up now 🙂

    1. Exactly…the illustrative 2.5% interest rate hopefully covers inflation (RPI is currently about 2.4%, CPI is about 1.5%) and gives you a very small real return on top.

      Welcome to the Escape committee

  9. 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!

    1. Thanks Sundeep! – I agree. See this page

  10. London Rob · · Reply

    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! 🙂

    1. 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.

      1. London Rob · ·

        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!

  11. […] a habit of telling us that they are good for us, the escape artists explains how this is not so. : Is your financial adviser screwing you ? Employers give us the false sense of security that they are doing us a favour by giving ud a job, […]

  12. […] FA now he’s got my back up. Many, many thanks to The Escape Artist for his enlightening post Is your Financial Adviser screwing you?  for making me […]

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