Before some of you reading this get angry at me, especially those in the financial industry, hear me out. I have two very intelligent family members that work in the financial service’s industry, and I have the utmost respect for them. But, advisors and brokers make money by charging fees to their clients. So what exactly does that mean? Well, a client sits down with an advisor and talks about their long term financial goals. The advisor then recommends funds to the client to align with their investment goals. Most advisors won’t tell their client what they charge in fees, and really how much it’s going to cost the client over their lifetime.
I’ve been studying personal finance for years now. I read my first personal finance book when I was in high school, and got extremely hooked. Learning everything I possibly could at a young age. When I was nineteen years old I opened a Roth IRA. I needed to get in the game early, and it’s definitely paying off. I wasn’t making much money when I was nineteen and just starting college, but I wanted to start putting money into a Roth IRA from my summer job to maximize my returns. Money wasn’t taught to me growing up by my parents, but I found an extreme passion for personal finance at a very young age after I came across some really great books.
The book that stood out to me the most, and I know it has for many was “Rich Dad Poor Dad” by Robert Kiyosaki. The reason I enjoy this book so much is that Robert talks a lot about the financial service industry and how it robs investors. Robert mentions starting businesses that produce cash flow, and invest in cash flowing real estate. Robert has pretty much all of his money in real estate and his businesses and avoids the stock market.
Now, I don’t agree with everything Robert has to say in his book, but agree with most. I plan to get into the real estate game by hopefully this summer (2020). I’m either going to do a house hack or buy a turnkey rental property that produces great cash flow. There are many ways to invest your money, Robert focuses mainly on real estate in his book. I don’t plan to put all my money in real estate as Robert talks about, but diversify. I’m still a big believer in diversification and don’t think you should have all your money in one place.
Yes, you should own real estate, stocks, bonds, mutual funds, ETF’S, etc. Majority of millionaires in the world are millionaires because of real estate. It propels your net worth over the long term like no other investment class. Should you use a financial advisor, totally up to you? Know beforehand what the associated fees are with any advisor and what type of relationship you want to have with them. Majority of clients fail to ask their advisors what the associated fees are with the account.
“Advisors and brokers have to make money somehow.”
I personally don’t use a financial advisor, and probably never will. But, I enjoy personal finance and constantly educate myself every day. I hear most people saying that they use an advisor because they don’t understand money and would rather have someone else manage it for them. The only time I will most likely hire a financial advisor is by using a fee-based advisor. These are advisors that charge by the hour to give you investment advice about your portfolio. I want to share with you some insight on what it costs to use an advisor over the long haul, and what you need to realize and take into account. A typical in person advisor is going to charge a 1% fee associated with all your assets under management. So as you make more money in the market, your advisor is going to make more money as well. I want to share with you a real life example directly from the Motley Fool.
Laura is a 34-year-old orthodontist. She recently finished paying off her student loans and is approached by a financial advisor who’s graciously willing to manage her $500,000 investment account for a 1% fee per year. Laura paid over 5% interest on her student loans, “Only 1% per year?!” she says, “Sign me up!”
Over the next 10 years, let’s assume the market (and Laura’s portfolio) achieves an inflation-adjusted annualized return of 7% (or 1.71% per quarter).
After 10 years, the value of Laura’s portfolio sits at $892,000.
Over that time period, Laura paid her advisor $68,290. Even an orthodontist would think that’s a pretty-penny to charge for a service.
But at least Laura can clearly see that money being withdrawn from her account every quarter. However, as those quarterly payments flowed out of her account and to the advisor, she is sacrificing all future growth on that forgone money.
Laura’s first quarterly payment to her advisor would have been around $1,271. Had she retained that money in her account for the 10 years, it would be worth $2,459?—?nearly double its original value. After 10 years of lost opportunity, that first quarterly fee was actually closer to 0.5% (or 2% annually).
Altogether, over the account’s 10 year history, Laura would be giving up an extra $25,421 in missed returns. Coupled with the actual fees paid, Laura is out nearly $94,000?—?$89,000 more than had she put her $500,000 into a Vanguard S&P 500 index that charges 0.05% annually.
That’s a pretty big difference when looking at returns right? Again, I don’t have anything against advisors, but understand the costs associated with an advisor before you make the decision. There are a lot of advisors out there that don’t have their clients best interest, and trust me I’ve spoken to many of them. If you decide to use an advisor, interview many of them before you make a decision and know your options.
I use Vanguard for pretty much all my investments. Vanguard is one of the biggest mutual fund companies in the world. Jack Bogle was the founder of Vanguard who believed in the idea of offering low cost funds to investors. Bogle was a simple man, and wanted to teach investors how simple investing could be for them. In the later years of his life he advocated owning only three index funds according to MarketWatch. One for US stocks, one for international stocks, and one for bonds. Jack believed that there was no sense in trying to time the market and in which 80% of investors and professionals don’t. He wanted to keep things simple, and will go down as one of the most prolific investors of his time.
Back in the beginning of this article I spoke about personal finance books. I’ve read dozens of books in my life on personal finance, many of which were difficult at times to comprehend. By far, the easiest one to comprehend for the everyday person is Ramit Sethi’s book, “I Will Teach You To Be Rich.” Ramit uses language in this book so that anyone can understand it, especially the millennial generation. He talks about living a rich life, which is different for every person. But, he also breaks down simple investing tools, which really comes down to learning about finance everyday so you can educate yourself. Personal finance doesn’t have to be that complicated, we just make it complicated. I highly would recommend checking out this book, I’ve learned so much from it!
To summarize everything, I want to state that I have the upmost respect for financial advisors. But, beware. If you decide to go that route, make sure you know the associated costs with using an advisor and to really assess to see if it’s worth it. There are so many books and tools out there today to use, which will help you learn about personal finance. You can educate yourself, just like I’ve done. It takes time and commitment, but it doesn’t have to be that difficult. We just make it difficult.