Ditch the Suit, Embrace the Algorithm

Hey there Money Saver! Welcome back to another week of How to Save A Buck, where we explore ways of saving money in personal finance, credit cards, and investing! Check out my archive here!

Picture this…

A mahogany desk, a tailored suit, and a soothing voice promising financial prosperity. This is the image of the classic financial advisor – a reassuring, yet expensive, fixture in wealth building. But before you hand over your hard-earned savings for a personalized portfolio plan, consider a bold truth: most financial advisors are a luxury few can afford (and likely don't need).

The Price of "Expertise"

Let's peel back that mahogany. The average financial advisor fees range from 1% to 2% of assets under management. That means on a $100,000 portfolio, you're shelling out $1,000 to $2,000 annually – just for someone to tell you what to invest in.

Over a 30-year investment horizon, those fees can easily devour a staggering five figures, even six figures of your potential returns.

The graph below shows how your $100,000 investment over 20 years gets reduced by almost $30,000 after higher fees eat away at your returns!

The Allure of Outperformance

So, what do you get for this hefty price tag? Advisors often promise personalized strategies and market-beating returns. But here's the reality: most actively managed funds underperform the market. A 2022 SPIVA report revealed that over 10 years, 85% of active large-cap US equity funds failed to match the S&P 500, a notable benchmark.

So, you're paying a premium for a service that statistically is unlikely to outperform a simple, low-cost index fund.

Even as a registered financial broker for many years, I never knew which way the market would go - no one will! Don’t let the allure of a financial “master” drain your wallet for investment fees. The index is a simpler, cheaper alternative.

The Shadow Side of Suits

Now, is everyone acting in your best interests? Not all advisors are created equal. Some operate with questionable ethics and put their interests ahead of yours. Hidden fees, unnecessary products, and unsuitable investments are all potential pitfalls lurking in the shadows of the financial advisory world.

Despite supposedly acting in your best interests, most brokers at large banks get rewarded for selling certain products. And I know because I saw it first hand! These investment solutions may be fine for your investment appetite, but you’d likely perform just as well in a similar solution that costs less. (Hint: save that $!)

The Index Fund Revolution

Don’t feel lost though. Average investors can keep pace with the proliferation of index funds. These passively managed baskets of stocks track broad market indexes, like the S&P 500, offering diversification, low fees (often under 0.1%), and historical returns that consistently outperform most actively managed funds.

These index funds are built and managed by some of Wall Street's brightest, as they track an index. Occasionally they will publish reports on what they think, so you can tap into the minds of these players without the lofty price tag or ethical ambiguities!

Empower Yourself

With a bit of research and online resources, you can take control of your financial future. Platforms like Vanguard and Fidelity offer user-friendly interfaces and educational resources to empower you to confidently manage your portfolio. Think of it as trading the comfort of a plush recliner for the satisfaction of building your financial throne.

The Bottom Line: Ditch the outdated notion of needing a high-priced advisor to achieve financial success. Embrace the power of low-cost index funds and the freedom of self-directed investing. You might just surprise yourself with what you can achieve without a mahogany desk and a tailored suit.

Bonus Tip: Start with a Robo-advisor! These automated platforms like Wealthfront offer personalized investment plans based on your goals and risk tolerance, often at a fraction of the cost of a traditional advisor. They charge 0.25% of assets - much less than the 1%-2% of a traditional advisor!

Save On,

Chris

[Disclosure: I’m a client of Wealthfront but do not earn any commission from them.]