Dear Mr. Financial Advisor,
We’ve had a lot of great times throughout the past few years. We’ve definitely had our shares of ups and downs (pun intended), but it’s time for us to part ways. It’s not you, it’s me. I appreciate all you’ve done for me but I’ve found someone new. His name is Vanguard. He treats me so good and offers me the world all wrapped up in one single total stock market index fund. Your high expense ratios and front load fees are just too much for me to handle anymore. I’m moving on to greener pastures. You’ve taught me a lot and for that I will always be grateful but I’ve realized I’m worth more than what you can offer. So to you I say goodbye, I have to do what’s best for me in the long run.
The Enchanted Gypsy
A financial advisor can be a tremendous help to most people. Investing can be intimidating and overwhelming. Most people don’t know the first thing about investing or couldn’t even tell you what funds their money are invested in. I used to be one of them. It pays (literally) to do a little research of your own and make informed decisions however.
I had always thought that I needed a financial advisor to help steer me in the right direction financially speaking. When I first started investing in my mid 20’s I was contributing to my 401K and that was my first experience with working with an advisor. The firm that managed my company 401K would come every few months and we had the opportunity to sit down with them and discuss our investments.
Once I really started accumulating a larger amount of money in my 401K the advisors noticed that I was serious about my retirement and they started taking more of an interest in my investments. They suggested that I go to their offices to sit down with my husband and go over more options and get a financial overview. This is when I learned all about the power of the Roth IRA and about how maximizing my investments could lead me to a hefty retirement account.
I remember them going over their fees on the white board in a big conference room and I didn’t quite understand it all nor did I think twice about it. Basically the more money I had invested in them the lower my fees would be so that sounded alright to me. I never questioned any of it, I thought this was just part of the process and seemed normal so it must be right.
A few years later I really started taking more of an interest into the personal finance world and began reading books, blogs, and learning as much as I could about retirement accounts. I also discovered Dave Ramsey who I admire greatly in many regards and he advises that you should invest in 4 different types of mutual funds: growth, growth and income, aggressive growth, and international. Millions of people followed his advice and seemed to be doing alright so I followed the lead. I decided to open up Roth IRAs and 529 accounts with one of Dave Ramsey’s endorsed local provider firms.
I have to say we loved our new financial advisor, he was a great guy and very pleasant to talk to. He would sit down with me and my husband for hours discussing our financial future and he was not telling us what to do, he was teaching us and allowing us to make decisions as he guided us through the process and explaining everything. He really seemed to have our best interests at heart and he followed Dave Ramsey principles so we thought we had found the perfect match for us. We didn’t have to spend one penny out-of-pocket for all that valuable information and coaching sessions…or so I thought.
Just like my 401K management group, he explained how the fees worked and again I didn’t see anything wrong with the payment structure. The firm he worked for made their money by charging front load fees starting at 5.75%. This basically meant that for every $100 we invested with them they would take their cut right off the top at $5.75. On top of that each mutual fund had an expense ratio of anywhere between 0.6% to 0.8%. These expense ratios were actually pretty good compared to some common ones that can cost up to 1.5%.
The years went by and we continued pumping money into our investment accounts and we would meet with our advisor and go over our earnings. I felt really good about how we were investing and the diversification of our portfolio.
As my personal finance interest continued to grow I started reading more books about early retirement strategies. This opened up a whole new world to me. I kept reading about how low-cost index fund investing was the optimal way to invest due to its low fees. John Bogle’s book “The Little Book Of Common Sense Investing” is all about index fund investing, terms that I was not very familiar with and sounded rather foreign to a basic investor like myself but it blew my mind. Other books followed suit and the recurring theme was “low-cost index funds” as the way to go.
A low-cost index fund is a type of mutual fund that is set up to mimic the stock market like the S&P 500 but it has a broad exposure, low operating fees and low portfolio turnover. It’s known as a passive investment choice. This differs from a typical mutual fund which is actively managed by a group or firm that tries to out perform the stock market, usually accompanied by higher fees and turnover.
One thing I always heard was that if you want to be wealthy you study what wealthy people do. So I kept reading about investment strategies of the wealthy. The one thing that was consistently common among almost all of them-they invested in low-cost index funds, specifically Vanguard funds like VTSAX.
I then discovered a podcast called ChooseFI all about achieving financial independence and retiring early. All I kept hearing was how index funds were the best way to invest so I continued to do even more research which led me down the rabbit hole.
I realized that the reason low-cost index funds were so highly prized was because it all came down to the fees. Then it clicked for me. Here I was paying a middle man a HUGE percentage of my investment money to do the same thing I could do for myself with out the high costs. The huge costs I was paying to my financial advisor didn’t bother me before because it wasn’t coming directly out of my pocket and I didn’t know any better. But in reality it was coming out of my pocket, I just didn’t see it.
Now that I felt confident and comfortable after learning all about index fund investing it was a no brainer. We decided to move all of our funds to Vanguard where they would be put into total stock market funds with an expense ratio of just 0.04%. That change alone would amount to thousands if not hundreds of thousands of dollars saved in the long run. Wow!
According to NerdWallet, “Expenses can make or break your long-term savings. If you invested $100,000 and made a 6% annual return, you’d have $105,000 more after 30 years if you paid a 0.25% expense ratio than if you paid 1.0%.” That’s significant!
The reason that places like Vanguard can offer such low-cost fees (82% less than the industry average) is because they do not charge any front or back load fees and their expense ratios are some of the lowest you will find. With their total stock market fund like VTSAX there is nobody to pay who sits back and analyzes different companies, there’s no trading and it means you own shares of every single US corporation and company. It is what it is, and it’s simple.
Research has shown that over the long-term actively managed funds consistently underperform the market compared to index funds.
It was a tough decision for us to take that leap and break up with our financial advisor because we really did like him but we knew it was the smart thing to do, keeping more of our money in our pockets instead of someone else’s.
It all goes back to “you don’t know what you don’t know until you know”. That’s why it’s so important to take an active role in your financial future, make the best decisions for you based on your circumstances, not just what other people say or do. If you’re not comfortable making those decisions then yes a financial advisor can be a great stepping stone towards that. It worked for us and I don’t regret it but I do wish I would have taken the leap into index fund investing sooner.
If you are going to be doing any long-term investing you will be hard pressed to find lower fees. The fees cut into the bottom line of your investments so much that it’s wise to keep those costs as low as possible. Index fund investing may not be right for you but for our path to financial independence it definitely checks all the boxes.