Today’s question comes from Mark. He asks:
“I have a quick question I would really love your advice on. Half of my retirement savings are in a Schwab account managed by my financial adviser. The account has mutual funds FMUEX, FMNEX, FMFIX (expense ratios of 0.92%, 1.14%, and 0.79%), and each quarter a 0.25% “Fee to Adviser” is deducted. The other half I put in Vanguard index funds without ever discussing it with him (expense ratio of 0.17%).
Am I getting ripped off by my adviser? Is it right that I have to pay a 1% adviser fee in addition to the expense ratios? I know you recommend index funds but if I bring that up with him he would say that the Schwab funds will outperform the index funds in the long run by much more than 1%.
I trust my adviser, but is it time to dump him?”
I just answered 271 emails, and this is a question I get all the time. (And in full disclosure I’m not an adviser, I’m just sharing my opinion on this matter.)
A 1% fee might seem like a tiny number that doesn’t really impact your finances. But because you’re smart, you know when you add up a 1% fee year after year you start looking at some pretty big numbers.
Just how big? Let’s say you invest $10,000 and earn 7% over 50 years.
0.0% fee: $10,000 grows to $294,570
1.0% fee: $10,000 grows to $184,202, and you lose $110,368 in fees
1.5% fee: $10,000 grows to $145,419, and you lose $149,151 in fees
So is it costing you? Yes, without a doubt. But maybe you think that investing on your own is really scary and you don’t even know where to start so you’re okay leaving it up to your adviser because that’s what they do and of course they can invest better than you ever could.
The next question you need to ask yourself is, “But can I really trust my adviser?” And there’s been some fascinating research in this area. My favorite is when Sendhil Mullainathan of Harvard and a couple colleagues from M.I.T and the University of Hamburg performed a sting operation by sending fake clients to advisers.
What did they find? The advisers encouraged the fake clients to chase returns, recommended investment strategies that fit their own interests, and pushed expensive actively managed funds rather than cheaper efficient ones like index funds.
Another study, by Susan Christoffersen of the University of Toronto and a couple colleagues from the University of Virginia and University of Pennsylvania, found that advisers shifted more of their clients’ money to funds that shared the fees with them, funds that also performed worse than the alternatives.
My own experience was similar. I reached a point where I thought I had enough money to justify paying an adviser. I’d more than make up the cost by implementing whatever investing strategies and tax loopholes they knew about.
When I met him at his office, I told him I’d saved up enough money so I didn’t have to work ever again. I don’t think he believed me, and started lecturing me on inflation, and rising housing costs, and the volatility of the stock market, and when I had kids I’d need money for college, and had I even thought about all this? (Yes, only obsessively for the last 10 years.) But I didn’t have time to tell him that because he went right into trying to sell me an annuity.
Warren Buffett recently said this about advisers, “Supposedly sophisticated people, generally richer people, hire consultants. And no consultant in the world is going to tell you, ‘Just buy an S&P index fund and sit for the next 50 years. You don’t get to be a consultant that way, and you certainly don’t get an annual fee that way.”
What he’s saying is advisers are there to earn a living, and if you feel like you need to use one, then use one. But you have to be okay knowing it’s going to cost you a lot of money over your lifetime, and even if you find one you trust, can you ever really know?