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.)
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 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% fee: $10,000 grows to $294,570
1.0% fee: $10,000 grows to $184,202 so you lose $110,368 to fees
1.5% fee: $10,000 grows to $145,419 so you lose $149,151 to fees
Is it costing you? Yes, without a doubt. But maybe you think 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.
The next question you need to ask is, “But can I really trust them?” 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? That the advisers encouraged the fake clients to chase returns, they recommended investment strategies that fit their own interests, and they pushed expensive actively managed funds rather than cheaper 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 had enough money to justify paying an adviser because I thought I could make up the cost by implementing whatever investing strategies and tax loopholes they knew about.
And when I met this guy at his office and told him I’d saved up enough money so I didn’t have to work anymore I don’t think he believed me.
Then he 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?