Have you ever thought about managing your money without a financial advisor? In today’s world of unlimited information and interconnectivity, it certainly is possible. You can simply hop online, sign up with a brokerage account for free, and start buying mutual funds and index funds in a matter of minutes. Many people are hesitant to do this, however, since they feel that they don’t know enough about investing to handle their money without a financial advisor. While I do understand this fear, I also understand the risk of hiring a financial advisor, and honestly, I have chosen to invest my money on my own and have been quite happy. Here are my top 5 reasons why I choose to invest without a financial advisor:
1) Financial Advisor Fees
I never really understood the fee structure of financial advisors. They could steer you completely down the wrong path and lose you thousands of dollars, but yet they still require a payment. That makes absolutely no sense!
Many advisors charge a flat percentage rate for their services each year. This rate can range from 0.5% to 2.0% of your total investable assets. The more money you invest with them, the lower the rate typically is. So, if you agree to pay your advisor 1% each year and you’ve got $1,000,000 invested with them, then you’ll be dishing out $10,000 every year. This isn’t so bad when you earn $100,000 in a year, but it’s pretty lousy when you lose $100,000 and then still have to pay your advisor another $10,000!
2) Advisors are Tempted by Mutual Fund Payouts
The second way advisors are compensated is with commissions from investment companies. In other words, if they sell you on a particular mutual fund, then that mutual fund company will likely compensate them for selling you on their fund. Therefore, if one of the mutual funds earns fantastic returns on a regular basis, but pays little to the advisor when compared to another fund that earns just modest returns, it will be pretty difficult for your broker to recommend the excellent fund that pays them little. Instead, many advisors would be tempted into signing you up with the lesser fund so that they can earn that large commission.
It’s hard to tell how often this happens, but there’s no doubt about it – it happens.
3) You Should Have a Hand in Your Investments
I have friends and family that have saved up quite a lot of money, but they know absolutely nothing about investing so they simply let their advisor take care of everything for them. Then, once a year their advisor meets up with them and shows them a couple pieces of paper to illustrate how amazingly well their investments have been doing.
This might sound great to some of you, but you do realize this is how scammers like Bernie Madoff got away with their scheme for decades, right? They simply told their clients how amazingly well their investments were doing, and their clients were happy, but really had no idea what was really going on with their money. When you don’t handle your own finances (or at least have some sort of clue how your money is being invested), then you become an easy target for deception and thievery.
4) Advisors Know More About Selling Than Investing
In my early years of finance, I almost became a financial advisor. But, then I learned that the job was more about selling than it was about earning the client a profit. For you see, unless an advisor is able to sell themselves to their clients, they won’t ever get the privilege of managing someone’s accounts! The financial advisor job is 80% sales and 20% financial knowledge. Therefore, your advisor might not even know that much more about the market than you! They just know how to sell themselves to sound knowledgeable.
I choose to invest without a financial advisor because I don’t need another sales person in my life. Instead, I have befriended many investment-minded people and we discuss the market every once in a while. They have nothing to sell – we just all want our investments to grow within the ever-changing market.
5) They Often Don’t Beat the Market
One of the most common myths of financial advisors is that they will likely beat the market. Honestly though, the chances of this are minute. After paying for their fees as well as the fees for each mutual fund they recommend, your earnings will often be much lower than that of the overall market. Of course they’ll never tell you this. Instead, they typically show you your earnings percent before the fees are tacked on. Twelve percent sounds pretty awesome, but after the yearly fees are deducted, you probably only made 9% or less. If you currently have a financial advisor, pay attention to the number they’re showing you and don’t be afraid to ask questions.
How to Invest Without a Financial Advisor
I already eluded to the simplicity of setting up an online brokerage account earlier in this article, and it truly is just that easy. Beyond signing up, investing doesn’t have to get all that complicated either. For me, I invest my money mostly into low-fee index funds. The return has been excellent, the expenses are low, and my money is growing exponentially.
If you feel comfortable, try to invest some of your money on your own and see how it goes. If your net worth is $100,000, take out $5,000, open an online brokerage account, and transfer your funds over. From there, take a look at mutual funds and index funds that have performed well over the last 15 years (and have a low fee percent). Select a few different funds and distribute your money among the different funds. Then, sit back and take note of how well they do! If you do well and are comfortable with your investments, then perhaps it’s time to fire your financial advisor!
This isn’t rocket science. If I had to venture a guess, I would say that 90% of the people out there could really invest on their own. Step out of your box and give it a shot!
Do you already invest without a financial advisor?