One of the most important habits to develop is one where you take personal responsibility for your own financial well-being. Unfortunately, or fortunately, I learned this lesson the hard way. As a medical student, the only thing I wanted to focus on was making the most of my medical education. I believed that I didn’t have the time needed to spend mastering the complexities of both the financial world and the human body.
Don't Blindly Follow A Financial Advisor
My solution to this problem was to blindly follow the advice of a financial advisor who would, “clearly know better than I.” Furthermore, I figured, “Their interests must be the same as mine, because, the more money I make, the more money they make. Right?” I have never been more wrong.
Understand Your Portfolio Allocation
The “expert” advice from my advisor was to allocate just under 30 percent of my portfolio into a new mutual fund, GL Beyond Income Fund, that had been created by the parent company, GL Advisors, of my advisor's investment firm. I would later come to find out that these funds were being misappropriated by the company’s CEO who used this money as his personal bank account to fund his lavish lifestyle.
Understand the Hidden Costs of Your Investments
Knowing what I know now, I look back at my portfolio and wonder, “How did I ever agree to allocate such a high percentage of my portfolio into a newly developed mutual fund?” Furthermore, I looked over the underlying expenses of this fund which charged its investors nearly 7%! To put this into perspective, the expense ration of VTSAX is 0.04%. The expense ration of GL Beyond Income fund was 175 times higher than that of a no-load index fund!!!
This event taught me an incredibly valuable lesson–No one will ever care about my financial well-being as much as I will. It was the turning point in my investing career. I recognized that although I could not control what had happened to me, I was directly responsible for my response to this misfortune and set out to educate myself about personal finance.
Obviously, the vast majority of individuals will not have the same misfortune as me when working with a financial advisor, however, I still believe that working with one will cost you substantially in the long run. Let’s take a look at 2 cases.
Case 1: Billy
Let's say Billy makes an average American salary of $44,720 (this is according to 2017 data). Now assuming Billy graduated from college and started his big-boy job at 22 and retires at age 67, giving him a 45-year investing career. Let’s say Billy is a bit more financially savvy than the average American and decides to save 10% of his annual salary (his actual savings rate should be substantially higher, but, hey, that’s a topic for another time) and invests this money in a tax-deferred, company-sponsored 401k.
Unfortunately, Billy’s investing strategy is fear-driven and he believes that he couldn’t possibly know as much as these so-called “financial experts” and decides to higher one at a rate of 1%. What will Billy have saved for retirement at the end of his investing career?
Case 2: Becky
Billy’s friend Becky agrees with Billy that it’s incredibly important to save for retirement and also deposits 10% of her salary in a 401k. However, Becky’s mentality about finance is not fear-driven like Billy’s. Becky knows that she has the capacity to learn and is capable of educating herself about personal finance.
She decides to strengthen her financial muscles by reading 2-3 reputable books on finance per year which she borrowed from her public library free of charge. Becky also discovered the world of podcasting where she could once again learn from other successful individuals and follow their formula for success.
Becky’s feeling fantastic after all those reps. She’s ready to flex her financial muscles and decides to fire her flabby financial advisor saving her a cool 1% annually. Becky knows that investing in no-load index mutual funds that average out the market, like VTSAX, will likely give her better returns than most actively managed funds. Warren Buffet also understands this concept and has instructed his heirs to do the same with his portfolio upon his passing.
Now let’s take a look at Becky’s retirement account.
Your Advisor Could be Costing you >300k
Despite saving the same amount of money and working the same number of years, Becky has 1.277M while her counterpart, Billy, only has .951M. That’s a difference of $326,000 just because Beck decided to read a few books and take responsibility for her own financial well-being.
A little bit of effort can sure go a long way. In reality, Billy likely has far less than .951M because his financial advisor convinced him to invest in mutual funds with high expense ratios that performed substantially worse than Becky’s no-load index funds that followed the S&P500 or total stock market
$13,000 More per Year in Retirement!
Assuming a safe withdrawal rate of 4%, Becky is now able to retire on an annual income of $51,000 that is generated from her investments. Assuming nothing catastrophic happens in the stock market, Becky will be able to enjoy these returns into perpetuity as her nest-egg shouldn't deplete for quite some time, if ever.
Billy’s safe withdrawal rate still provides him with an annual income of $38,000 per year. However, had Billy made the simple change of ditching his financial advisor and developing the habit of taking personal responsibility for his finances, he’d have an additional $13,000 a year to spend on the experiences/things/people/charities that bring him joy in life.
Let’s start habituating financial education into our everyday life and taking action towards developing our own financial physiques. Be Becky, not Billy! How about you, what has your experience been with or without using a financial advisor?