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Is your financial advisor worth $10,000 ?
We had to fire our financial advisor. He was a nice guy and meant well I’m sure but he had to go. It started off great with a free financial plan and help rolling over old 401k plans. He even set up an IRA and a 529 College Savings Plan which, at the time, seemed like something a professional should do. We just didn’t know what we didn’t know. Once we realized exactly how much he would cost us in the end we decided to fire our financial advisor.
A cautionary tale for anyone setting up college savings
This story starts years ago, before I discovered the financial independence community. Before we learned what we know now. It was that time we found ourselves in a situation that traditionally calls for a financial advisor. Well, at least we thought so at the time. Among other things, we wanted to set up a college savings account for our son. I’m not spoiling the plot since it is in the title, but this is a cautionary tale.
Should I have known better? Maybe…
I should address the fact that my ‘About Me’ page does note that I have a background as a financial analyst, a degree in business, and worked for a bank which will make my blind spot for personal finance at the time sound odd. It does. It is odd and I’ll briefly explain.
My area of expertise is financial reporting, budgeting, and forecasting which means I had elaborate personal income statements and balance sheets because they made sense to me. The investing end of the finance equation never appealed to me personally so I never got around to learning much about it despite it being so important to my future. Like many people, I wrongly assumed investing involved individual stock picking which felt more like gambling to me (still does) and I was pretty risk-averse with my money.
Knowing what I know now I would not have found myself in this situation today. We wanted to defer this task to an expert more capable of handling our money (like we would a plumbing or auto repair problem). The instinct to seek expert advice still makes sense today in many situations, even personal finance related. We didn’t do enough research to know what we did or didn’t need from a financial advisor. We also didn’t research what kind of financial advisor we should look for. I now see how easy it would have been to set up these accounts myself and save a lot of trouble and money. Hindsight is often 20/20. I hope that by telling my story below I can help at least one other person avoid this.
We had three tasks for the advisor: set up an IRA account for my wife, set up my son’s college fund, and advise us on what to do with our idle cash. Like many people in that situation, we knew that we should be doing something with these things just not entirely sure what yet. As a service to members, our credit union offers meetings with one of their financial advisors and this seemed like a good a place to start. We hoped that since we weren’t picking a random name out of the phone book that they would be someone vetted as well.
Rollover a 401k
My wife had left her full-time employment after our son was born to care for him so she no longer had access to the 401k plan at her office. We needed to roll over her 401k balance to an IRA and set up a way to continue contributing to the annual maximum. I at least knew that rolling over a 401k from one company to another one was a thing. I had to roll over mine in the prior year after changing jobs. The issue was how to do that independent of an employee sponsored retirement plan. We wanted the advisor to help.
Set up a college savings account
We wanted to set our son up with a college fund because we want him to start his adult life with less debt than we did. We knew they existed but not how to open one up and what to invest in once we did. Also, we weren’t entirely sure how much we should be saving. We wanted the advisor to help.
Help us with this extra cash
We are both diligent savers, having accumulated an amount in our savings account beyond a regular emergency fund that suggested we should be investing that money. Investing the cash was technically the right thing to do in this situation, just not exactly how to open those accounts or what to invest in. We thought we wanted a financial advisor to guide us in this endeavor to avoid any rookie mistakes. We assumed that, as a financial advisor, they knew more than us and would make it their job to get us the best returns.
This is where you need a financial advisor, right?
These three life events seemed like the exact situation you would need a financial advisor to us based on what little we knew of the personal-finance as portrayed in popular media. We set up a meeting and had our finances reviewed by the advisor. He rolled over her 401k to an IRA he opened for us, set up automatic deposits to the IRA, opened a 529 college savings plan for our son with automatic deposits, and invested our cash. It all seemed great.
A ‘Fire Our Financial Advisor’ storm on the horizon
Sometime after opening these accounts, I discovered the FIRE movement (financial independence retire early). It spoke to me at a fundamental level like a long lost friend who just understood me. I quickly devoured everything I could read, watch, or listen to in regards to handling my finances and setting myself up for financial independence. Whenever I learned something new I rechecked my finances to make improvements if possible. This was one of those situations.
Over the next year or so the college savings account stagnated in value, a small red flag for me or at least something worth looking into further. As a relatively risk-averse person who checks account balances each month, I was keenly aware of how little the investments were growing. I even compared the returns to my 401k to rule out market fluctuations (that wasn’t it). I had a hard time wrapping my brain around how a professionally managed investment account gained almost nothing. The fund was functionally worth the same as when I made the initial deposit even though we contribute $200 a month.
This may not have been a huge red flag when we started our journey. It was a red flag now. At least now I had the knowledge and tools to evaluate my investment account.
Fees cost more than you might think
Reading through the iconic “JL Collins Stock Series“, I came across the fantastic documentary by PBS called “The Retirement Gamble” that opened my eyes to just how destructive fees could be on an investment over a long timeline. I mean, I knew fees were bad obviously. I just never sat down and did the math on exactly how much money I’d lose over the 15 years before my son gets to college age. The fees are all such a small percentage, they couldn’t possibly amount to much is what I kept telling myself.
I’m lucky because doing a deep dive on the college savings account to research why it isn’t growing plays to my strengths as a financial analyst. I spent years as a financial analyst buried neck-deep in accounting data trying to explain budget variances for reporting purposes and this was functionally no different. Most people don’t have that luxury of experience.
Forensic accounting: the sexiest accounting
First, I pulled a list of every transaction on the account since inception to make sure every deposit I thought I sent over was received. Second, I dug through our paperwork at home to find the fund prospectus we got when opening the 529 college savings account which should have the expense ratio on the investment. Third, I found the paperwork we got from the advisor detailing his fees.
Prepare yourself to be as angry as I was when I laid this all out and did the math. It has been years and I’m still salty about it. First, there was an expense ratio on the fund of around 0.9% annually. Second, an Assets Under Management (AUM) fee of 1.2% charged annually by the advisor for managing the investment. Finally, a 4.26% load fee on all deposits to the account. I’ll briefly explain each below so you can get angry too and we can commiserate together.
I should stop here and note that I was angrier with myself than the advisor for not fully understanding what I had bought into. I had done more research into the expense of an annual pass to Walt Disney World than the account that will hopefully pay for my son’s college expenses. He isn’t without blame here but it is mostly on me for mistaking a salesman for a true financial advisor. Enough of that, back to the story.
Fees… so many fees
All figures quoted below are based on an initial balance of $2,000 contributing $200 a month for 15 years and an annualized return of 5 – 7% for illustrative purposes. Your mileage may vary on the returns of any given investment over time but these figures seemed reasonable for what I and many parents would experience in this situation. The “expense” noted for each fee is a combination of the direct fee incurred plus the opportunity cost of not investing those fees in the account over 15 years. Essentially, it is not just the fee we need to worry about but the lost gains by depositing slightly less due to fees every year. The comparison to expected college expenses is based on the Vanguard College Cost Projector for the four-year public university nearest our home which is approximately $35,000 total for tuition and fees only.
Expense ratio on the fund
The expense ratio on the fund was around 0.90% at the time which sounds small without context. I just took the advisor’s word that this was a good fund at face value without looking at alternative options. I didn’t realize this expense ratio was almost twice as much as recommended by the financial independence community and nearly 9 times higher than what I would be paying if I invested in index funds on my own. Over 15 years that seemingly small fee could cost my son between $3,500 and $4,500 in his college savings account, nearly one entire semester worth of tuition missing from the fund.
Load fee on the contributions
The load fee of 4.26% arguably made me the angriest when I found it in the transaction listing next to every deposit we made over the year. This is a sales charge or commission typically charged by full-service brokers or financial advisors. It amounts to $102 lost immediately each year for almost no reason at all. I say that because there are plenty of options to invest where I don’t get charged a fee for depositing my money.
Fidelity, where I have the account now, will gladly take my deposits and invest them for free so why should I ever pay this fee? A mutual fund with a load fee should either have a lower expense ratio (this one did not) or have higher returns to make up for it (this one certainly did not). The load fee alone could have cost my son between $2,000 and $2,500 over 15 years, roughly half a semester of tuition.
Assets under management fee
The advisor himself charged a 1.20% assets under management (AUM) fee which he assured me was standard for the industry and a tiny amount. I vividly recall the advisor reassuring us that 1.2% of the small amount invested would be less than $50 and surely we’d pay such a small amount to ensure our son’s investment is well managed. In my opinion, the fund we were invested in was functionally on auto-pilot and he was making no real moves in the account so I couldn’t justify paying that expense. This expense alone could have cost my son between $5,000 and $7,000 over 15 years or almost one year of tuition.
All in, the three fees outlined above would have cost us between $10,000 and $14,000 in lost savings between now and when he goes to college. Even projecting 15 years from now, that could easily be one entire year of tuition and fees at a public university. Employing an advisor to set up the account for us and not much else was not worth that much. It might be for you.
When I brought up the account’s poor performance to the financial advisor at our quarterly meeting, he suggested that the entire market was down and it was affecting everyone and not to worry. I noted that I didn’t seem to be feeling those shocks in my 401k and personal investments if that was the case. Strike one in the fire our financial advisor column.
I showed him the rate of return on the college savings account against a benchmark like the S&P 500 and Fidelity Total Stock Market Index for the same period to highlight how poorly the fund was performing. He needed to explain why he chose a mutual fund with a load fee when there were so many at his disposal that did not have one. Strike two in the fire our financial advisor column.
Unfortunately, none of the answers to those questions were particularly good. I severed our relationship and moved the funds as quickly as I could to Fidelity where I currently enjoy zero commissions and an expense ratio on the portfolio of 0.118% (almost 18 times lower!!!). Strike three in the fire our financial advisor column (I looked these up prior to moving the funds).
[Disclaimer: this article is not sponsored in any way by Fidelity even though it would love to be]
Angry at myself for almost being swindled out of $10,000, I built a couple of interactive spreadsheets and shared them with a lot of my coworkers. I made sure that everyone I knew with kids my son’s age knew what I knew now about how fees affect their college savings plans. I felt like it was important that this information not stay only with me and if it helped just one other person I’ll be happy.
Red Flags in setting up the College Savings Account
I know what you are thinking and yes, there were red flags throughout this story that I can see now that I am past it. First, my documentation on our financial position and plan was more thorough than the one he made for us which was overly generic and not tailored to our goals. This didn’t immediately stand out because building financial reports was something I did for a living so that made sense to me at the time.
Also in our first meeting, he jumped to defending his fees unprompted. If he felt they were reasonable himself, he sure spent a lot of time trying to justify them on the front end. We didn’t immediately feel the need to fire our financial advisor.
To fire our financial advisor was the only solution
While we worked together, he tended to relay the information through my wife to me instead of directly to me as I requested. I’d like to think it wasn’t because I was a financial analyst more likely to realize there was an issue than my wife but that might be wishful thinking. The website to see our investments was hard to log into, hard to decipher, and didn’t connect to financial aggregators like personalcapital.com making the monitoring of the fund difficult at best.
Additionally, nothing was done to manage the account one quarter when the market dropped 15% a few years ago. I’m not saying he should have been able to predict that and shelter our investments but we had to contact him. Isn’t that why he gets paid the AUM fee?
In conclusion, I don’t blame him (entirely) for that situation. He was a glorified salesperson I mistook for a fiduciary financial advisor. I should have read up more on the investments I was looking to acquire and what to invest the money in once set up. I should have read the fee disclosure more carefully and done the math on exactly how much any fee costs me in the long term. The decision to fire our financial advisor has paid off and we don’t regret it.
The real positive here is that this event angered me enough to learn as much about personal finance and investing as possible so that I can handle these types of investments going forward. It encouraged me to write this article and blog as a whole to share my story and knowledge with as many people as I can. I sincerely hope this helps at least one other person.
Shortly after we had to fire our financial advisor and ran the numbers over and over again in my spreadsheets we made another change. We decided to double up on our monthly contributions. This sounds like it’d be a lot of money but we’re only doing it for the next 5 years and stopping all contributions. We call it our Coast 529 College Savings Plan and you can read all about the math in the related post.
Had a financial advisor set up our son’s 529 college savings. There were a lot of fees and they would have dragged the final balance down by $10,000 or more if left unchecked. We decided we had to fire our financial advisor. Open your own 529 account and invest in broad based, low expense index funds.
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