Have you ever noticed that every person giving financial advice always wants you to give up coffee? Because that coffee cost $4.00 a day and that times 60 years at 12% interest is however many millions of dollars. You would think that Bill Gates must have massive self-control over his desire for coffee and that Microsoft thing is just his side hustle. I don’t even drink coffee and I get tired of hearing about how it is ruining your retirement.
I met with my 401K plan advisor and he gave me a two-page brochure about our 401K and a one-page flyer about “the real cost of coffee”. Now yes, I understand they are trying to show how a small expense over time can turn into a very significant amount of money in the future. They just need some new examples. I don’t know of a single person that actually stops for a Starbucks-type coffee every day or even almost every day. Most people at my work are just rushing to get in on time. Perhaps you do get coffee every day but maybe that cup of coffee is the highlight of your morning and is what motivates you to get out of bed and get going.
What if they showed how much money you could save if you turned your inside temperature up 1 degree in the summer and down 1 degree in the winter? What if they showed how carpooling one day a week could save on gas? Or how about if they cut their cell phone usage and were then able to cut their phone bill in half? What about canceling the gym membership in favor of an even better home gym?
Or how about they show you how much their 1% (or greater) advisor fee is going to cost you over the next 40 years? Boom! Mic drop. I’m kind of thinking Mass Mutal won’t be putting that together as their next one-page flyer. The funny thing about all financial advisors who get paid based on a percentage of whatever you invest is they never want to show you what those fees are costing you. And, I don’t blame them, because it makes that cup of coffee start looking like the last thing you need to worry about.
When I was younger and just starting out, I wanted to be sure I was getting off to a good start. One particularly famous financial guru, Dave Ramsey, has always recommended working with an advisor and even has approved some people you can contact through his website. So I got hooked up with one to see about working with him. We met and he went over my plan recommendations and showed me how he could help me achieve my financial goals and how the tiny bit I was paying him was nothing compared to the money he was going to make me. The meeting lasted about an hour and I walked out of there feeling really good. I told him I wanted to think about it over the weekend and would contact him Monday about moving forward.
After a few hours of researching over the weekend, I became suspicious that I may not be getting the best deal. In fact, it appeared that I was getting a downright awful deal and this guy was an absolute scum bag who was just trying to take advantage of me. Here was his amazing advice: buy Fidelity Adviser Freedom Fund 2055 Class A, through him. Now, target date funds aren’t bad and, in fact, I think they are a pretty good option for people who don’t want to think about anything. However, I am paying a financial advisor so why is he recommending I buy literally the most generic fund in the world? Oh yeah, because, that fund charges 5.75% FRONT END FEE PLUS 12b-1 MARKETING FEES. I didn’t even realize how absurd that was at the time but now I’m really like WTF! You can literally open a Scottrade account yourself in 10 minutes and buy the exact same fund for about 0.7% in fees. So for every $1,000 I would have invested with him I would have immediately lost $57.50. How can anyone make money when you are taking that kind of hit right off the bat? Factor in inflation and over a lifetime of investing with him I may not have even came out ahead of just saving cash. If I would have gone through him to set up my Roth IRA and invested up to the max every year, he would have cost me many years of retirement savings.
This was a very chatty guy, initially, but when I called him the next Monday to discuss this, he suddenly got quiet and a little rude. I am sure he could see the writing on the wall as to where this conversation was going. Damn customers who have a calculator. He tried to lie to me and tell me the Class A shares all but guarantee better performance. I told him I see zero difference between the Class A and the version I can buy myself. He then offered to pick another bull shit fund for me. At which point I said that I am not interested in investing in any fund that is going to charge me over a 1% fee. He didn’t offer anything and just said “good luck” in a very condescending tone. I told him I appreciated his time and hated that we could not work something out. I feel bad for all the people he has conned into working with him and are getting screwed every month.
On to my second advisor, who I just recently emailed, who is in charge of my company 401k. I told him I was interested in contributing more but wanted to see some cheaper funds, specifically index funds, and wanted to know if any could be added. He replied very quickly and professionally with why those fees are there and how I should almost be thankful someone is getting rich off me. He pointed to a handful of funds that have far outperformed the market over the last ten years even when you adjust for fees. So if I would have had some cheap index fund I would have been leaving big returns on the table. Now I am guessing he didn’t actually expect me to go research this myself but I went and pulled the adjusted returns of every one of our funds and found that not a single one had even come close to matching the market returns over the last ten years. And I pointed out to him that, since the inception of the funds that he gave me as examples of awesomeness, none of those would have matched the market returns either.
So again, I asked if we could get some cheaper fund options. I again received a quick and thoughtful reply that totally dodged the question and instead tried to explain to me how it really isn’t as simple to calculate the returns as I am making it out to be as there are tax implications that I’m not looking at and some other buzzwords that I don’t fully understand. Basically, no you are not getting any cheaper fund options because these funds, while horrible, are paying a fantastic rate to me for selling them. Enjoy!
Now I know this has all sounded like just one big bashing article against financial advisors but what I am really trying to do is warn people to be careful. If you feel like you need some professional advice on financial matters then absolutely speak with someone but be sure they are getting paid a flat fee. If they are advising you to purchase funds through them, then run. There are thousands of good honest advisors out there who can absolutely help you but there are just as many who only want to bleed as much money from you as possible. If you aren’t already using Personal Capital you need to be and you need to use their 401K fee analyzer and then you will start running from fees as hard as I do.
I personally use, and recommend people use, the online robo-advisor Betterment. It is a flat .25% fee and they select extremely low-cost ETF funds to meet your goals. You pay no transactions fees per trade, they handle auto draft, rebalancing, tax-loss harvesting and you can set up tax coordinated portfolios. I did it myself with Scottrade for years, which was great, but I am glad I made the switch as I believe the time I am saving and the benefits far out weight the .25%.
Note: Link above to Betterment gets you 6 months free if you join and gets me one month free;)