The actual cost of hiring a financial advisor

You’re going to end up paying them 30-40% of your wealth over a 30 year period.

Hiring a financial advisor could be one of the most expensive financial mistakes the average person could make. This isn’t just an anecdotal statement: it’s mathematical.

With a few small exceptions, the more I dug into the data, the more I’m convinced. (Especially if you’re talking about the average financial advisor, which is a glorified franchisee whose primary goal in life is to sell life insurance packages).

I ran a couple comparisons, and to cut to the chase, paying a financial advisor will cost you between 30-40% of your invested wealth over the course of 30 years.

There’s a lot to dig into: the difference between Series 6 and Series 7 licenses, the amount of wealth/income you’re dealing with, and your own personal financial capability. But in most cases, I think that most folks need an accountant and tax attorney far before they ever need to pay literally hundreds of thousands in fees to a financial advisor.

The exceptions are these: A) you have so much wealth (as in the tens or hundreds of millions) that you need to set up a family office, or B) you are so inept with money that you need someone to manage your pocketbook for you.

In the case of A) you are likely competent enough to figure things out for yourself. In the case of B) the simplest solution is “spend less than you make” which, admittedly, is hard for many folks to do. Just hire a bookkeeper.

They come out of the woodwork

The instant you look like you’ve made at least three bucks, these guys appear out of nowhere. College acquaintances you’ve forgotten about pop up in your LinkedIn inbox saying things like “hey how’s it been going?” and if you’re not careful you find yourself having mediocre Tex-Mex with some bozo dropping scripted phrases like “have you considered your financial future” or “don’t let your hard-earned wealth suffer from lack of professional attention”.

I swiftly realized this game was unwinnable and that these financial advisors, a nebulous term which seem to solely be applied to former business majors who never did business, were tenacious in the manner that only a Tupperware sales lady can surpass.

I discovered, however, the magic phrase that makes Edward Jones, Ameriprise, and Northwestern Mutual disappear from your inbox forever. I started asking a simple question: “how much of your own money do you personally have under management?”

To date, not a single financial advisor ever answered this question.

It seems like a reasonable question. After all, if I were looking for a guitar tutor, I’d probably ask him for a little musical demonstration to make sure he knows what he teaches.

But this is all anecdotal, right?

Let’s do the math.

The biggest issue is cost of management. Popular wisdom says to find a fee-based advisor, not a commission-based advisor. This is irrelevant. It doesn’t matter.

Ameriprise starts at 2%. Northwestern starts at 1.65%. Edward Jones starts at 1.4%. In nearly every case, these advisors simply invest your money via their franchise guidelines into predetermined mutual funds.

Series 6 licensees can only legally sell mutual funds, annuities, and insurance packages. (The Series 6 exam takes 90 minutes). If you find a Series 7 licensee (the exam takes 3 hours 45 minutes) then they can also sell stocks, bonds, and ETFs.

Doing the math

A fee of 1.4% may not sound like a lot, but the compounding effect is massive.

Let’s create a scenario: you invest $100,000 into the S&P500 and hold it for 30 years. Scenario #1 is with an advisor with a 1.4% management fee. Scenario #2 is by directly buying SPY in your brokerage account.

Scenario #1: By handing over the reins to a financial advisor, with a 7.4055% average annual return, and a management fee of 1.4%, your $100,000 investment turns into $575,244.

Scenario #2: By simply clicking “buy” inside your brokerage account, with a 7.4055% average annual return, and no management fee, your $100,000 investment turns into $852,699.

This means that, for the exact same investment strategy, going with 1.4% at Edward Jones costs you an incredible 32.5%, or $277,455. Going with Ameriprise’s 2% would be even worse, costing an entirely unnecessary $359,516 in fees.

That’s like an extra starter home going straight to your financial advisor, instead of your kids. Half of a very nice beach house. A top-line brand-new Ferrari.

When does a financial advisor make sense, if ever?

Financial advisors do two things: manage your portfolio, and sell whole life insurance.

In order to be as fair as possible, I suppose that there’s a time and place for paying a financial advisor 30-40% of your wealth over the course of your lifetime. There are people who are truly absolutely ignorant about finances, and still make a decent income. If this is you, then perhaps having someone force you to save something, anything is worth it.

But in reality, it’s really just about self control and a little bit of basic math. The vast majority of Americans - especially those with decent incomes and no particularly destructive vices - would be far ahead if they just put a few bucks into an index fund and called it a day. (Ironically, if you had bought $100,000 of gold 30 years ago and just sat on it, it would be worth $775,200 today).

I would love to hear your feedback, and if you think I’m wrong. I may very well be.