Many very bright and successful people sign over their hard-earned nest egg to a financial advisor, because they are afraid of making a mistake managing their own money.  I fell into this trap myself.

I quickly realized that I had been doing better on my own, fumbling along, sometimes making mistakes.  In fact, it is cheaper to make several monumental investing mistakes every year than pay for your financial advisor’s beach house and sailboat through high recurring fees.

The most profitable line of business of financial firms like Morgan Stanley, Wells Fargo, Merrill Lynch and similar brokerage houses is “wealth management.”  Where do these billions of dollars in profit originate?  You.

(1) The financial advisor takes around 1% of all the money managed for his “services” (or takes a commission of 5.25% of all the money invested).

(2) The stock or bond portfolio manager that the financial advisor chooses (in the form of a mutual fund, ETF, or separately managed account) takes *another* 0.75% to 1.25% behind the scenes, even though they can’t outperform monkeys throwing darts at random stocks.  This money vanishes without ever showing up itemized on a bill.  Then, a part of that fee gets sent back to your financial advisor under the table, as a kickback.  This is completely avoidable.

(3) On bond sales, advisory firms often mark up the price 1-3% and keep the difference, just as your local car dealer marks up their used cars.  When bonds pay razor thin yields of around 2%, the advisory firm essentially eats your entire return between the fees and markups.

(4) Active trading or “churn” to artificially boost returns (for the advisor and money manager) results in a higher capital gains tax bill that you, the client, must pay to the IRS.  Even with tax loss harvesting, you’ll be paying an extra 1% to 2% per year of your assets in taxes.  This is avoidable by avoiding advisors who include active management in their strategy.

So in summary, these fees and taxes equals over 3% per year lost to traditional financial advisors, the mutual fund managers, the separate account managers, and the IRS.  Assuming the markets rise 5% per year, this means for every $1M invested, it costs an extra $30k per year in expenses and taxes, and this loss continues to compound year after year.

If you complain, as I did, your financial advisor will offer an advisory fee discount and then find ways to hide the rest of the fees to maintain their profit margin.  Don’t be fooled.  It’s like pushing a jar of overripe kimchi into the back of your fridge, when it starts to stink.  It’s still there.  You just don’t see it.  But, it’s the same jar, and it still stinks.

Over 30 years, your $1M grows to $1.8M with a financial advisor.  But by dumping the advisor, $1M grows to $4.3M.  That’s huge!

Yes, that’s right!  After 30 years, you’d wind up with $2.5M more for doing less than 1 hour of work each year by putting all your money in a cheap all-in-one fund like Vanguard Life Strategy Fund that only costs 0.16% per year.  This is my preference.

If you need hand-holding (i.e. someone to yell at during the next bear market) or want to say “I have a finance guy” at cocktail parties, hire a low-cost Vanguard Advisor (0.3% per year), who will choose only low-cost, tax-efficient index funds.  Alternatively, try automated investment services that are fully transparent like those offered by Schwab, Betterment, or Wealthfront.

— AK