The 9 Reasons Why You Should Never Use a Financial Advisor

Wealthy individuals understand one thing that many do not – you can’t delegate investment decisions and management of your money to someone else. You should always be CEO of managing your investments. 

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It used to just be a given that after you accumulated a certain amount of savings, you would hire a financial advisor to manage your money. Wealthy individuals understand one thing that many do not – you can’t delegate investment decisions and management of your money to someone else. You should always be CEO of managing your investments. 

Many are starting to catch on to the fact that financial advisors aren’t all that they were cracked up to be. Where you thought they were making you more money, they were actually quite likely making you less money than you could have earned if you were willing to spend a little time and handle your investments yourself. Read more to find out why the ultra wealthy never use financial advisors to manage their money. 

Please note that we are not financial advisors or registered investment advisors. We do not give investment advice and encourage you to do your own independent research and seek the assistance of qualified individuals where necessary before making any investment decisions.

1. A Financial Advisor Will Almost Never Beat the Market

Most financial advisors will try to tell you to invest in mutual funds. Most of the time. these mutual funds are set up and managed by whatever company the advisor is affiliated with. For example, if your advisor works for Vanguard, chances are good he or she is going to suggest you put your money in a Vanguard mutual fund. It is well established that these funds almost never outperform the market. 

Recent studies have shown that actively managed funds underperform the market, or whatever benchmark they are trying to outperform, almost 94% of the time. That means you would be better off merely investing in an index fund (which you can easily do yourself with no advisor) instead of working with a financial advisor 94% of the time. Stated otherwise, the odds that your financial advisor will outperform the benchmark is 6%. Those aren’t great odds!  

The odds that your financial advisor will outperform the benchmark is 6%.

 

It is important to remember here that we are just talking about overall performance. That means we haven’t even taken into account the fees you have to pay a financial advisor and the impact those fees have on the amount of money you make. 

2. You Are Paying for Bad Advice

Although there are different pricing structures, most basic financial advisors charge a fee that is a percentage of the total amount of money they are managing. According to NerdWallet, the average fee charged by financial advisors is between 0.25%-1% of assets they are managing. 

That means if you have $1M managed by a financial advisor, you are paying anywhere between $2,500 and $10,000 each year. Usually, you are charged a higher fee until you have a good bit of money being managed by the advisor. That means in earlier years when you are most cost sensitive and trying to build more wealth, you are likely to be charged a fee closer to 1% a year. 

Something that often gets overlooked is the lost investment potential of the amount of fees you pay each year. Let’s take an example where we compare a situation where you have $1M invested for 10 years with a financial advisor you are paying 1% to manage your money as opposed to not having an advisor. Let’s assume the amount of growth on your investments is 8% each year in both cases (even though we know 94% of the time you will make less money working with a financial advisor). 

With Financial Advisor

Year
Starting Balance
Annual Growth
Less Advisor Fee
Ending Balance
1
$1,000,000
$80,000
-$10,000
$1,070,000
2
$1,070,000
$85,600
-$10,700
$1,144,900
3
$1,144,900
$91,592
-$11,449
$1,225,043
4
$1,225,043
$98,003
-$12,250
$1,310,796
5
$1,310,796
$104,864
-$13,108
$1,402,552
6
$1,402,552
$112,204
-$14,026
$1,500,730
7
$1,500,730
$120,058
-$15,007
$1,605,781
8
$1,605,781
$128,463
-$16,058
$1,718,186
9
$1,718,186
$137,455
-$17,182
$1,838,459
10
$1,838,459
$147,077
-$18,385
$1,967,151

Without Financial Advisor

Year
Starting Balance
Annual Growth
Less Advisor Fee
Ending Balance
1
$1,000,000
$80,000
$0
$1,080,000
2
$1,080,000
$86,400
$0
$1,166,400
3
$1,166,400
$93,312
$0
$1,259,712
4
$1,259,712
$100,777
$0
$1,360,489
5
$1,360,489
$108,839
$0
$1,469,328
6
$1,469,328
$117,546
$0
$1,586,874
7
$1,586,874
$126,950
$0
$1,713,824
8
$1,713,824
$137,106
$0
$1,850,930
9
$1,850,930
$148,074
$0
$1,999,005
10
$1,999,005
$159,920
$0
$2,158,925

After 20 years, the fees paid to your advisor would have cost you $800,000 in investment growth. After 30 years, it would have cost you a whopping $2.5M

The difference in the value of your investments is that you would have almost $200,000 less money when using a financial advisor than if you had not used a financial advisor. This gets even worse with more time. After 20 years, the fees paid to your advisor would have cost you $800,000 in investment growth, and after 30 years, it would have cost you a whooping $2.5M. When you take into account the ability to compound your money, that $10k fee you paid to someone else to manage (or mismanage) your money can really cost you over time. 

This of course does not take into the account the fact that your investment growth would also likely be higher 94% of the time if you had just invested in index funds instead of using a financial advisor as we discussed above. 

If you read the fine print, you will notice that you are required to pay the fees regardless of how well your portfolio performs. So that means a financial advisor could make really bad investments with your money and still get paid. Admittedly, they are incentivized to make you more money because as the amount of money they make you goes up, the base on which their fee is imposed also increases. With that said, I certainly wouldn’t want a situation where someone can lose half my money and I am still on the hook for their fees. 

Notably, you also are no longer able to deduct the fees paid to financial advisors for tax purposes. This means any fees you pay are an actual cost with no offset of a tax deduction. 

3. A Financial Advisor Will Not Provide Holistic Comprehensive Advice

One of the first concepts you will learn in any Finance 101 class is that you must diversify your investments.

 

One of the first concepts you will learn in any Finance 101 class is that you must diversify your investments. However, for some reason financial advisors will tell you to put all of your money in one place – the stock market. 

Diversify doesn’t, and certainly shouldn’t, mean to merely diversify the types of stocks you own. Rather it means diversify the types of investments you make. 

It is well settled you should have several different, and ideally uncorrelated, sources of income. If 100% of your source of income is coming from investments in the stock market, you aren’t properly diversified. 

Why do financial advisors do this? It is really quite simple, every dollar you take out of your brokerage account and put into something else is one less dollar your advisor’s fees are imposed on. If I have $1M and I put all of it with an advisor to manage, that advisor is making $10,000 in fees from me a year (with the fees being much higher over time as my money grows). But if I decide to only put $500,000 in the brokerage account and use the other $500,000 for a different type of investment, such as real estate investing for example, that means my advisor’s fees are cut in half to $5,000 a year. 

That means every financial advisor in this country has a pecuniary motivation to persuade me that my money is better off in a brokerage account managed by them than investing in any other asset class. Not only does that go against the basic principles of finance, it looks like a pretty clear conflict of interest to me. 

4. The Industry is Full of Conflicts of Interest

I don’t want to spend a lot of time on this point, but you definitely need to keep in mind that if you make the decision to work with a financial advisor, you need to be very careful about who you choose. In many cases, you may be getting biased advice because the advisor could have a financial incentive to recommend a certain investment over others. Some types of advisors are not even required to disclose these conflicts to you. 

For example, broker dealers commonly have arrangements whereby they receive a commission from each investment you make. That means that not only are you paying the advisor to recommend investments for your money, they are also getting paid by whoever they tell you to put your money with. That means financial advisors have every incentive to tell you to invest where they stand to gain the most instead of where you stand to gain the most.

Financial advisors have every incentive to tell you to invest where they stand to gain the most instead of where you stand to gain the most.

 

If even after reading this article you decide you just have to use a financial advisor, make sure you do your research and pick one who has a fiduciary duty to only work in their client’s best interest. 

I would also argue every financial advisor has a conflict of interest because of the point I discussed above – they are always going to tell you to put all of your money in the stock market so they can keep getting their fees. 

5. Financial Advisors Don’t Invest in Themselves

One of the first questions I ask before making any investment is how much of the manager’s own money are they investing. Whether it’s a real estate fund, private equity fund, or any other type of investment, if I am trusting my money with someone else to manage, I expect them to eat their own cooking.

Research has shown that many fund managers don’t even invest in their own funds. A few years ago, Morningstar released an eye-opening study that indicated almost 50% of fund managers had no ownership in their own funds.

This alone should be a deal breaker. If the people with whom you are trusting to manage your hard earned money don’t even believe in their own strategy enough to invest in it, why should you?

6. Financial Advisors Don’t Have More Money Than You

Financial advisors make bank, right? Wrong.

Recent data from the Bureau of Labor Statistics (BLS) indicates the national average salary for a financial advisor is $122,490. Financial advisors in New York make the most of any other state, with average wages of $170,000. To put this into perspective, someone making that level of salary would generally not even be able to afford a two-bedroom apartment in New York City.

The reason for pointing this out is not to be mean or to pick on financial advisors. Rather it is to bring up an infrequently addressed issue – why are you trusting someone who makes less money than you to manage your money?

If you are someone who is on the path to building wealth, you are going to be making significantly more money every year than a financial advisor. In which case, you have clearly figured out a formula that works for making money. Why not continue to trust yourself with managing that money?

A financial advisor’s single goal is to make you money. Would you go to a doctor who didn’t know more about medicine than you? Would you trust a contractor to build your house if they didn’t know more about construction than you? If that’s the case, why would you trust managing your money to someone who doesn’t make more money than you?

7. A Financial Advisor Can’t Take Proper Risks

One basic principle for building wealth is that you need to be comfortable taking risks. Because they are managing other people’s money, financial advisors can’t take adequate risks. I take risks with my money every day. All wealthy people I know also take risks with their money. But a financial advisor can’t take risks because they are too afraid of losing their client’s money.

Financial advisor can’t take risks because they are too afraid of losing their client’s money.

 

Sure, it is easy to explain away any losses in the markets after a big crash like what happened in 2008, but try being the one who has to explain why you lost someone’s money in a year when the market was up (as is usually the case). It’s pretty clear why and understandable that a financial advisor would not want to take risks with their client’s money as a general rule.

8. They Use Outdated Methods for Investing

If your financial advisor tells you to max out your 401k or IRA, please do me a favor and run for the door as fast as possible. I have written extensively on why these tools are outdated and bad ways to accumulate wealth. Nevertheless, financial advisors still continue to tell clients to use 401ks and IRAs.

One reason this is the case is that he or she can still charge their fees on amounts you have invested inside the retirement plan. So it makes no difference to an advisor if you put money in a brokerage account or retirement plan – they are still going to get their money.

As I stated above, financial advisors will commonly tell you to put all of your money in the stock market. The idea that all of your savings should be in publicly traded stocks is pretty outdated and bad investment advice.

Financial advisors still continue to tell clients to use 401ks and IRAs.

9. A Financial Advisors Won’t Understand the Issues You Face

To build wealth in a sustainable way, you need to have a good understanding of the admittedly quite boring areas of tax, law, and insurance. Taxes can eat into your savings in a significant way, reducing gains by 50% or more in some cases if you are not careful. Finding a financial advisor who has a good working understanding of the tax laws is virtually impossible.
Investing money also exposes you a great deal of legal risks. It is critical you have a good strategy for asset protection in place. You will also want to structure your investments in the right way to reduce any taxes and legal exposure. Making sure you have adequate insurance and there are not gaps in your coverage is also critical. Financial advisors are not properly equipped to advise you on any of these issues.

 Taxes can eat into your savings in a significant way, reducing gains by 50% or more in some cases if you are not careful.

 

So, What Should You Do With Your Money?

To build wealth you have to learn how to invest the money you make. Regardless of whether you think a financial advisor is a good idea or not, you can’t simply delegate all the decisions over how to invest your money to someone else. The risks are just too high.

Our mission is to provide you with insights and tools to allow you to take control over your investments. If you are willing to commit the time and resources to learning about investing, you will quickly see there is a formula to how you build and maintain wealth.

There are also other endless resources, books, and podcasts, many which are available to you free, that will allow you to start educating yourself on potential investments that might be right for you. What can be more fun than learning how to make money?

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