My Client Was Getting Ripped Off by a Financial Advisor. These Were the Red Flags

A photo of Chloé Daniels Courtesy of Chloé Daniels
Even if you want to hire a professional advisor, you have to educate yourself about money first, says coach Chloé Daniels.
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There’s nothing wrong with seeking professional investing advice. But at the end of the day, no one is going to care about your money as much as you are—so you have to take steps to protect and educate yourself. 

Last year, a client who had attended one of my investing workshops booked me for a check-in session. Bethany (I’ve changed her name for privacy) was pretty sure she was paying some high fees with her financial advisor, and she thought her account didn’t look right.

“Every time I asked him what I was invested in, he’d skirt the question and talk in circles,” she said. 

Bethany had decided to get her finances in order after a divorce in 2020, and the financial advisor had shown up at the beginning of her journey. He was an old friend from high school, and even though they hadn’t kept in touch, he seemed eager to help her manage her investments.

“I figured I could trust him because I knew him, and he was working with a big investing firm,” Bethany said. But after attending my class and hearing me talk about red flags that might mean your financial advisor doesn’t have your best interest in mind, she decided it was time to get a second opinion.

What we found was disappointing.

First, we discovered that every time she transferred money into the account, she was charged a nearly 6% load fee, aka a sales fee. Six percent may not seem significant, but when you look at the power of compound interest—or in this case, compound fees—it can turn into hundreds of thousands if not millions of dollars in the long term.

Think about it this way. Let’s say she contributed $500 a month to this account. With a 6% load fee, that means every month she was putting in an actual $470. Assuming a 40-year time frame and an 8% average annual return, at the end of 30 years of investing this way, she’d have about $1.46 million.

What would happen if she was able to invest the full $500, paying no load fees? She’d have $1.55 million. That’s a nearly $100,000 cost, JUST looking at the load fees.

But, of course, it wasn’t just the load fees.

The firm she had her investments at also charged an asset management fee, typically around 1% of assets under management. So now we’re bringing her total fees (that we know of) to 7%. 

And even that’s not all.

The entire reason Bethany decided to work with a financial advisor is so he could manage her portfolio for her, and she wouldn’t have to worry about picking her own investments. But when we looked inside her portfolio we discovered that 40% of her money wasn’t invested at all. It was sitting in cash. The other 60%? It was invested in a target date fund with a 0.8% fee. 

That brings our fees to nearly 8%—all for a partially invested portfolio she could’ve easily done herself. After all, target date funds are designed for people who don’t know what investments to pick. You pick a target date fund based on the year you want to retire, and then it will automatically reallocate to whatever investments make sense for your time horizon. It’s completely hands off, takes 15 minutes to set up online, and there are plenty of target date funds that are well below the 0.8% fee.

So what exactly was Bethany paying for?

At 35 years old with more than 30 years until retirement, there was no reason for Bethany to have 40% of her portfolio sitting in cash. She already had a pension through her work, so if anything, her Roth IRA could’ve been an opportunity for her to get a little bit more aggressive.

Pro Tip

If you’re ready to start investing, sign up for a free online brokerage and look for low-cost index funds. Here are five brokerages to consider.

How This Financial Advice Could Have Cost $300,000

Let’s see how much this financial advisor was really costing my client. 

In our previous example, we estimated investment growth by using an average annual return of about 8% a year.

Since 2006, the average annual return for VFIFX, which is a Vanguard Target Retirement 2050 Fund (with only a 0.08% fee) has been about 7%. With 60% of her portfolio invested in a target date fund, we could expect her portfolio to grow at 4.2% a year, on average, before fees.

After her annual fees of 1% for asset management and 0.8% fee for the fund, Bethany’s looking at closer to 2.4% in average annual returns. After 30 years, she’d have about $243,000 invested for retirement.

Now what if she was 100% invested in a low-fee target date fund, paying only 0.08% because she’s doing it herself?

With $500 a month going directly into her target date fund, assuming a 6.92% average annual return after the 0.08% fee, she’d be looking at $558k  by the time she retired.

That’s a nearly $315,000 difference.

Almost 4 in 10 Americans use financial advisers, according to Northwestern Mutual’s 2021 Planning and Progress Study. So how do we protect ourselves to make sure this doesn’t happen to us? 

  1. We do a little bit of self-education. Unfortunately, we don’t know what we don’t know. So if we don’t know anything at all about investing, it’ll be nearly impossible to tell if our financial advisor is doing the right thing for us or not. Learning the basics of investing may seem intimidating, but we’re in 2022. There are tons of free educational resources including podcasts, YouTube, Instagram, blogs, and more. And if you want the shortcut, there are affordable courses that will help you educate yourself.
  2. We only work with fiduciaries. If you are shopping for a financial advisor, one of the first things you want to look for is someone who works as a fiduciary. What that means is they are required to work in your best interest because they are liable for the financial moves they make for you. What we don’t want is someone who works under the suitability standard. Suitability means they can pick and suggest products for you that are “suitable,” but that doesn’t necessarily mean they are the absolute best option for you.
  3. We pay attention to the red flags. Some of the biggest red flags when working with a financial advisor are an unwillingness to explain things to you, opaque policies and fee structures, selling you products you don’t fully understand, and working for a commission rather than fee-only. 

We are responsible for our financial futures, and doing even the smallest bit of self-education could mean hundreds of thousands more in retirement. 

And Bethany?

When I checked in with her this month, she’s moved over to a Fidelity account and is managing her own investments.