Opinion: Why I Don’t Use Investment Advisors To Manage My Money

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For decades, consumers have turned to advisors employed by big-name, full-service Wall Street brokerage firms to manage their investments.

These big firms, with teams of investment analysts churning out research and detailed financial projections, claim to know how you should invest your money wisely and aim to beat the market indices.

In reality, many advisors employed by these large investment firms are salespeople whose mission is to bring in business to help the investment firm get more assets under management. They don't provide personalized advice. And you pay for your individual advisor’s expertise to manage your investments, whether they make you money or not. That’s a problem.

There are a few key reasons why I don't use financial advisors. Firstly, money managers have historically underperformed compared to the S&P. Secondly, I don't like the fees associated with financial advisors, which can eat into investment returns. Finally, no advisor will ever care about my money as much as I do, and even the best financial advisors can't guarantee success.

Ultimately, I believe managing my own finances is the best way to ensure financial success.

The Short Version

  • I won't use a financial advisor and I prefer to take care of my own investments.
  • Historically, money mangers have underperformed the S&P, the annual fees cut into your investment returns, and nobody cares about my returns like I do.
  • Rather than using an investment advisor, I recommend investing in index funds.

Reason #1: Money Managers Don’t Beat the S&P. In Fact, Research Shows They Don’t Even Come Close

According to published data by SPGlobal, a research firm that tracks and compares the performance of actively managed mutual funds with the performance of the S&P index, an unmanaged investment in the S&P index fares much better than managed mutual funds.

In 2021, the S&P gained 28.7%. During that same timeframe, 79.6% of actively managed domestic equity funds lagged behind the S&P Composite 1500.

And that’s not an anomaly. Over the past 20 years, 90% of actively-managed domestic equity funds underperformed the S&P Composite 1500. And the results aren’t much better for internationally-focused funds – about 85%-90% trailed their respective benchmarks over the past 20 years.

And those conclusions are backed by another independent investment research firm, Dalbar Inc. Since 1984; it has tracked and compared the performance of the average equity fund investor with the performance of the S&P 500. Dalbar publishes an annual report entitled Quantitative Analysis of Investor Behavior (QUIB).

Take a look at this summary chart of their research findings. Over the last 30 years, the S&P 500 delivered gains of 10.65% before inflation. The average equity fund investor saw gains of 7.13%.

Ok, so the averages aren't great. But perhaps you think that it's still worth it to hire “the best of the best.”

Well about 10 years ago, my older sister and her husband turned their investment funds over to a brokerage firm that only works with wealthy clients. Unless you have a minimum of $500,000, this firm doesn’t want your business. I have to admit I was a tad envious that they had enough money to hire this prestigious firm and was sure they’d knock it out of the park for big sis.

Last year, they pulled their money out because their investments had merely kept par with the performance of your average index fund before expenses. They were very disappointed in their returns over those ten years when the stock market indexes had fared very well. I was surprised…and also not surprised.

According to a study by Morningstar, virtually all top-performing investment managers experienced three-year stretches where they underperformed their benchmark and peers over a 10-year period.

Reason #2: Annual Fees Reduce the Value of Your Investment Returns by a Lot

Typically, money managers make money via:

  • Commissions on the trades they do on your behalf,
  • A flat fee percentage on the value of your assets under management, or
  • A combination of both

Fees are a drag on your investment returns. They reduce the amount of funds available to invest each year, which means you lose out on the compounding effect of the funds year after year. And most money managers get paid whether your investments go up or down.

It’s no secret that fees reduce the value of your investment portfolio. This chart, published by www.investor.gov, shows the difference in total returns on a $100,000 portfolio, assuming a conservative 4% annual return invested for 20 years with ongoing annual fees of 0.25%, 0.50% or 1%.

The 1% annual fee reduces the portfolio value by $30,000 compared to the 0.25% fee. That’s 30% of your initial investment, which averages $1,500/year in fees. It seems like a huge cash outlay to make an annual 4% return.

This chart doesn’t show you what your investment would be with no fees, but that’s easy enough to calculate using a compound interest calculator.

$100,000 invested over 20 years at 4% without fees turns into $219,112. That’s nearly $10,000 more than the portfolio returns you’d get paying the 0.25% fee and almost $40,000 more than the returns at 1%.

The invention of the index fund, created by John Bogle at Vanguard in 1975, was a huge innovative benefit for investors. Index funds provide a low-cost way for individual investors with limited funds to diversify and benefit from long-term stock market gains by following the movement of the S&P 500 or other benchmark indexes.

Read more >>> How to Invest in Index Funds: Do It Right

Reason #3: Nobody Cares More About Your Money Than You Do

Nobody has a crystal ball to predict the performance of any investment. That’s why every mutual fund prospectus clearly states that past performance doesn’t predict future success—your investment could lose money.

There are no performance guarantees when investing in the stock market. But one thing is clear: nobody cares more about the performance of your investments than you.

My husband and I have sat through many advisor presentations over the years – solicitations to get our business and subsequent annual account update meetings with the advisor in charge of making our money grow.

The cadence is always similar. It starts with an overview of where the market is and is expected to go. Then they talk about how they’ll put together a plan tailored to our unique goals. They'll finish with a promise to closely monitor our investments and ensure they perform under their stewardship.

I’ve concluded that advisors, in many cases, are salespeople touting the rhetoric provided by corporate executives. Their job is to steer you toward general advice, not to truly understand your unique financial situation or support your individual goals. I’m all for paying for a professional to provide expertise, but I don’t want to pay for canned advice.

So, What's a Better Alternative?

Actively managed mutual funds cost 100 basis points. Investing in the S&P Index via an Exchange Traded Fund (ETF) costs just three basis points. Not sure how you feel, but I’ll take higher performance at a lower cost any day of the year.

The beauty of index funds is that you benefit from the long-term uptrend of the S&P while investing passively. You don’t need to manage your funds and you don’t need to pay a money manager to support you. You get the benefits of stock market investing without the higher expenses of an investment management team.

You might consider an ETF over a mutual fund when investing in an index fund for a few reasons:

  • ETFs that invest in the S&P index are even less expensive than a mutual fund counterpart (.4% vs .16%).
  • ETFs are more tax-efficient. Many mutual funds pay a taxable capital gains distribution, but ETFs do not)
  • Investment minimums are typically lower – you can often buy fractional shares with just a few dollars.

While ETFs have multiple benefits, using a mutual fund to invest in an index might still be the best option for automatic investing and dollar-cost averaging. Also, if you're investing inside a 401(k), mutual funds may be your only option.

Read more >>> Best Ways to Make Passive Income

The Bottom Line: For Me, DIY Investing Is the Way To Go

There are three reasons why I don’t use an investment advisor to manage my money: Money managers consistently underperform the returns of the market indexes, annual fees significantly reduce the value of my investment returns, and nobody cares as much about my money as much as I do. Therefore, nobody will monitor and adjust my strategy as well as I can.

Decades of data show that individual advisors, even the highest paid, do not consistently beat the market indexes. Plus their advice is expensive, which reduces your investable assets each year, resulting in lower long-term returns.

If you’re interested in passively investing in the stock market, consider buying shares of an index ETF with the lowest expense ratio you can find. And leave your funds there long-term. Boring? Yes, you won’t have an exciting stock story to tell at a cocktail party. But is it smart? I'll let you do the math and analysis.

Further reading:

Ruth Lyons

Trading three decades of financial publishing experience in the corporate world for a life of personal and financial freedom as a freelancer in 2012, Ruth is passionate about helping others take control of their personal finances and to become aware and educated on their options as self-reliant individuals. Disenfranchised with the high cost and lackluster performance of her IRA, college savings and other retirement accounts handled by a full-service broker, Ruth moved her retirement money to a self-directed IRA in 2015. Ruth holds an MS in Finance from Johns Hopkins Carey School of Business (1991) and a Business Management degree from University of Maryland (1984). You can follow Ruth on: Twitter

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