Walnut Creek Wealth Manager Reveals Cautionary Tales Of Why You Should Work With Fiduciary Financial Advisors
See What Happened to This Investor, and Also How His Own Flawed Strategy Got Him in Hot Water
A letter writer in the September 2019 print edition of Kiplinger gave a detailed explanation for what led him to fire his financial advisor. The story offers a firsthand account of what can go wrong when you work with a non-fiduciary financial advisor.
However, as you’re about to see, the letter writer himself is also guilty of one major mistake, one that’s all too common among investors who seek to maximize their growth but miss the mark when they try to achieve it.Here’s a truncated version of the letter:
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Table of Contents
- Walnut Creek Wealth Manager Reveals Cautionary Tales Of Why You Should Work With Fiduciary Financial Advisors
- 7 Secrets To High Net Worth Investment Management, Estate, Tax and Financial Planning
- 7 Ways Not Having a Fiduciary Can Set You Back
- 1. Moved His Money without Consulting Him
- 2. The Advisor Assured Him He Was Getting Better Returns
- 3. Paying 1.5% Fees to Mutual Fund Companies
- 4. The Advisor Collected an Additional Fee from Fund Companies
- 5. Net Returns Were No Better
- 6. Work with Fiduciary Financial Advisors Only
- 7. His One Investment Mistake at the Root of the Problem
- Looking For a High Net Worth Fiduciary Financial Advisor?
“When I hired my advisor, we agreed on a 1% fee of total assets under management, and he was to invest in equities only. Gradually, he moved my investments to mutual funds without consulting me…. He claimed I was getting a better return … by using mutual funds…. I discovered that not only was I paying him 1%.
I was also paying management fees of up to 1.5% to the fund companies. What’s more, there was a ‘third party arrangement’ where the advisor was also getting a fee from the fund companies.
And I wasn’t getting a better return on my investments after I paid all the fees…. Now I do my own investments and deal with fiduciary advisors only.”
Do you see the letter writer’s investment mistake? Let’s break this letter down and extract seven key principles you can learn from it about financial advisors and fiduciaries,
and then look at why this investor is likely to end up in hot water again if he keeps employing his stated strategy.
Special note: This real-life letter features some of the seven warning signs that you might be working with the wrong financial advisor, which you can read about in our free eBook, The Ultimate Guide for Choosing the Best Financial Advisor for Investors with $3 Million to $70 Million Liquid Assets. Get your free copy here.
7 Ways Not Having a Fiduciary Can Set You Back
Here are seven key principles that emerge from this letter writer’s experience with a non-fiduciary financial advisor.
1. Moved His Money without Consulting Him
When you sign up with any financial advisor, both parties should be crystal clear about the nature of your working relationship. Unlike this investor,
if you are comfortable giving your advisor the freedom to make decisions with your money without consulting you, and if your advisor prefers to work under those terms, you can agree to that up front.
But if you want to be consulted about any major changes your advisor wants to make, you can agree to that as well. And, some advisors will simply advise and recommend, but you will still be the person making the actual changes.
This approach takes more time away from you, of course. So deciding on your ideal working relationship comes down to the primary reasons you want to use a financial advisor. If one of your primary goals is to not have to worry about your finances, then you would look to empower your advisor to make decisions on your behalf.
All of this – whichever form of working agreement you settle on – speaks to the essential need for a fiduciary financial advisor. A fiduciary commits up front to making decisions that are solely in your best interests – not in theirs.
When this particular advisor moved this letter writer’s money into new mutual funds without asking him, this would have been fine if he was acting as a fiduciary (and if this action was within the boundaries of their stated working agreement).
But as you saw in the letter, it appears the advisor was making these moves to benefit himself as well, and did not tell his client about his actions.
2. The Advisor Assured Him He Was Getting Better Returns
This is the pit so many fall into. It all hinges on the word “better.”
How do you know you’re getting “better” returns? What are you measuring it against?
The greatest problem with this question is that you rarely get to compare apples to apples.
For instance, it doesn’t work to simply look at one year’s returns and compare them to the previous year when a different investment strategy was used. Why not?
Because the previous year’s returns resulted from different economic conditions. If the whole economy and stock market improve in the second year, then your first year’s strategy would also have done better the second year.
It takes extensive investigation, research, and skill to factually and definitively compare the results of one investment strategy against another.
In other words, science is hard.
However, this letter writer doesn’t dispute that his gross returns were higher using the advisor’s mutual fund strategy. He disputes that it benefitted his advisor, but not him…
3. Paying 1.5% Fees to Mutual Fund Companies
One of the points we stress repeatedly with all our high net worth clients, whether they live in San Jose, Napa, or Incline Village, Nevada, is the question of investment costs. Every advisor charges some kind of fee. The advisor in this letter charged a 1% fee, a fairly typical number.
The question becomes, what other investment costs are you paying on top of that fee, and how does your advisor work to minimize those costs for you? A true fiduciary financial advisor will work tirelessly to minimize your costs.
Even many fiduciaries don’t fully realize how much of this lies within their control. See 6 hidden and avoidable costs that can wither your portfolio.
In this investor’s case, he discovered he was paying an additional 1.5% just to put his money in the various mutual funds his advisor had begun using. As he correctly concluded, that meant his money would need to earn 1.5% more than his previous strategy just to break even with it.
Do you know the additional costs and fees you’re paying through your current financial advisor?
And don’t be deceived – if you’re managing your money on your own, you’re not avoiding all this. You’re still likely paying some of these hidden costs. For high net worth and ultra-high net worth portfolios, these costs can add up to hundreds of thousands of dollars – per year.
Yes, this is a BIG deal. This letter writer was right to call his advisor on it.
4. The Advisor Collected an Additional Fee from Fund Companies
This is where your reasons to insist on working only with a fiduciary financial advisor ought to become crystal clear and non-negotiable.
The letter writer describes a “third party arrangement” whereby his advisor gets money from the same mutual fund companies he’s now investing his client’s money in. This could be called a ‘kickback,’ or in more polite terms, a ‘referral fee’ perhaps.
To be clear, it’s perfectly legal, and if you like your advisor and want him to be well-compensated for taking away the hassle of managing your finances, you might decide this sort of arrangement doesn’t bother you.
What’s not stated in the letter is, does this additional fee come out of the 1.5% he’s paying to the fund companies, or is it yet more in addition to that? Either way, what’s clear is that the advisor benefits financially from his arrangement with these fund companies.
If this action had also been in the investor’s best interests, as it must be if the advisor was acting as a fiduciary, then again this fee wouldn’t be a problem.
But assuming it is coming out of the 1.5%, how much is 1.5% of your portfolio?
Suppose you have $10 million in your portfolio, and your advisor shifts $7 million of it into these various mutual funds. 1.5% of $7 million is $105,000.
That’s $105,000 in addition to the 1% base fee that you’re now paying to use this advisor’s chosen investment strategy.
If it were us, we’d prefer to save you as much of that $105,000 as possible. And as this letter writer clearly indicates, so does he.
5. Net Returns Were No Better
The writer makes clear that after paying all these fees, his net returns weren’t any better.
Again, you might think that if you’re managing your finances yourself, you don’t have to worry about this. But take a look at these hidden and avoidable costs again. That is not an exhaustive list.
You’ll find even more in our free eBook, The Ultimate Guide for Choosing the Best Financial Advisor for Investors with $3 Million to $70 Million Liquid Assets.
Even managing your own finances, you’ll face many of those same costs. They include various taxes, trading fees, mutual fund fees, bank fees, and more.
The popular notion that you’ll save money by ‘doing it yourself’ simply isn’t true in many cases – especially with higher net worth investors and the increasing complexity of their portfolios.
This letter writer doesn’t state if he’s a high net worth individual, but the principle he identifies remains true: Gross returns don’t matter. Net returns – after taxes and all the other costs you’ll pay – are what ultimately matter to you.
6. Work with Fiduciary Financial Advisors Only
This letter writer learned the hard way that working with fiduciary advisors should be considered a baseline requirement for anyone searching for a financial advisor.
With a fiduciary acting in your best interests exclusively, you shouldn’t have to worry about an advisor going behind your back like this one did. However, it doesn’t stop there.
Are all fiduciary advisors the same? Is that the only requirement you should look for in a financial advisor?
Are all brain surgeons the same? Are all oncologists the same? As in these specialist professions, there are other factors that distinguish elite and top-tier financial advisors from most others.
This is one question we explore in depth in our free ebook, The Ultimate Guide for Choosing the Best Financial Advisor for Investors with $3 Million to $70 Million Liquid Assets.
If you’re seriously looking for a financial advisor and determined to find the one who is best for you, this resource should be number one on your reading list. Get your free copy today.
(And if you’re in the ultra-high net worth category, get the version made especially for you, The Ultimate Guide for Choosing the Best Financial Advisor for Investors with $10 Million to $500 Million Liquid Assets.)
7. His One Investment Mistake at the Root of the Problem
At the start of the letter, the writer reveals his own investment bias, one we see all too often among investors who think they know best how to optimize their finances.
He says “we agreed” that “he was to invest in equities only.”
In other words, he wants 100% of his money in equities, with none in bonds, cash, or other investment options. Generally speaking, this is a high-risk investment strategy with greater potential for larger losses during economic distress and periods of flat growth.
Nearly every investment expert agrees on the preeminent importance of asset allocation [link to blog 42] if you want to truly maximize your long-term growth and achieve lasting financial security. This investor appears to have insisted that his advisor use an equities-only investment strategy.
The great irony of this is that, had he been using a fiduciary advisor, that advisor would have told him of the flaws of this approach and probably refused to be bound by such an agreement.
With this high-risk strategy in place, even if he is saving on management fees (and assuming he’s not paying more in other costs, a highly unlikely assumption) he will likely earn lower long term growth because he’ll suffer greater losses during economic downturns.
And if he believes he can time the market accurately and avoid the effects of such downturns, he is defying reams of data speaking to the near-impossibility of successfully doing this. See why market timing nearly always depresses investment returns.
Looking For a High Net Worth Fiduciary Financial Advisor?
Pillar Wealth Management is a fee only fiduciary that works exclusively with high net worth and ultra-high net worth individuals and families – those with over $2 million in investable assets.
If that’s you and you’re looking for a fiduciary advisor, get a free Wealth Management Analysis and see how our approach ensures you the long term and hassle-free financial security (and SO much more!) that you want.