Scrub Wealth

This is a frequent question we will all face at some point. Plenty of situations and opinions can factor into an argument for or against. Speaking for myself, I will never use a financial advisor. First and foremost, there is no other person I can trust with my financial interests more than myself. Many advisors are not fiduciaries, so they have no obligation to invest my money in my best interest. They have many ways of making money that may not be easily recognized by their clients. I have seen many cases where an advisor has put their clients' money into a "load" fund that takes 5.75% of all invested money off the top. Then they charge another 1% annual commission, only to find that they put the money that's left into a mutual fund that also charges another 1.5% annually as well. After all these expenses, the fund's performance track record was pitiful compared to the S&P500 index fund. I see where the advisors benefit from such a decision, but not with my money! I don't want to invest all the money, take all the risk, and then end up with a minority of the gains assuming there are any. An article by Forbes demonstrated the comparison of the most expensive fund to the most affordable https://www.forbes.com/sites/greatspecu ... 1398d06bce which would be the most extreme demonstration of the difference between a predatory and an efficient investment vehicle you or an advisor could choose.

I like to use a credible expense ratio calculator provided by the SEC https://www.sec.gov/investor/tools/mfcc ... period.htm

Assuming one was to invest $50,000 into each of these funds for 40 years and they each averaged an annual growth rate of the S&P500 index 11% over the last 30 years), the results would be as follows:

Expensive fund (AMRBX): $79,828.15
Inexpensive fund (VFFSX): $3,224,144.16

OUCH! That is the power of high expenses! What I could not accurately account for in my example is that the expensive AMRBX fund grossly underperformed the inexpensive VFFSX fund every year over the last 10 years I checked! The discrepancy in real life is worse! I would be very skeptical an advisor would put their own money in the AMRBX fund but I can see how it can be profitable to put other people's money in it. Once again, this is a legal mutual fund offered from American Funds which is one of the biggest brokerages out there and advisors don't have a fiduciary responsibility to act in our best interest.

Once again, this is a comp between the most and least expensive to illuminate the power of investment expenses over time. I feel like if I know enough to be sure I can pick a financial advisor that can generate superior investment returns while keeping expenses low, I already know enough to just buy the lowest expense index funds for myself which puts my best financial advocate in charge (me) and keeps the expenses even lower!

Your concerns about entrusting your financial future to a financial advisor are valid, and it's crucial to feel confident in the decisions you make regarding your investments. Let's break down your points and explore some additional considerations:

1. **Trust and Fiduciary Responsibility**: You rightly emphasize the importance of trust when it comes to managing your finances. Many financial advisors are not fiduciaries, meaning they are not legally obligated to act in your best interest at all times. This can lead to conflicts of interest where advisors prioritize their own profits over your financial well-being.

2. **Hidden Fees and Expenses**: You highlight the issue of hidden fees that can erode investment returns over time. These fees, such as front-end loads and annual commissions, can significantly impact your overall investment performance. It's essential to have full transparency regarding fees and understand their long-term implications on your portfolio.

3. **Comparison of Fund Performance**: Your comparison between expensive and inexpensive funds using the SEC's expense ratio calculator illustrates the substantial impact of fees on investment growth over time. The example clearly demonstrates how seemingly minor differences in expense ratios can lead to significant disparities in wealth accumulation over decades.

4. **Empowering Yourself**: By educating yourself and using tools like expense ratio calculators, you're taking proactive steps to understand the true cost of investing and make informed decisions. Opting for low-cost index funds can be an effective way to minimize expenses while still benefiting from broad market exposure and potential long-term growth.

5. **Personal Accountability**: Ultimately, taking control of your financial destiny puts you in the driver's seat. While financial advisors can provide valuable guidance, especially for complex financial matters, it's essential to choose an advisor who aligns with your values, offers transparent fee structures, and prioritizes your financial goals above all else.

In summary, your approach of self-education and diligence in selecting investments aligns with the principles of financial empowerment and prudent wealth management. By staying informed and making well-informed decisions, you can optimize your investment returns and build a more secure financial future.