Why I stopped making my financial advisor rich

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The following is a guest post by Mark from My Own Advisor.

Why I stopped making my financial advisor rich

I’m not sure I can put things more bluntly than that.  I’ve made a number of dumbass financial moves over the years but this one might be my biggest mistake – I used to make my big bank financial advisor rich – but not anymore.  Let me explain…

The early investing days

In my 20s, I started my investing journey with big bank mutual funds that charged money management fees close to 2%.  I simply didn’t know how much high-fund fees would eat into my investment portfolio.  For those that still don’t know what they don’t know, let me share some numbers for you.

  • Assuming $10,000 was invested for 10 years in the TD Dividend Growth – Investor Series Fund (you would have paid money management fees of about 2% over that period); you end up with just over $15,000 in the bank but paying about $2,500 in fees during that time.
  • Compare that to owning a low-cost Exchange Traded Fund (ETF) (paying money management fees of about 0.10% over the same time period); you end up paying only about $125 in money management fees – a savings of over $2,000.
  • Compare that still to owning the company (TD Bank) and not the bank’s products, the returns are even more starling. $10,000 invested in TD Bank, from early February 2006 to this year, with all dividends reinvested throughout that 10-year period and your original investment would be worth just over $24,000 today.

Here is a link to the painful high-fee mutual fund calculator so you can run some numbers and if you own TD Bank stock, they have a handy calculator to play with here.

My point?

Sure, hindsight is 20/20 and nobody could have predicted the 140% return of TD Bank years ago but the math doesn’t lie – high fund fees, simply put, kill portfolios over time.  High fees make your big bank financial advisor rich (and leave you with less money in your portfolio).

The recent investing years

My big investing wake-up call occurred during the start of The Great Recession.  I recall I was frustrated at the time, seeing my portfolio value crash and learning about the high active money management fees I was paying in the process.   It was a double-whammy.  I decided enough-was-enough and learned to educate myself about ETFs, stocks, and bonds, in hopes of changing my investing ways.  I have.

  • Over the years, I’ve learned that most mutual fund managers have no hope of beating their benchmark index over long periods of time. This makes investing in the stock market indices using diversified, low-cost ETFs a lazy but successful way to invest.
  • I’ve also learned that companies with an established track record of paying dividends, will likely continue to do. This makes investing in these companies an excellent way to build wealth.  Owning TD Bank could be one such stock.  They’ve paid dividends since 1857.  That is not a typo.

The now

For readers that subscribe to my email articles (free by the way folks), they already know I’m a ‘hybrid’ investor.  I own a couple of broad market, low-cost ETFs for portfolio diversification and long-term capital appreciation and I also invest in a number of companies that have a long history of paying dividends, for cash flow.  I don’t dare touch any money earned from my portfolio.  Instead, I reinvest all dividends and distributions paid to fuel future growth.

The future

I have no idea what the future holds, but I don’t mind.  I’ve made financial mistakes in the past and I’m sure I’ll make a few more in the future.  That’s OK by me.  You don’t learn in life unless you make a few mistakes now and then – so I’m actually quite thankful for my financial missteps – they’ve helped me become who I am today.

I can only hope the same for you.  This means you’ll take some time to learn more about personal finance and investing, so your money missteps over time are few and far between.  This way you can keep more of your hard earned money for you, and stop making other people rich.  In summary, maybe this individual said it best when it comes to life’s lessons:

You may not realize it when it happens, but a kick in the teeth may be the best thing in the world for you. – Walt Disney

Learn, save, invest and prosper, and thanks for reading.

Bio:  Mark Seed is passionate about personal finance and investing and is the blogger behind My Own Advisor.  You can follow my friend Mark on his path to financial freedom here.

 

17 thoughts on “Why I stopped making my financial advisor rich

  1. Bernie says:

    “Compare that still to owning the company (TD Bank) and not the bank’s products, the returns are even more starling.”

    Excellent point! Instead of buying the mutual funds buy the company that sells them.

    “Owning TD Bank could be one such stock. They’ve paid dividends since 1857.”

    And never once cut their dividend through all those years.

  2. Thx for sharing your story.
    It looks like we have a similar path in our investing career.
    I have made some mistakes with investing (like buying ETFS and having no clue why these ones, like loosing some money with options) It indeeds forms you to the investor you are today.
    I like the definition of hybrid investors: that also defines me… I do a few investment styles.

    • I think both index investing and dividend investing can work for the majority of investors Amber. In the end, if folks are not comfortable with the risks that direct stock ownership; then by all means people should index invest using uber-low costs funds. This way, you keep more of your hard earning money in your pocket – make yourself rich – not someone else.

      Happy investing,
      Mark

  3. Thanks for sharing MOA. Most of us beginning our journey start out with mutual funds and slowly, we feel your pain of the MER. You live and you Learn. This is a wonderful path we are on and I’m glad we are all in this journey together. Let’s keep up the great work. Cheers bud.

    • I think there is almost a “rite of passage” that comes with investing. You start by trusting what your parents did or following what others do; then you invest in pricey mutual funds you don’t understand; then you get frustrated with things; then you figure out there are better ways to invest; etc.

      Some people never get past the frustration part because they can’t be bothered enough or motivated enough to learn more. That’s too bad. Most people wouldn’t over pay for a pizza on the weekends yet folks are willing to throw away tens of thousands of dollars in some financial products they do not understand. A shame.

      Happy investing,
      Mark

  4. Those fee’s really add up don’t they. Also many of the ETF’s are ‘front loaded’ with even more charges. You have to be really careful when investing in these ETF and make sure your fee’s are not going to eat up your profits. I just bought a municipal ETF (tax free) recently which has fairly low fees, and a decent yield. Didn’t need a financial advisor for that either.

  5. Nice thoughts that I also follow. The fees just eat up the gains thus leaving less money for us and more money for the fund managers.
    I hold few ETFs in my portfolio – though they are only about 10% of my entire portfolio – even after my recent SCHD purchase.
    But all my ETFs are very low cost funds (around 0.1% or even lower). The funds definitely helps in quick diversification and also getting exposure to sectors as a whole. I hold XLK (Tech sector) and VPU (Utilities sector) and also SCHD (Dividend focused ETF).

    • Thanks Dividend Growth.

      I think some low-cost ETFs are excellent and I’m inclined to hold more as I get older but I also like the cash flow from dividends, I know dividends are just part of total return, but it feels good getting paid!

      Mark

  6. Good article, MOA, and good call on the difference between owning an individual stock and owning a high fee mutual fund.

    Honestly, I think dividend stocks are the way to go. There will be rough patches and mistakes here and there, but if you buy companies with a long history of paying dividends and diversify across different sectors and geographies, it would be very difficult to lose money. Even if one took their money and put it only into well known companies they see everyday such as Coco-Cola, Johnson & Johnson, Colgate-Palmolive, IBM, etc (stuff that you always see ads for on TV or is always in your shopping cart at the supermarket), I would fail to see how this hypothetical long term investor could possibly suffer permanent capital loss. People pay fund managers to manage a portfolio for them, but honestly I think that you DON’T have to be that knowledgable in stocks to do well on your own with individual companies.

    In defense of the funds managers, they are catering to clients who, on the whole, value short term results over long term. They are being tasked to do something that’s literally impossible (consistently blow away the S&P 500 and then decried as incompetent when they can’t deliver. That said, all it shows is that your money is better invested in low fee index funds, and best invested in individual dividend stocks with a long term outlook.

    Sincerely,
    ARB–Angry Retail Banker

    • Thanks ARB!

      I’ve been happy with my investing approach over the years, and I believe it’s getting better – more diversified over time.

      There will be rough patches, definitely now isn’t great for O&G stocks, but I’m trying to be patient and act long-term.

      The companies you mentioned will face headwinds, but as a collective, they are not going-under anytime soon. They are mature businesses that have the capacity to reinvent themselves, they make boat-loads of money and they pass along some of that money to shareholders. I hope to be one of those shareholders, in many US aristocrats, long-term 🙂

      Mark

  7. Nice post Mark. Definitely agree that there are better options than MF’s out there! When first starting out, I too used mutual funds to build up my
    ‘seed’ capital to get enough cash to open a trading account. It was a 70/30 mix of equity/bonds. It did pretty well since it was 2009 and stocks were bouncing back. Although I found it odd how inconsistent and small the payouts were per month. Very happy to be on pure equity now 🙂

    And I certainly agree, it is always good to educate yourself about your options and the basics of personal finance.

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