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For decades, consumers have turned to advisors employed by large Wall Street brokerage firms to manage their investments.
These large companies, with teams of investment analysts who produce detailed financial research and projections, claim to know how to invest your money wisely and aim to outperform market indices.
In reality, many advisors employed by these large investment firms are salespeople whose mission is to do business to help the investment firm manage more assets. They do not offer personalized advice. And you pay for your individual advisor’s expertise to manage your investments, whether they make you money or not. This is a problem.
There are a few key reasons why I don’t use financial advisors. First, money managers have historically underperformed the S&P. Second, I don’t like the fees associated with financial advisors, which can affect investment returns. Finally, no advisor will ever care about my money as much as I do, and even the best financial advisors cannot guarantee success.
Ultimately, I believe that managing my own finances is the best way to ensure financial success.
The short version
- I will not use a financial advisor and prefer to handle my own investments.
- Money managers have historically underperformed the S&P, annual fees are reduced to your investment returns, and nobody cares about my returns like I do.
- Instead of using an investment advisor, I recommend investing in index funds.
Reason no. 1: Money managers don’t beat the S&P. In fact, research shows they don’t even come close
According to data released by SPGlobal, a research firm that tracks and compares the performance of actively managed mutual funds to the performance of the S&P index, an unmanaged investment in the S&P index outperforms the funds significantly managed investments.
In 2021, the S&P gained 28.7%. During that same time period, 79.6% of actively managed domestic equity funds lagged the S&P Composite 1500.
And this is not an anomaly. Over the past 20 years, 90% of actively managed domestic equity funds underperformed the S&P Composite 1500. And the results are not much better for internationally focused funds: between 85% and 90% tracked their respective benchmarks over the past 20 years.
And these findings are backed up by another independent investment research firm, Dalbar Inc. Since 1984; has tracked and compared the performance of the average equity fund investor to the performance of the S&P 500. Dalbar publishes an annual report titled Quantitative Analysis of Investor Behavior (QUIB).
Check out this graphic summary of their research results. Over the past 30 years, the S&P 500 has returned 10.65% before inflation. The average equity fund investor made gains of 7.13%.
Okay, so averages aren’t great. But you might think it’s still worth hiring “the best of the best.”
Well, about 10 years ago, my older sister and her husband gave their mutual funds to a brokerage firm that only works with wealthy clients. Unless you have a minimum of $500,000, this company does not want your business. I have to admit I was a little envious that they had enough money to hire this prestigious company and I was sure they were going to knock it out of the park for big sister.
Last year, they took their money out because their investments had only kept up with the return of your average index fund before expenses. They were very disappointed with their performance during those ten years when the stock indexes had done very well. I was surprised…and not surprised either.
According to a Morningstar study, virtually all top-performing investment managers experienced three-year periods where they underperformed their benchmark and peers over a 10-year period.
Reason no. 2: Annual fees greatly reduce the value of your investment
Money managers typically make money by:
- Fees on trades they make 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. They reduce the amount of funds available to invest each year, which means you lose 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 for 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 value of the portfolio by $30,000 compared to the 0.25% fee. That’s 30% of your initial investment, which averages $1,500 a year in commissions. That seems like a lot of cash to get a 4% annual return.
This chart doesn’t show you what your investment would be without fees, but that’s easy enough to calculate using a compound interest calculator.
$100,000 invested over 20 years at 4% with no fees becomes $219,112. That’s almost $10,000 more than the portfolio returns you would get paying the 0.25% fee and almost $40,000 more than the 1% returns.
The invention of the index fund, created by John Bogle at Vanguard in 1975, was a major breakthrough 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 indices.
Read more >>> How to Invest in Index Funds: Getting it Right
Reason no. 3: No one cares more about your money than you do
No one has a crystal ball to predict the performance of any investment. That’s why every mutual fund prospectus makes it clear that past performance is no predictor of future success: Your investment could lose money.
There are no performance guarantees when investing in the stock market. But one thing is clear: no one cares more about the performance of your investments than you.
My husband and I have attended many advisor presentations over the years: applications to get our business and subsequent annual accounts update meetings with the advisor charged with growing our money.
The cadence is always similar. It starts with an overview of where the market is and where it is expected to go. They then discuss how they will develop a plan tailored to our unique goals. They will end by promising to closely monitor our investments and make sure they work under their direction.
I’ve come to the conclusion that advisors, in many cases, are salespeople promoting the rhetoric of corporate executives. Their job is to guide 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 is a better alternative?
Actively managed mutual funds cost 100 basis points. Investing in the S&P index through an exchange-traded fund (ETF) costs just three basis points. I don’t know how you feel, but I’ll take higher performance at 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. Get the benefits of investing in the stock market without the higher fees 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 (0.4% vs. .16%).
- ETFs are more tax efficient. Many mutual funds pay a taxable capital gains distribution, but ETFs do not)
- Investment minimums are usually lower – you can often buy fractional shares for just a few dollars.
While ETFs have multiple advantages, using a mutual fund to invest in an index may 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 >>> The best ways to earn passive income
Bottom line: For me, DIY investing is the way to go
There are three reasons I don’t use an investment advisor to manage my money: money managers consistently underperform market index returns, annual fees significantly reduce the value of my investment, and no one he cares so much about my money. like i do So no one 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 outperform market indices. Also, their advice is expensive, which reduces your investable assets every year, leading to 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 for the long term. Bored? Yes, you won’t have an exciting story to tell at a cocktail party. But is it smart? I’ll let you do the math and analysis.
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