Which advisor is best for you? Financial Advisor, Robo-Advisor, or Financial Coach?
In this episode, we're looking at the pros who can help you manage and invest for retirement.
- The 3 advisors that can help you invest - a person, a robot, or a coach
- The 3 ways financial advisors get paid
- What you'd pay Bobby Axelrod to invest in his Axe Capital fund
- What happened when I let a robot manage my money in 2015
- The two 'F's" that you must know about before hiring any financial advisor
This is the My Money My Freedom podcast, where we unpack and simplify all things money so that you'll always have more than enough to live your best life for life. Now here's your host. Financial coach Susan Lassiter-Lyons.
So there are basically three different types of people who can help you invest and save for retirement. We're going to talk about all three in this episode of the My Money, My Freedom podcast, and I'll tell you what I like and what I don't like.
And, as always, leave it up to you to make your best decision, because after all, it's your money.
All right, first up, let's talk about Robo advisors. Robo Advisors are all the rage right now. All a Robo Advisor is is an online financial management service that provides automated, algorithm based portfolio management advice without the use of humans. Right?
This is just a computer or a robot managing your money.
It's like saying Alexa manage my money and then letting the robot buy and sell stocks with your money. These robo advisors usually have annual fees ranging anywhere from, and Alexa, of course, is telling me she doesn't know how to manage my money. So that's totally cool. And about on par.
Anyhoo, these robo advisors usually have annual fees ranging anywhere from half a percent to 1% of the total amount of your money that they're managing.
So if you have $100,000 that is being managed by a robo advisor, you are paying that service 1% of that money every year to manage your money.
Now some of the most well known robo advisors are. There's one specifically for women that's getting a lot of attention right now, called ElleVest. There's also a couple more Betterment, Personal Capital.
And there's one that I tested back in 2015 on a recommendation from Tony Robbins money book that is already out of business.
The second type of person that can help you manage and invest your money is a financial coach, and that's what I am. Where we do it a little bit differently. Instead of managing your money for you, I teach you how to plan, invest and manage your own retirement portfolio. I charge a one time enrollment fee for the coaching program and the training, and then I work with you to implement it.
That way you have the skills for life, and you're empowered to manage your own money and make your own decisions. And that's really why I do what I do. The reason why I'm a financial coach is because I want to empower people to control, manage and invest their own money and to feel confident in doing so.
It's like the proverbial you know, instead of handing you a fish, I want to teach you to fish so that you'll have fish for life. Kind of a weird metaphor, but I think you know what I'm talking about.
The third type of person that can help you manage and invest your money is a financial advisor and a financial advisor is just a person who actually invests your money for you just like a robo advisor. But it's a real person Now, this person buys and sells stocks on your behalf, and sometimes they also help with estate planning and tax planning.
There are basically three ways that financial advisors can get paid, okay, and this is where you really need to pay attention because this is kind of the true difference um in choosing an advisor or understanding how best they can serve you or not.
So fee only advisors charge an annual hourly or flat fee, and the fee isn't based on the returns that they deliver. But they're based on how much money you invest, right, also known as a um, which is just an acronym for assets under management.
So if you ever are somewhere and there are a bunch of financial advisors and they're talking or having dinner or cocktails or whatever, usually the big question that they ask each other is, Hey, what's your AUM? Which means, how much money do you manage? And I guess there's some sort of hierarchy in Financial Advisor land as to you know, where you are in the pecking order, depending on how much money you you manage.
So when you pay somebody just based on the amount of money they're managing for you and not in their performance, I think it adds kind of extra unnecessary risk and certainly expenses to your investment strategy, because there's really very little incentive for the financial advisor to perform well for you.
So, uh, take my niece Marina for example, and my nephew, Aaron. They've both at one time or another had their retirement portfolios and their trust funds managed by a professional financial advisor. And they routinely, like, don't even beat the market returns for the S & P 500.
They, you know, usually are just tooling along long at about a 3% annual return. And you know, they're lucky if that even beats inflation, so they're really getting nowhere fast.
Um, commission based advisors are paid through the investments that they sell you. And that's why so many of these professional advisers push folks into annuities and whole life or universal life insurance. Because those two financial products pay the most lucrative commissions out there.
Fee based advisors earn a combination of those two right, so they make a combination of a fee for your assets under management, plus commissions on the products that they sell you.
Now there's a whole other category of money managers out there who manage private investment funds that accredited investors can invest in. Now, an accredited investor, by definition, is someone who has a net worth of a million dollars or more not including the equity in their primary residence. Or they make $200,000 a year in salary individually or $300,000 jointly with their spouse every year. And they're expected to, you know, keep making this money year after year. That's what an uncredited investor is now.
These accredited investors can invest in private funds, private hedge funds that are managed by hedge fund managers. So if you've ever watched the show Billions, this is what Bobby Axelrod does, right? Bobby Axelrod has Axe Capital. He invests his money and other people and institutions invest money, uh, into his fund. And then his team buys and sells stocks and other investments, uh, products to try to get a higher return than the general market.
So if you invest a minimum of around $100,000 which is usually the the minimum investment requirement for most of these private funds, you could expect to pay, um, it's just known in the business as 2 and 20. What that means is to invest in these funds, you're paying 2% of the amount of money that you're investing, and then you pay 20% of your profits to the manager. Right?
So you're going to pay 2% of the total money that Bobby Axelrod is managing for you. Plus, you're going to give him 20% of your profits. That's how Bobby Axelrod got to be a billionaire, right? That's how a lot of these guys get to be billionaires like Carl Icahn, is another big money manager. And, um, Bill Ackman and so many of the other famous guys out there who do this like Ray Dalio, all sorts of guys.
Now I personally have a big problem with Robo Advisors, and I have two big problems with financial advisors.
So first, let me talk about Robo Advisors. So I let a robot manage my money for a year just to test it out back in 2015. Um, I manage my own portfolio, but I read a book by Tony Robbins where he was touting this robo Advisor and Robo Advisors were brand new back then, and I hadn't really heard about him.
And, you know, I'm always looking to see if I can get a leg up on the market and look for additional ways to invest and make money. And so I thought, you know, I'll give it a whirl. If the robot can do better than me, let's see what will happen.
So I, uh, carved out $25,000 of my own money for the robot to manage that year in 2015. And that year, the S & P 500 which is what most people refer to as the market, had a total return of about 1.38%. So it was not a great year in the market. The money that I managed for myself, I returned 7.2%.
So I for every year I've invested right for, like, the last 31 years, I've my own investments have done better than the market has. So that's not unusual.
But what is unusual is that the market returned 1.38 that year. I got 7.2% that year, and the money that the robot managed got negative 3%.
Yep, I paid a robot a half a percent on my money. My 25,000 just to lose me $750 for the year. It's not cool, Robot.
Needless to say, I won't let a robot manage my money ever again, and I don't recommend that you do either.
Now the two big problems that I have with financial advisors, the human kind, are funds and financial fiduciary the two F's, right?
So back in the olden days, I feel like financial advisors really did what they were supposed to do. They got to know you. They studied the market.
They studied companies like Warren Buffett, right? This is a guy who's probably read every single annual report and quarterly report from every company he's ever invested in, both his money and the money of his investors.
Nowadays, they just have their own robot choosing the investments, and nine times out of 10, they're choosing mutual funds and index funds.
Now here's the problem with that. All a fund is is a basket of individual stocks that you pay somebody else to pick for you. So if we carry this thought, here's how it works. We would pay a financial advisor 1% of your money every year, right? So it's $1000 for every $100,000 that they manage. Then you pay a fee to the fund manager, and that's called an expense ratio.
So if that expense ratio is also 1% then you're paying 2% just in fees to have some Schmo invest your money in a fund that somebody else manages.
Now we're going to talk more about fees in the next episode of this podcast. But honestly, that's not the worst of it.
The biggest problem I have with advisers is about a topic called the Fiduciary Rule.
Guess what? Did you know that financial advisors are not legally obligated to act in the best interests of their clients?
President Obama tried to change that back in 2015. But of course the financial services associations and Republicans fought it every step of the way, mainly because they said it would be too expensive for financial advisors to act in their client's best interest and disclose conflicts of interest.
Now, personally, I'd be more concerned about how much it's costing us individual investors to get self serving advice from an advisor. But that's just me.
These days, advisors and financial planners can voluntarily follow the fiduciary rule, but they are not required to do so.
A lot of my clients tend to come to me from other financial advisors, and I seem to get a lot from Edward Jones. Now, Edward Jones is what's known as a full service broker, and, unfortunately, or fortunately for them, being a broker also means that they do not have to follow the fiduciary rule. Said another way, Edward Jones and other financial advisors like them, who are full service brokerages don't have to have your best interests in mind when they're managing your money.
And that's insane.
So those are your options to have your money professionally managed, folks.
You can put your hard earned retirement money with a robot.
You can put it with someone who legally doesn't have to act in your best interest, or you can get educated.
And you can manage your own money with the help of a coach, because at the end of the day there is no one, and I mean no one who will ever care more about your money than you do.
Thanks for listening to My Money My Freedom. Visit our website at mymoneymyfreedom. co and follow us on Instagram @mymoneymyfreedomhq