A few of my friends are furious at me.
They’re financial advisors.
They’re good people and take care of their clients.
So they wonder, in angry emails to me, why I would recommend that investors fire their advisors.
Let me state up front that if your advisor is doing a better job than you can, or if having someone else manage your money helps you sleep better at night, then by all means, stick with that person. They’re worth every dollar you pay them.
But you likely can do better and save money at the same time.
Most of us are aware of the conflicts of interest that some brokers look past in order to generate a commission. There are times when a broker recommends a trade or an expensive mutual fund that is not in the client’s best interest but generates a nice payout for the advisor.
Those brokers should be dumped immediately because they’re more concerned with their money instead of yours.
Even the good ones—the advisors and certified financial planners that really are trying to manage your money in a cost-effective way, still most likely underperform the market.
Chances are those advisors have clients in mutual funds, which charge expenses. The average expense ratio for an equity mutual fund in 2011 was 0.79 percent. That means whatever the gross returns you’d subtract nearly 1 percent for expenses. On top of that, you’re likely paying either steep commissions or 1 percent of your assets to the advisor to manage your money. Even if they have you in index funds, which are typically very inexpensive, your total fees and expense will likely be at least 1.25 percent. It will be even more if the advisor is using anything but the least expensive funds.
Numerous studies throughout the years have shown that the majority of mutual funds underperform the broad market every year.
In 2011, 84 percent of actively managed mutual funds underperformed the stock market. In other words, you’re paying someone over 1 percent of your assets to not even track the market.
Luckily, there is a better way.
If you manage your own money, you instantly save that 1 percent fee you’re paying to your advisor. That can add up over the years. If you have a $500,000 account, you need to seriously think about whether it’s worth paying someone $5,000 per year to manage your money for you. And if that account grows over time, you’ll be paying even more.
But if you take care of it yourself, you will save thousands of dollars a year that can be put back into your investments and compound over time.
How much will you save? Let’s assume that your advisor does a terrific job and grows your $500,000 account by 10 percent per year. After ten years, you’ll have paid the advisor $83,000 in fees and your account will be worth $1,172,867. However, if you handled it yourself, without paying the 1 percent, you’d have $1,296,871, over $124,000 more than with the advisor. So it’s not just the $83,000 in fees that you’re paying. That $83,000, when put to work, turns into an extra $41,000.
If you’re used to someone else managing your money for you, the idea of doing it yourself might be frightening. Fortunately, there’s a conservative approach you can take that can easily generate double-digit returns over the long term (which would likely crush the returns you’d get in a mutual fund or with a broker).
Investing in Perpetual Dividend Raisers, companies with a track record of raising their dividend every year, can not only beat the market, but also be a vital tool to helping you reach your financial goals.
Companies that boost their dividends by a significant amount every year, not only enable you to outpace inflation, but if you’re still in the wealth building stage, can help you triple your money in ten years—all while investing in conservative stocks that historically are less volatile than the overall market.
For example, a stock like Altria (NYSE: MO), which currently pays a 5.1 percent dividend yield, has been raising the dividend for 43 consecutive years and over the past ten years has raised the dividend by an average of over 11 percent per year.
If Altria continues to raise the dividend by 11 percent per year over the next ten years, an investor who bought $10,000 worth of stock would achieve a dividend yield of over 13 percent in ten years. If they reinvested the dividend, their $10,000 turns into $36,653, assuming Altria tracks the market’s historical average.
But with that kind of dividend growth, even if Altria’s share price didn’t budge for the entire ten years, investors who reinvested the dividend would still more than double their money and finish the decade with $23,235.
Now, ask yourself, would you make any money in a mutual fund or paying an advisor 1 percent per year if the stock market stays flat for ten years? I can pretty much guarantee that the answer is no.
Marc Lichtenfeld is the author of Get Rich with Dividends, A Proven System for Earning Double Digit Returns, the Associate Investment Director of the Oxford Club and the Editor of the Ultimate Income Letter.