Why You’re Worse Off With Financial Advisors

How experienced is your financial advisor?

The truth is it doesn’t matter because no matter how experienced your financial advisor is, 92.25 percent of the time, they do no better than the S&P 500. In other words, you can invest in an S&P 500 index fund and 92.25% of the time, you will do better than all financial advisors.

My guess is your financial advisor is pretty experienced at ripping you off but has little experience with making you money. I think the more important question is, can you trust your financial advisor or any financial advisor? The answer is probably not.

Why?

It’s because you are not the financial advisor’s priority. Their pay structure is not geared to benefit you; it’s geared to benefit them. They get paid commissions on the products they sell and fees for every transaction they execute, so they’re gonna want to sell as many products and execute as many trades as they can. See the problem here?

Don’t get suckered in by the fiduciary designation. You’re thinking, “Well, they’re fiduciaries. Aren’t they legally bound to work in my best interest?” Not exactly.

8.4% of financial advisors that are fiduciaries ARE ALSO BROKERS.

Why should you be very careful with these people? Because they suck you in by telling you they’re fiduciaries. That’s how they gain your trust. But remember, they’re also snakes. They have a broker license! The problem is you never know what advice you’re getting. As a fiduciary (your benefit)? Or as a broker (their benefit)?

Only 1.6% of all financial advisors are pure fiduciaries. These people, by law, have to put your interests first. This means that their advice can usually be trusted. It doesn’t mean their advice will make you money since most advisors don’t beat the market anyway, but at least you can trust with some assurance that they’re not out to explicitly rip you off. With only 1.6% of all financial advisors legally bound to act in your best interest, that means the other 98.4% are free to act in their own best interest. Not good odds.

Why You’re Worse Off With Financial Advisors

Let’s assume you have a semi-competent financial advisor that puts your money in an S&P index fund. In the past 20 years, the S&P 500 has returned, on average, a 7% return per year. Inflation has averaged 3% during this time. Financial advisor fees range from 0.75% to 1.5%. So, assuming you make a 7% return in a year, that leaves you with a 4% profit after accounting for inflation.

Not so fast! Remember, you’re paying your financial advisor around 1%, which leaves you with only 3%. You may think 1% is not that much. It is if you think about that fee as a percentage of your entire profit of 4%. Think about it, 1/4 of your profit is going to your financial advisor. Doesn’t seem like such a good deal anymore, does it? And that 1% is an average fee. Some charge as much as 1.5%

So where should you put your money?

If you’re thinking mutual funds…. WRONG! What is a Mutual Fund? A Mutual Fund is a company managed by a bunch of glorified financial advisors with the goal to invest your money for you. Their hook? That they’ll beat the market…..for a fee of course.

Of course! You put up the money, and they charge you a bunch of fees. You know where this is going. They’ll invest your money and most of the time, they will not beat the market. If their investments go wrong, you pay the full price from the loss PLUS the fees. If their investments go right, they get a cut of the profits. Nothing about this seems right.

But wait, it gets worse! Mutual Funds charge exorbitant fees.

In 2016, there were 9,511 Mutual Funds in the United States (almost twice the number of individual stocks). Why so many? Because they make a ton of money, and everyone wants in on the action. Remember when we thought financial advisors were ripping us off with their 1% fee?

You want to be sitting down for this…

Mutual Funds charge, on average, 3.93% – almost four times that amount! In our profit example above, if you made 4%, you only get to keep 0.07% of that. That’s highway robbery.

I’m not exaggerating when I say mutual funds are terrible investments. How’s this for terrible? 96% of mutual funds have failed to beat the market over the past 15 years. Mutual fund managers know they’re ripping you off.

Most don’t even trust their own investing skills. According to data provided by Morningstar, only 49% of mutual funds have at least one manager who has invested in the fund. They don’t even trust their own product. Why should you?

It’s clear you’re better off without financial advisors, especially the ones that run mutual funds. If you just invest in the S&P 500, you’ll beat your financial advisor 92.25% of the time.

But how do you beat the market? Learn from the wealthy.

Here are a few of their tactics:

  • Seek out alternative assets that are uncorrelated to Wall Street
  • Prioritize passive income opportunities
  • Generate multiple streams of income
  • Seek out productive assets or businesses
  • Partner with experts with geographic and asset-specific expertise

Financial planners and mutual funds will not make you rich. You will make them rich. There are better ways to beat the market and, more importantly, to generate wealth. You just have to take control of your money and seek out cash flowing alternative investment opportunities shielded from Wall Street volatility.

About the author

Investor, writer, speaker, and founder. Kyle Jones, key principal of TruePoint Capital, is accountable for investment decisions, asset management, and overseeing financial activities, operations, and investor relations. Kyle additionally is a Global Sales Leader for a large Fortune 100 technology company. Kyle received a Bachelor of Science degree from Texas State University – San Marcos.