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My sister text me on Thursday morning and asked the following question :
“ I’m meeting with an investor today to talk about what to do with some money. Do you know what I should be asking in particular. Or just feel it out and see what he has to say “.
Now not many of my family or close friends have an interest like I do in financial affairs. So when I get a chance to talk to people close to me about it i get excited. When she text me, I was in my day job at the time so I couldn’t ring her straight away but I sent her the following text message.
Cool. Here are some questions to ponder before your meeting with him:
Questions for you….
- What is ur goal or what do you expect to achieve from your investment?
- Is it a lump sum that you will leave or will u be adding to it?
- How long are you investing for? Is for u? Is it for peanuts college fund etc. (she is currently expecting so peanut is the name we give to baby bump until he arrives in May 😊)
Questions about financial advisor
- Does he get the fee every year even if your portfolio is not performing and is down?
- How much is the fee?
- How much does the execution of each trade cost.. Stockbroker fees any other hidden charges?
Part of these question were to get her thinking about her financial goals. What does she expect from her investment? how much time is she willing to invest for? and what her appetite to risk is. The other part was to ask the financial advisor some questions to get a feel of what they charge and how they charge it.
After meeting him she Text me the following .
https://www.buymeacoffee.com/dividendtalk
“He charges 1% a year and What it appears is that 60% will be put into fixed Income ( don’t know what that means) and 40% of it will be in stocks “
Now 1% a year might not seem like alot of money to pay someone for financial investment advise. But 1% can seriously damage the magic of compounding.
What is Compounding?
For my fellow Engineering or Math geeks the formula for future assets is derived for the concept of compound interest. You need the present value of an asset, the annual interest rate, and the total number of years you intend to invest for. The generalised formula for compound interest is in this case is
where:
- FV = future value
- PV = present value
- i = the annual interest rate
- n = the number of years
For all of you normal people who don’t like maths, All you need to know is that compounding is the magic formula that will make you money grow over time. The more time you give it, the more your money will grow.
Compounding working against you!
A word of caution,just as the laws of compounding can work for you, it can also work against you. Even as little as a 1% fee can have a massive impact of the amount of returns you make over time.
In my head paying 1% is basically throwing money away. The luxury of been able to throw 1% of my investments away each month is something I don’t have. I would much rather invest in my education and learn how to do it myself.
I understand that investing can be daunting for a beginner with so much to choose from and I can understand why my sister reached out to a financial advisor in the first place. But I suggested that I explain different aspects of investing such as low cost index funds, mistakes i’v made and resources that I find useful that might guide my sister to make a decision which she feels is best for her.
The last sentence is an important one, I am not a financial advisor and not in a position to offer financial advice to anyone but what I can do is explain what I know from my own experiences and breakdown what I do or at least try to do.
This will hopefully give my sister a foundation to build her own knowledge to make an informed decision and maybe set her on her own path to financial independence. Or maybe it might make her realise that she don’t have the time to educate herself and she will be more comfortable with a financial advisor.
Math Time!!
I am currently reading a simple path to wealth by JJ Collins where in the opening few chapters based on his parameters in low cost index funds the returns from January 1975 to January 2015 was 11.9% on average.
As he notes some years were down and some years were up but if you averaged it out over the 40 years the returns were 11.9% a year. This seemed like a good place to start some calculations to show what effect 1% can have to your overall return.
If you put $10,000 into a account in 1975 and added no more money,assuming a growth rate of 11.9% a year for 41 years, by the time 2015 came along you would be a millionaire with a cool $1,004,693.40. You can check that yourself by inputting the following numbers into your calculator :
10,000(1+0.0119)^41 = $1,004,693.40
Now if your financial advisor was to achieve the same returns, with a 1% fee you would have to pay out nearly $63,000 in fees over 40 years..Not enough to make them rich, but still a decent chunk of your cash all the same.
If you take $63,000 from $1,004,693.40 you should have $941,693. Does that sound right? Would you expect to have $900k in your account?
Well in fact it’s wrong because paying this 1% fee every year would reduce your compounding power and you would actually be left with $695,333.88 as I have shown a table below.
| Year | Capital | return | EOY return | 1% Fees | EOY after fees |
| 1975 | $10,000.00 | 11.9% | $ 11,190.00 | $100.00 | $ 11,090.00 |
| 1976 | $ 11,090.00 | 11.9% | $ 12,409.71 | $ 110.90 | $12,298.81 |
| 1977 | $12,298.81 | 11.9% | $ 13,762.37 | $122.99 | $ 13,639.38 |
| 1978 | $13,639.38 | 11.9% | $15,262.47 | $ 136.39 | $ 15,126.07 |
| 1979 | $15,126.07 | 11.9% | $16,926.08 | $ 151.26 | $ 16,774.81 |
| 1980 | $16,774.81 | 11.9% | $18,771.02 | $167.75 | $ 18,603.27 |
| 1981 | $ 18,603.27 | 11.9% | $20,817.06 | $186.03 | $ 20,631.03 |
| 1982 | $20,631.03 | 11.9% | $23,086.12 | $ 206.31 | $ 22,879.81 |
| 1983 | $ 22,879.81 | 11.9% | $ 25,602.50 | $ 228.80 | $ 25,373.71 |
| 1984 | $25,373.71 | 11.9% | $28,393.18 | $253.74 | $ 28,139.44 |
| 1985 | $ 28,139.44 | 11.9% | $31,488.03 | $ 281.39 | $ 31,206.64 |
| 1986 | $31,206.64 | 11.9% | $34,920.23 | $ 312.07 | $ 34,608.16 |
| 1987 | $34,608.16 | 11.9% | $38,726.53 | $ 346.08 | $ 38,380.45 |
| 1988 | $ 38,380.45 | 11.9% | $ 42,947.73 | $ 383.80 | $ 42,563.92 |
| 1989 | $ 42,563.92 | 11.9% | $ 47,629.03 | $ 425.64 | $ 47,203.39 |
| 1990 | $ 47,203.39 | 11.9% | $ 52,820.59 | $472.03 | $ 52,348.56 |
| 1991 | $52,348.56 | 11.9% | $ 58,578.04 | $ 523.49 | $ 58,054.55 |
| 1992 | $58,054.55 | 11.9% | $ 64,963.04 | $ 580.55 | $ 64,382.50 |
| 1993 | $ 64,382.50 | 11.9% | $ 72,044.02 | $ 643.82 | $ 71,400.19 |
| 1994 | $71,400.19 | 11.9% | $79,896.81 | $ 714.00 | $ 79,182.81 |
| 1995 | $79,182.81 | 11.9% | $ 88,605.57 | $ 791.83 | $ 87,813.74 |
| 1996 | $ 87,813.74 | 11.9% | $98,263.57 | $ 878.14 | $ 97,385.44 |
| 1997 | $97,385.44 | 11.9% | $108,974.30 | $973.85 | $ 108,000.45 |
| 1998 | $108,000.45 | 11.9% | $120,852.50 | $1,080.00 | $119,772.50 |
| 1999 | $119,772.50 | 11.9% | $134,025.43 | $1,197.72 | $132,827.70 |
| 2000 | $ 132,827.70 | 11.9% | $ 148,634.20 | $1,328.28 | $ 147,305.92 |
| 2001 | $ 147,305.92 | 11.9% | $164,835.32 | $1,473.06 | $ 163,362.26 |
| 2002 | $163,362.26 | 11.9% | $182,802.37 | $1,633.62 | $ 181,168.75 |
| 2003 | $ 181,168.75 | 11.9% | $ 202,727.83 | $ 1,811.69 | $ 200,916.15 |
| 2004 | $200,916.15 | 11.9% | $224,825.17 | $ 2,009.16 | $ 222,816.01 |
| 2005 | $222,816.01 | 11.9% | $ 249,331.11 | $2,228.16 | $ 247,102.95 |
| 2006 | $ 247,102.95 | 11.9% | $ 276,508.20 | $ 2,471.03 | $274,037.17 |
| 2007 | $ 274,037.17 | 11.9% | $ 306,647.60 | $2,740.37 | $303,907.22 |
| 2008 | $ 303,907.22 | 11.9% | $ 340,072.18 | $ 3,039.07 | $ 337,033.11 |
| 2009 | $ 337,033.11 | 11.9% | $ 377,140.05 | $ 3,370.33 | $ 373,769.72 |
| 2010 | $ 373,769.72 | 11.9% | $ 418,248.32 | $ 3,737.70 | $ 414,510.62 |
| 2011 | $414,510.62 | 11.9% | $ 463,837.38 | $ 4,145.11 | $ 459,692.28 |
| 2012 | $ 459,692.28 | 11.9% | $ 514,395.66 | $4,596.92 | $ 509,798.74 |
| 2013 | $ 509,798.74 | 11.9% | $ 570,464.78 | $5,097.99 | $ 565,366.80 |
| 2014 | $ 565,366.80 | 11.9% | $ 632,645.45 | $ 5,653.67 | $ 626,991.78 |
| 2015 | $ 626,991.78 | 11.9% | $ 701,603.80 | $ 6,269.92 | $ 695,333.88 |
Lets face it $700k does not seem bad and if someone offered you nearly $700k from a $10k investment, you would usually take the hand off them.
But when you consider that you could of made $309k more with the same amount of money than it does make you think if it is worth the 1% fee. Remember you will not receive 11.9% Growth every single year, but this should give you an example of what difference 1% can make.
PROs of hiring an investment financial advisors
To give some clarity, I am not totally against financial advisors and there are some cases where there is some benefit to hiring one.
For example if you feel completely lost and have no clue how you should map out your financial future, maybe you have student debt or you personal situations have changed and you need someone to help you put a step in the right direction.
I get that it can be overwhelming and maybe you don’t have any goals yet. Getting a financial advisor would be a good start and maybe give you time to make better financial decisions in the future.
Or maybe you inherited a large amount of money and you don’t know what to do with it . You get the point, there are plenty of reasons someone might need to hire an adviser but in my opinion, nobody will care about your money more than you will.
I think that even if you feel the need to hire an financial advisor now, spend some to time educate yourself and you will be surprised that maybe investing is not as hard as you first thought. You might even save yourself some money in the process.
Disclaimer - Engineer my Freedom is not a licensed or registered investment adviser or broker/dealer. We are not providing you with individual investment advice on this site. Please consult with a licensed investment professional before you invest your money. This site is for entertainment, informational, and educational use only. Any opinion expressed on the site here and elsewhere on the internet is not a form of investment advice provided to you. We use information, data, and sources in the articles we believe to be correct at the time of writing them, but there is no guarantee of their accuracy, completeness, timeliness, or correctness. We are not liable for any losses suffered by any party because of information published on this site or elsewhere on the internet. Past performance is not a guarantee of future performance. By reading this site or subscribing to it, you agree that you are solely responsible for making investment decisions in connection with your funds.
