Show Notes
This episode will blow your mind when you find out how neglecting something that seems so small and insignificant can have a catastrophic impact on your timeline to reach FI. Jeff Harrell discusses how investors who make sure they pick up every “nickel, dime, and quarter” possible in their investment portfolio will reap the benefits many years down the road.
Listeners will be provided with other resources that you surely would never be directed to by the traditional financial services industry. After listening to this episode, you will be armed with the knowledge necessary to help make better investment decisions when it comes to not only choosing your investments, but how you go about personally obtaining financial advice.
Understanding the impact a small percentage can make will allow you to turn the power of compound interest in your favor.
(Season 2 Episode 7)
Resources Mentioned in Episode:
Forbes article, “How A 1% Investment Fee Can Wreck Your Retirement”
YouTube video, “Retirement Plans: Last Week Tonight with John Oliver” (21-minute episode)
Advice-only financial advisors:
Podcast produced by Ted Cragg of QuickEditPodcasts.com
Music Credit: Dream Cave / Adventure Awaits / courtesy of www.epidemicsound.com
Transcript
When you are on your path to FI there are all kinds of things you can do to help make your journey as enjoyable and efficient as possible. Taking the time necessary to educate yourself on FI principals and how to incorporate them into your personal situation is key. If you ask me, the stock market is the easiest and best tool available to help all of us reach FI. But you have to make sure you maximize its power to the fullest. Simply missing out on as little as 1% annually can prolong your path to FI by years.
Welcome to the second season of Invested Poorly: Sad Tales of FInancial Fails, a short-form podcast designed to help everyday investors make wiser investment decisions by learning what NOT to do with their money. Host Jeff Harrell shares timeless stories from his former life as a financial advisor, about the poor—and irrational—choices he witnessed investors make that disrupted their journey to financial independence, or FI. Your ability to recognize, and avoid, similar mistakes could make all the difference for you along your path to reach FI.
Check out the “Introduction” episode for more background on Jeff, why he created this podcast, and how it can guide you to becoming the hero of your own investing story. Now, on with show.
I mean, it’s only one percent. When you say it like that it doesn’t sound like much, does it? In reality, as you get started with investing and you only have a couple thousand dollars, one percent is definitely not going to break the bank one way or the other. However, it’s important for investors to realize that while this may be the case when your investment portfolio is small, the compounding effect of neglecting this over a long period of time can be devastating.
Now, there are countless studies out there highlighting the detrimental impact of reducing the return of an investor’s portfolio by 1% or 2% over time. So, if you need convincing, take my inquisitive little nephew’s advice and “search it up.” You won’t have any problem finding these studies. Although most of the research focuses on fees, the reality is I would consider anything that reduces your returns by 1% or more to be potentially catastrophic to your investment results.
To make it easy on you, I have included two resources in the show notes that highlight the impact of 1% or more. One is a Forbes article and the other is a John Oliver episode. Although both of these center around fees, I think the most important takeaway from these should be how BIG 1% is to an investment portfolio over time.
The Forbes article is one that reminds me of a story I heard from a fellow financial advisor while I was working in the industry. He mentioned that one of his long-time clients called and asked a very straightforward question. The client simply asked what services he was providing to him now, versus when their relationship began? The advisor was a little perplexed by the question until the client offered a follow-up response. He pointed out that at the outset of their relationship he was being charged around $6,000 a year and now, ten years later, he was paying over $40,000 per year in management fees.
Any reasonable person would conclude that the increased fee amounts to something more than just standard inflation. Well, the reason for this huge increase is pretty straightforward. This client began working with the advisor with around $500,000 in assets and ten years later he had amassed over $6,000,000. Thus, the massive increase in fees was simply due to the higher level of assets being managed. Although the advisor was offering a few more bells and whistles now versus ten years ago, he knew, that in reality, he wasn’t doing anything materially different for the client.
You can draw your own conclusions from this example, but I’ll tell you where it left me before I exited the industry. Tying a comprehensive financial planning relationship to investment management fees creates a perverse incentive for advisors to focus exclusively on higher net worth clients.
For advisors who charge a fee based on assets under management, there is absolutely no correlation between the amount of time they spend working on a client relationship and the fee being charged. The only thing that matters is how much money they are managing. So a low maintenance, easy-going client with $5 million under management, who only calls you twice a year, will be charged five times what a $1 million client is paying. Even if that $1 million client calls every week, is a pain in the butt to deal with, and takes up 10 times the number of hours compared to the $5 million client. I can’t think of any other industry that operates this way.
Now if you ask me, the John Oliver episode is absolutely hilarious, and I hope you take the time to watch it. I was a financial advisor when it first came out and I distinctly remember a couple of clients contacting our firm after it aired to get our take because, let’s just say, it reflects rather poorly on the financial services industry.
But before I go any further, I want to be clear: I honestly don’t think it is fair to make a blanket statement that all fees should be avoided at all costs. There is no doubt many investors need help with their finances and paying for advice seems totally reasonable to me. But I do believe the financial services industry has done the public a disservice by very often tying financial planning fees, which can be extremely valuable, to investment management fees, which rarely add any value. Hopefully being a listener of this podcast makes you acutely aware of this, so you can decide what type of service, if any, you actually need and how to make sure you are paying for that and nothing else.
Believe it or not, there are “advice only” financial advisors out there who are trying to change the landscape of the industry by doing just that. I’ve included links in the show notes for learning more about these types of services, if it’s something of interest to you.
So, while studies vary in regards to the exact impact of a 1% reduction in investment returns, nearly all of them conclude that over a 30- to 40-year time period missing out on something as small as 1% will result in a 25-35% reduction in wealth. Just think about that. We are talking about roughly one third of your potential net worth wiped out by simply missing out on 1% every single year. How small does 1% sound now?
Next, let’s transition to a FI discussion by suggesting that missing out on 1% every single year is equivalent to having to work anywhere from two to seven more years to reach FI. Even worse, let’s think about what this means for someone who really leaves a lot on the table and that 1% turns into something even bigger, like 2% or 3%. The extra years needed to reach FI are quite frankly heartbreaking. And as my adorable, yet sometimes impatient, little niece would say, “that’s a long time.”
I’ll close out this episode with the best advice I can give you in terms of how to make sure you capture every percent of return possible when it comes to your investments…automate everything. I’m telling you, automation is the key to multiple years of investing success. In fact, one of my favorite memories of working as a financial advisor was when a client came up to me at a conference after a presentation I had just given. We had a lengthy conversation, but the one thing I remember from it was him thanking me profusely for putting everything on autopilot. He was honest and said if we had not done that for him, he undoubtedly would have, in his terms, “wasted” way more money in his early years and still probably be working instead of comfortably living a FI life.
I think this goes to show you that after you educate yourself on investing and figure out what the right strategy is for you, the final step is to just stick with it. This, combined with a lot of patience, is the secret to FI.
I sure hope you enjoyed this episode of Invested Poorly and will be able to take something from it to improve your decision making as you navigate the twists and turns of your personal investing adventure. Be sure to check out my website at AreYouFI.com (that’s A R E Y O U F I dot com) where you can find resources and show notes with the charts and graphs I mention during the episodes. These are like little treasure maps that can help you choose more wisely along your quest to reach FI, or financial independence.
Never forget, in the short-term the stock market is unpredictable, and as my mischievous little nephew likes to say, “things just happen”! So focus on the long-term, by controlling your emotions, simplify your investments, and always… ignore the noise.
I’m your host, Jeff Harrell. Thanks for listening.
Invested Poorly: Sad Tales of FInancial Fails was created for informational purposes only and should not be relied on for specific tax, legal, or investment advice. You should consider consulting a qualified professional to review your situation before engaging in any transactions. Investing involves risk, including loss of principal and past performance is no guarantee of future results.
This podcast was produced by Ted Cragg. Learn more about creating podcast mini-series like this by visiting QuickEditPodcasts.com.