Financial advisors – Do not get ripped off

Mr. The Poor Swiss | Updated: | Investing
Be very careful with financial advisors

(Disclosure: Some of the links below may be affiliate links)

I have already mentioned financial advisors on this blog and my dislike of them. But I have not yet delved into the subject. It is essential to realize the dangers of financial advisors.

Most financial advisors do not have your interest at heart, but theirs! This is the main issue with financial advisors. Most are biased. And this bias can cost you a lot of money in the long term.

And there are other issues with financial advisors as well. So, in this article, we are going to delve into the problems with financial advisors.

What does a financial advisor do?

There are different levels of involvement for financial advisors. But the idea remains the same: help you with your money. But they will generally focus on the investing side of things (it is more lucrative for them to focus on that point).

A financial advisor will start with the current status of your finances. From there and from your financial goals, they will help you plan what you have to do to reach your goals.

And then, they will help you implement your financial plan. For this, advisors will generally propose to invest your money. In most cases, they will manage your money directly. In other instances, they will only advise you, and they will let you invest your money according to their recommendations.

They can also help with estate planning, severance packages, and even divorce issues.

There are two kinds of financial advisors:

  1. The advisors in a bank or financial institution.
  2. The independent advisors.

We will talk about financial advisors in general in this article.

Financial advisors are often biased

For me, the biggest issue with financial advisors is that they are often biased. And they are biased in several ways.

If you are talking with a financial advisor from a bank, insurance, or a mutual fund provider, they will entirely biased towards selling you the products from this financial institution. So, even though these products may not be the best for you, they will only sell you these products. This limitation is a red flag since they are not serving you. Instead, they are serving the financial institution.

A more significant issue is when they get a commission for the products they sell you. For instance, if they are making you buy into a mutual fund, they may get a part of the management fees you are paying to the mutual fund. The issue is that the advisor will only recommend the products he gets the highest commission from. So, they have their own interest at heart, not yours!

These two points are big red flags. If you use a financial advisor, it is to improve your financial status. But this only works if the financial advisor has your own interest at heart. But if they have their own interest at heart or they care more about the financial institution than about you, they will not serve you properly. This defeats their purpose entirely.

Financial advisors can be very expensive

The second important issue with financial advisors is that they can be very expensive!

There are several ways a financial advisor can be paid.

  1. He can get a flat fee. This could be a fee per month or year or a one-time fee.
  2. He can get an hourly fee based on the time he spent financial planning for you.
  3. He can get a fee based on your assets.
  4. He can get commissions based on the products he sells you.

The first two models are acceptable. They may not be cheap, but in the long-term, they are going to be much better than the last two.

Getting a fee based on your assets is adding a hefty management fee to your assets. It means that you are going to lose money to the fees. And considering that financial advisors will not deliver higher returns than average, this will cost you a lot. So you need to remember that investing fees are important.

And being paid by commissions is an indirect way to make you lose money. They will generally make more money when selling expensive products (high management fees). So, even though they may not charge you much, you will lose in fees because of the bad products they are making you are investing in.

So, making you invest in expensive products is another way that financial advisors are expensive. Sure, this is indirect, but whether you pay money to the fund or the advisor directly does not matter. What matters is the total amount of fees you are paying to invest your money.

Finally, keep in mind that you will pay the fees regardless of the performance of the portfolio. So, if the advisor is doing a great job, you may not mind paying the fees. But you will also pay the fees if the advisor underperforms the market. And you will pay the fees when the market is going down for everybody.

You most likely do not need a financial advisor

Most people do not need a financial advisor. This fact is something that big financial institutions do not want you to know. Financial advice is a very lucrative business, so they obviously want your money.

The main reason people use financial is that they think investing is too complicated for them. But investing is not nearly as complex as advisors make it looks. You need very few financial instruments to invest your money. And with passive investing, it has become easier than ever. So if you want to get started yourself, I would encourage you to read my guide and start investing in the stock market.

Another thing that people believe (and that advisors want you to believe) is that a financial advisor will give you higher returns. But this is not true, for several reasons. First, even if they could generate higher returns, the fees would reduce the returns to subpar returns.

Then, it is improbable for anybody to beat the market in the long term. This difficulty to beat the market is why it makes sense to focus on index investing. If your financial advisor recommends (or invests for you in) index funds, you will get the same returns as anybody investing like this. But you will have to pay the advisor’s fees, and that will reduce your returns.

Selma

Selma is a great Swiss Robo-Advisor that will let you invest simply. It is a great way to invest in the stock market without the hassle of DIY Investing.

Finally, if you think you cannot (or do not want) invest yourself, there is an alternative to a financial advisor: Robo-Advisors. A Robo-advisor is a digital advisor that will help you invest your money. Their fees will be lower than a human financial advisor. However, their returns are likely to be the same. Most Robo-Advisors are very simple and focus on index investing (it is a good thing!).

With a Robo-advisor, you will save fees compared to an advisor, and it will be very simple. Of course, it is still more expensive than investing by yourself, but it is a great middle ground for many people. Of course, a Robo-advisor will not cover anything like estate planning or severance packages, but for investing, they are a great solution.

For more information, I have a guide about Robo-advisors.

How to choose a financial advisor?

What if you want to have a personal finance advisor? Here are a few points you should check before choosing a financial advisor.

First, I would only recommend an independent financial advisor. An advisor that is a part of a bank (or any other financial institution) will be strongly biased towards their products. And he will generally be limited to the products the bank or the institution provides. And these products are unlikely to be the best for you.

Second, I would make sure that the advisor is not financially interested in the products he is proposing to you. Even if he is independent of a financial institution, he may still touch a commission (possibly a large one) if you opt for some products.  And once again, this will bias him to offer your products for which he will get more money rather than products that will serve you best.

Third, I would only use a financial advisor that lets me invest myself. I would think that this point is optional because not everybody wants that. But I would not trust my money to a financial advisor.

Fourth, if the advisor invests for you, you should make sure that all the accounts are in your name. The advisor should be set as an advisor, not as the owner of the account. If his name is shown as owner, he will be able to withdraw the money. And I would also refuse to give an advisor power of attorney.

Finally, I would only use a financial that charges a flat fee or hourly fee for its services. I would never use a financial advisor that would charge a fee based on your assets. In the long-term, this would eat too much of your savings.

I am sure it is challenging to find a financial advisor with such criteria. However, I think it exists. And the fact that these criteria are challenging shows that you must be very careful about all financial advisors.

Tips for dealing with financial advisors

If you are dealing with financial advisors, here are a few tips to avoid some issues.

First, you should always think before signing anything. I would recommend reading what the advisor proposes to you entirely. And I would especially recommend waiting at least one day before signing. If the financial advisor becomes pushy, I would recommend leaving and not sign anything he would propose to you.

Then, I would recommend asking all the questions you have. Even if you think a question is dumb, ask it. If the financial advisor cannot answer all your questions or become irritated with them, it is a good sign that you should not deal with this advisor.

Finally, you should always be ready to say no. If the advisor proposes you something that you do not want, say no. And if the advisor does not respond well to your refusal, once again, do not deal with him. You should be comfortable with a good financial advisor. If you do not feel comfortable, just quit!

Conclusion

You should now realize that there are many issues with financial advisors. The two most significant problems are that advisors are expensive and do not have your best interest at heart.

So, you have to be very careful when dealing with one financial advisor. If you want a financial advisor, you need to make sure that you choose one that will serve you (and not serve itself or another financial institution). And you may also want to consider a Robo-advisor instead.

And you may probably not need a financial advisor at all. Investing by yourself is not as complicated as people think. You can forget much of the noise and focus on a few financial instruments and reap 99% of the benefits of investing. And DIY investing does not take that much time.

Have you ever had a good or bad experience with a financial advisor?

Mr. The Poor Swiss is the author behind thepoorswiss.com. In 2017, he realized that he was falling into the trap of lifestyle inflation. He decided to cut on his expenses and increase his income. This blog is relating his story and findings. In 2019, he is saving more than 50% of his income. He made it a goal to reach Financial Independence. You can send Mr. The Poor Swiss a message here.

17 thoughts on “Financial advisors – Do not get ripped off”

  1. Why do we need financial advisors when we have your blog?! :-D

    I recently discovered your blog and let me tell you that you are doing a great service to many people by explaining personal finance in a very simple and transparent way. Oftentimes “professional” financial “advisors” make things unnecessary complicated and less transparent.

    So, I wanted thank you for that: the articles you write offer a lot of useful information and save me time (and money!).

    Keep up the great work!

    PS) As a small sign of appreciation, I decided to open a finpension 3a account using your code. I did it, not just because you said “it’s an excellent third pillar”. But because, like in many of your articles, you also presented a very detailed analysis that allowed me to evaluate if it was the right option for me or not (and you were very transparent about the presence of affiliated links in the article).

    1. Hi Luciano,

      Thanks a lot for your kind words, I greatly appreciate the encouragement!
      I am trying to make this as simple as possible. Hopefully, I am doing a good job.

      Thank you very much for using my code, this helps me a lot :) And good choice using Finpension 3a as your third pillar!

  2. Hi PoorSwiss,

    I think you are right in calling out the downsides of what most people associate with financial advise, which in many cases is actually just sales.

    I do think there is a place for financial advisors, because we all have blindspots and biases which a 3rd party might be able to look past. Money is a very emotive subject and if someone can provide impartial advice (I would only advocate for a fiduciary FA) this could be important. I do not use one myself yet, but I do plan to, particularly a financial planner to help navigate towards retirement. I do my own investing but with kids (family in general), mortgages, taxes etc there are a lot of things I could use advice for, and feel more confident in having checked with a fixed fee advisor. Even though I feel ok with my investing and have an idea of my asset allocation targets, I would value a CFP perspective on this when I get over 40.

    I think this clip summarises the role well for me.

    https://www.youtube.com/watch?v=TI5p8vqdjTw

    1. Hi FrancInvesting,

      That’s a good way of putting it. Sales is very often mixed up with financial advice (because advisors get more money by selling rather than advising).
      For some complex subjects such as taxes and full retirement planning or estate planning, there is indeed a place for financial advisors, but they should never sell their own products or be financially interested in any product they recommend.

  3. Great post and I commend you for writing about this topic. Addition to your points my thinking goes as follows:

    1. Financial advisor cold calling. Why would I ever trust someone who is calling me to get my business? Clearly, if they were any good, folks would be flocking to them, not the other way around.

    2. If the advisor knows how to make big money, they would do so for themselves. Not others. Why work for others if you can work for yourself?

    3. Passive investing often beats active investing over the long-term (10 years or more).

    4. I would not trust anyone else with my future. It’s too important. As this article states, with some dedication and commitment you can learn about the stuff you need to know and take control of your own affairs.

  4. All the advice above is good advice. I can only add that if you ever receive a call from anyone from DeVeers offering financial advice…. you hang up the phone immediately. These guys are very active in the Ex-Pat community. Outrageous hidden fees and very poor products. I only wish I had come across the FIRE community before they called…

  5. If you’re looking for a personal recommendation for a fiduciary financial advisor in Switzerland, I highly recommend https://www.vermoegens-partner.ch/
    I did the free introduction talk (through MS Teams due to Covid) and got an offer for about 10 hours @ 180 CHF per hour customized to my situation (early retirement).
    Mr. Gempp was very interested in the FIRE concept, studied my calculations and offered valuable tips.
    In the end, not all hours were really needed (and hence, not billed).
    I think I’ll save at least CHF 20’000 in taxes just by following his suggestions of how to split the pension into multiple accounts and in what order to consume the various containers in the 5 years span I reach 65.
    They aren’t pushy at all to upsell further services, it was a very pleasant experience.

          1. I was in their branch office in Basel in late 2017 for the free introduction meeting.

            This was just after the crypto boom. I wanted to double-check with them that there really is no capital gains tax. I wasn’t close to early retirement, only like 20% there.

            They do the free meetings with (very) junior assistants. Mine seemed to have no clue about crypto, but didn’t offer to re-schedule with someone else.

            She listened to me for 15 minutes, then asked why I’m declaring the crypto at all, and then basically told me to come back when I had real money.

            I somehow doubt they’d have suggested I buy into a low-cost passive index fund. It was all too corporate and slick for my taste.

          2. Thanks a lot for sharing again Basler!

            It’s a bit sad that a financial advisor does not even know about crypto. They should at least know the basics, no need to be experts. I do not like crypto, but I know about it.

  6. I 100% agree you don’t need a financial advisor. I blog in the personal finance space and help manage a $65 million dollar portfolio for a nonprofit board I chair, so I read a lot of material regarding investing. Yet I still have most of my investments managed by others. I pay Personal Capital 0.75% to manage one account, Vanguard Advisor Services 0.30% to manage another and Betterment 0.25% to manage a third. I end up paying five figures in annual fees for their services. I absolutely do not need their help but at this point in my journey I want their help. My only goal at this point is to not lose money, I do not need a high return. Personally I don’t enjoy investing my own money, it feels like gambling, which I also do not enjoy. So I just let reputable robo and semi robo investors handle it for me. They’ve also helped me make decisions on Social Security. I will net an extra $60,000 on Social Security thanks to advice from my Vanguard advisor and my Personal Capital advisor confirmed there was not much incentive for me to pursue a backdoor Roth conversion. That was a significant study that cost me nothing extra and one they will revisit each year to see if I should make a change. The tax loss harvesting pays back part of their fee each year and I just look at it as a luxury I can afford that lets me enjoy life without having to spend any time on my portfolio. But that’s just me, if I had your drive and interest in financial matters I no doubt would do it myself and save significant amounts of fees. Great post as always!

    1. That’s a good example of how Robo-advisor can help and apparently you also got some extra help from them, which is good. Even Robo-advisors have some professional people inside that could help.
      And as you mention, you do not even need a Robo-advisor, but you choose to do it to help you. It’s a good trade off between investing entirely by yourself and get ripped with a bad financial advisor.

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