9 Steps to Financial Freedom (Step 6)
Click here to see all of Andrew’s 9 Steps to Financial Freedom or click on them individually as Steps 1-3, Steps 4-5, Step 6, Step 7, Step 8, and Step 9.
Step #6 Find a financial advisor without a conflict of interest
Finding a financial planner can be one of the most important decisions you make. But too many people take it far too lightly.
Remember that there’s no reason to buy a “load fund” which charges a sales fee for an investment product. As quoted in the American Association of Individual Investors Guide to the Top Mutual Funds: “Funds with loads, on average, consistently under perform no-load funds when the load is taken into consideration” (Larimore, Lindauer, LeBoeuf 2007, p117). They don’t perform as well as “no load” funds, so advisors choosing them for you have conflicts of interest you need to be aware of (Gardner 1998, p80).
A portfolio of diversified indexes will almost certainly outperform a portfolio of actively managed mutual funds over time. If your advisor tries to talk you out of this reality, it’s time to find another advisor. Advisors get paid based on “trailer fees” for the products they sell. And index funds from companies like Vanguard don’t pay incentive fees to brokers or advisors.
Watch out, also, for advisors who charge high asset-based advisor’s fees. If your account is valued at, say, $100,000, and your advisor charges 1.75% on assets, this means that they silently remove $1,750 from your account in that given year. That money will be gone forever. You won’t be able to compound that money into future investment returns. They typically charge a percentage on assets each and every year, regardless of whether your account gained or lost money. You’ve seen how small percentage points can make a big overall difference in your account, over time. So don’t take the decision to use an advisor who charges a percentage of assets lightly.
There are certified advisors who charge one time fees to offer advice. If you’re comfortable with taking their advice and following through with making fund purchases (preferably index fund purchases) directly from the respective companies, you would likely find this to be the most economical solution. Many prudent people ensure that their advisors don’t sell financial products at all—distancing themselves from any conflicts of interest. As such, these advisors charging one time fees are those most likely to advise purchases of “no load” mutual funds and index funds. Unlike most financial planners, they aren’t entitled to receive sales fees or mutual fund trailer fees, so they’re more likely to act with your best interests in mind.
Finally, Vanguard, the non-profit sellers of low-cost index funds, employs salaried advisors you can hire on an annual basis to guide you. And if your account value exceeds $250,000, their advisory service is free.
David Swenson strongly recommends non-profit investment organizations like TIAA CREF and Vanguard. Using these companies and the advisors associated with them will also guarantee that you won’t be dealing with conflicts of interest (David F. Swensen, Unconventional Success—A Fundamental Approach to Personal Investment, New York, NY: Simon & Schuster Inc., 2008, pp. 345-347)….
And if your money is with TIAA CREF, opt for their indexed products over their actively managed mutual funds whenever possible. Humorously, Douglas Dial, a portfolio manager with TIAA CREF says, “Indexing is a marvelous technique. I wasn’t a true believer. I was just an ignoramus. Now I am a convert. Indexing is an extraordinarily sophisticated thing to do” (Taylor Larimore, Mel Lindauer, Michael LeBoeuf, The Bogleheads’ Guide to Investing, New Jersey: John Wiley & Sons Inc., 2007, p. 82). As a teacher, you may already have your money with TIAA CREF, which handles the investment accounts of many teachers and professors. If your money is with TIAA CREF, take solace in recognizing that its fees are exceptionally low. And keep in mind what Douglas Dial says, and ensure that your TIAA CREF portfolio is fully or predominantly in index funds….
[VF NOTE: See Opening a US brokerage account for information on how to open accounts if you didn’t open accounts before moving overseas.]
Click here to see all of Andrew’s 9 Steps to Financial Freedom or click on them individually as Steps 1-3, Steps 4-5, Step 6, Step 7, Step 8, and Step 9.
This post was originally the chapter “The International Teacher’s Nine Steps to Financial Freedom” in the book Reviving, Retooling and Retiring for Teachers (published by Michigan State University). It was graciously reposted here by Andrew Hallam, public speaker, author of Millionaire Expat: How To Build Wealth Living Overseas, and webmaster of andrewhallam.com where this post also appears. The word “teacher” was sometimes replaced with “US expat.”
