I was mad: My advisor was selling off my kids' investments to pay himself
Updated: Jan 19, 2022
This is a post about why I fired my financial advisor and how I started investing on my own and teaching my kids. This is a true story and one of the reasons why I teach parents to invest and help them teach their own children. I will also share with you a helpful resource that I used to make my decision, and I hope it helps you decide what is best for you and your children’s investments.
Ever since I was a teen and read The Wealthy Barber by David Chilton, I knew that investing was a crucial key to financial freedom. I was excited to invest, and as soon as I was 18, I opened up a mutual fund account with a local bank and started putting away a little bit of money. Not bad for an eighteen year old, but to be honest, I was confused. I lacked investment education. I did not really understand the product that I was investing in. I invested in something that the bank clerk recommended based on my risk assessment that he completed. I knew that I was doing the right thing by starting to invest at a young age, but I had no idea whether I was doing it right. Even the clerk at the bank sounded like he did not know more about investing than me. It looked like he was just pushing the bank’s investment products. I did not know what else to do, so I kept my investments, but only invested a small amount periodically.
Fast forward ten years. I was married with a newborn. As soon as my son was born, we opened up an RESP account for him (equivalent to a 529 account in the U.S. and educational investment accounts in other countries). We have been contributing maximum contributions to this account based on the government guidelines. We want to make sure that our kids do not have to worry about taking educational loans, like I had to, if they chose to do post secondary education (another post coming up about that soon). I want to be transparent with you about how we set up our kids’ investments in case it can help you.
Besides the RESP educational investment accounts, we also have other investment accounts for our kids. These other accounts are custodial accounts, which means that they are in our kids’ names but we have control over them until the kids turn eighteen. In Canada these are called in-trust accounts. In the U.S. these would be equivalent to UTMA/UGMA. (I will discuss different options for kids investment accounts in another post).
We invest money from two different sources into these custodial investment accounts. The first source is monetary gifts for the kids from family and friends. All the gift money that my kids received since they were born has been invested for them into these custodial accounts. When they were little, we would invest 100% of all the monetary gifts. As the kids got older, they wanted to enjoy and spend some of the monetary gifts, so we agreed that they have to invest half into this account, and that they can spend the other half however they want to. This may not be how you want to do things with your kids, and that is fine. You should set up your finances and teach kids about money in accordance with your family values and beliefs. Our family believes in balance and that we need to be responsible with our money, but also enjoy it and share it with others who are less fortunate.
Other money that gets deposited into these custodial accounts is a portion of my kids’ allowance. We have different requirements with respect to our kids allowance money, but one of them is that they save 50%, which gets invested in the custodial accounts once it is accumulated to a substantial amount.
The kids’ custodial accounts were originally opened up with a well known financial planning and advisory services company. At the same time we opened up retirement accounts for us in order to do monthly contributions towards our retirement. Our first investment advisor was a nice guy. However, our investments were not doing all that great. We were getting an average 3 - 4 % return each year. I knew that things were not great, but we stayed with him. Periodically I compared our return to the advisor fees, and they were reasonable.
I remember being at a party and we were talking about investments. Some guy, who I just met, was making fun of our measly 3 - 4% return. He said he was getting 8% return “with his eyes closed” on his investments. I remember being offended and thinking whatever a$$hole, I don’t have time to sit in front of my computer and day trade, or spend hours each day analyzing stocks or listening to the market news. I have better things to do with my life.
In my own head I was justifying our investment decisions by thinking that at least we are making some money on our investment. 3 - 4% return was better than leaving our money in a savings account or term deposits. I was also a busy mom of very young kids who had a demanding corporate career and no time to sit down and drink my coffee before it gets too cold. I had no time to educate myself more about investing or even do the legwork to get a better advisor. I was not happy with the situation we were in, but I was justifying it to make myself feel better. So, we did what most people do, we just stayed with our advisor and continued to invest every month in our retirement plan, and periodically invest into our kids’ custodial accounts.
Years went on like this, and one day our investment advisor called us and said that he was retiring, but he was transferring our account into the hands of a trusted colleague, another advisor. Let’s call him Joe. Joe seemed nice and knowledgeable. He promised a lot. He noticed that our portfolio was not performing well over the past several years, and he was committed to changing that. We were excited to be working with him. However, during the year that we worked with him, I would periodically review our statements and started noticing that the fees he was charging us were astronomical in comparison to our previous advisor. The impact of fees on our investment accounts was not as noticeable at first, because of the way they were shown on the monthly investment statements. My husband and I were investing each month and injecting money into our retirement accounts, and the advisor fees were deducted from these contributions and not as noticeable at first. Therefore, the effect of the fees was not as bothersome.
We went on like that for a bit, but then a couple of months in a row we only invested money into our retirement accounts, and did not make any contributions to our kids’ trust accounts, because the kids did not have enough saved up from their allowance. I noticed that even though we did not make a contribution to our kids' investment accounts, large fees were deducted from their accounts so that Joe could pay himself and his team. At first I was shocked, then livid. Then the mama bear came out. I was thinking, how dare he sell my kids’ investments, so he can pay himself?! Joe was not doing any work with respect to my kids accounts. They have been invested in the same mutual funds since the kids were born. Nothing changed over the years. Joe did not do any work in order to be compensated.
I am going to backtrack a little and explain how fees work in case you are new to investing, so that you can understand why I was outraged, as well as to make sure that you avoid the same issue from happening to you and your own children.
A mutual fund is an investment product that is composed of a mix of stocks, bonds and some other investment products. A professional investment manager chooses what investments go into that mutual fund. This professional investment manager is a different person from Joe, the investment advisor that I hired to help me with my investment portfolio. The professional investment manager also charges a management fee for their work, because they are managing the mutual fund and choosing what investment products that will be part of the mutual fund. The mutual fund fees can be as high as 2.5%. My kids were already paying those fees when we invested into those mutual funds. However, in addition to those fees, we were paying Joe, our investment advisor, whose job was to advise us which mutual funds or other investment products to invest in. Joe’s job was to advise us to buy or sell investment products in order to earn money on our investments and reach our goals based on our risk assessment.
However, when it came to my kids’ custodial accounts, we were not selling or buying any new investment products. My kids' accounts were invested in the same accounts as they were when they were first born. So why was Joe charging my kids money for managing their accounts when he did not do anything? He sold off some of their investments, so that he could pay himself! I could not believe it!
I think that most parents can agree with me that we can tolerate wrong when it is done to us, but when someone wrongs our kids, a mama or papa bear comes out.
That is what happened with us. For all these years, I tolerated low returns and management fees. I lied to myself and even justified the poor performance of our investment account by saying that I was too busy to do something about it. I patted myself on the back that at least we were investing and doing something to prepare for the future regardless of the fact that our returns were mediocre. Being a CPA, I knew that we were still doing more than many of my clients, friends or family.
It was time to stop lying to myself. I reviewed our statements and calculated the total annual fees that were charged by our new advisor. I was shocked to discover that the total amount we paid him in one year was equivalent to all the money I invested in my retirement for the whole year!!!
Let me clarify that for you, every month I would put away an amount into my investment account, and that amount went straight to our financial advisor to pay for his fees for managing my, my husband’s and the kids’ accounts! Therefore my money was not working for me to create the bright future I envisioned. My money was creating a bright future for my advisor.
Breaking up with our investment advisor was not easy despite my anger. It was definitely the right decision, but it was scary. I didn’t have the confidence to invest on my own behalf or on behalf of our kids. I was afraid that I was going to lose all the money that we worked hard for and put away each month. I used this free tool (https://learningtofi.com/mer-fee-calculator/) to calculate Joe’s fees over the next several decades if we stayed with him, and the results pushed me to fire him. I learned that if we stay with him over the next 25 years, we would pay him over $350,000 in fees based on his rates! I just could not justify that. That could be the money that we invest for our future.
Here is a short video that details how to use the calculator I mentioned above so that you can calculate your investment fees.
After calculating these fees, I started learning how to invest on my own, and that is when I stumbled upon ETF and index fund investing. I could not believe how easy it is to invest in ETFs and index funds, and that anyone can do it. I described that process in more detail in my other blog. Here is the link. I also teach it in my Wealthy Kids Investment Club, which is a family membership program that teaches parents and kids how to successfully invest. Check it out here.
I want to be clear. I am not suggesting that everyone should go out there and fire their investment advisor. What I am suggesting is that you evaluate whether you are getting a good return on investment. I am suggesting that you compare that return to how much you are paying your advisor. Use the tool I mentioned earlier to calculate how much you are going to pay in investment fees going forward if you stay with your advisor. Some investment advisors are amazing and totally worth the fees they charge, especially if you are a working parent, who does not have time to educate themselves and invest on your own behalf or on behalf of your children. However, I caution you to be selective when hiring advisors, and to spend a bit of time learning about investing in ETFs and index funds, then deciding if you want to invest on your own and save on fees or hire help.
I truly believe that investing in ETFs and index funds is extremely simple and that anyone can do it, including children. That is why I teach kids how to invest. Again, if you want more information about it, check out my blog that talks about it in more detail and also check out my Wealthy Kids Investment Club.