When I left my full-time job after 13 years to become self-employed, I possessed a sizable 401k with my former employer. As a money coach, I knew transferring my 401k to an IRA was a smart move. This way, my financial planner, who knew the ins and outs of my money situation, could proactively manage my investments. Since my husband changed jobs nine months earlier, we had multiple six-figures between our two accounts.
I knew “Brad,” the financial advisor I selected, from my local chamber of commerce. I considered him a friend and he seemed to be a good, solid guy and a smart money manager. My husband went along with my choice of Brad as our advisor since I handle the majority of the finances in our household.
Three years after our rollovers transferred to Brad’s care, I read the thought-provoking book by Tony Robbins, “Money Master the Game: 7 Simple Steps to Financial Freedom.” Robbins enlightened me on the ways financial planners were paid and warned of the hidden fees in many mutual funds. I decided to investigate on my own and researched the investments in our IRAs to see how they stacked up. I felt confident my buddy Brad had surely put our money in low-cost funds with above-average track records.
To my dismay, I realized that over half the funds Brad had selected were dismal performers. Many of these underperforming funds were also charging higher than average fees for their fund category. I also discovered that all of the mutual funds were managed by the company that employed Brad. He was likely getting extra compensation by selling me his company’s funds versus the best-performing ones in each category.
Using the fee analyzer tool at Personal Capital, I almost fainted when I found out that these above-average fees could cost my husband and me $250,000 over the next 20 years. I met with a different financial advisor who reviewed our investments and confirmed my suspicions. We were definitely overpaying for underperforming funds in our IRAs, which would have a significant impact on our balance at retirement if it wasn’t rectified.
I felt betrayed by Brad, who I trusted to look out for my family’s best interests. I was embarrassed that I allowed this to happen, being a money coach myself. I felt like I let my husband down because he trusted me to handle this part of our finances.
I undertook the painful process of breaking up with my former advisor and selecting a new one, a fee-only fiduciary advisor. My husband and I interviewed several people and decided together who would handle our investments.
Here are the lessons I learned from this situation.
Know Enough to Be Dangerous
What do I mean by that? You don’t need to be a stock market whiz; however, you should educate yourself on the basics of retirement planning and the investments within your 401k or IRA accounts. If your advisor becomes defensive when you ask questions, that’s a red flag.
Seek a Fee-Only Fiduciary Advisor
This type of advisor receives an annual commission, a small percentage of your account balance. He or she does not receive incentives from any mutual fund companies, so they are more likely to select the best investments for you to grow your balance as high as possible. The higher your IRA balance, the higher their commission.
Involve Your Spouse (or Significant Other) in the Financial Decision-Making Process
My husband did not meet Brad until we were already transferring our accounts over. He later confessed that he never really had full confidence in him as our advisor. Now, we meet with our current, fee-only advisor annually, and always together.
Yes, the world of investing and retirement can be confusing and complex, but don’t let that stop you from holding your financial advisor accountable. Ask him or her how they are paid to manage your account. If you’re not satisfied with the answers, begin the search for a fee-only fiduciary advisor.
Click to read more about how one woman’s fear held her back from good investments.