Is Your Advisor In Your Pocket?

Pete Clemson  |

Image Source: Evati, Inc.

Two years ago, my mom offered to pay my airfare to visit her. She gave me the number of her travel agent and, without thinking, I dialed it. After 25 minutes on the phone, the travel agent informed me that there would be an extra $25 charge for the “service” they’d just provided. As I hung up, I realized that if I had booked the trip with one of the travel apps on my phone I would have saved myself 20 minutes and avoided a ridiculous service fee.

A few months later, I had a similar interaction with a financial advisor. I was trying to understand why they were using an actively managed mutual fund that charged a 1% management fee on top of the fee the advisor was already charging me. The financial advisor didn’t have a very good answer to that question, wasting my time again and making it clear that there must be a better way to manage my money.

According to an S&P report, over the past 15 years only about 1 of every 20 actively managed mutual funds beat the benchmarks they were tracking against (92.2% of large cap funds fell short, 95.4% of mid-cap funds missed the mark, and 93.2% of small cap funds under-performed relative to their benchmarks). While those active funds don’t usually beat (or even match) their benchmarks, they are still likely to charge you significantly more in management fees.

A growing body of research supports a simple and effective (if boring) strategy for maximizing the growth of your portfolio: Use highly efficient funds that are designed to mirror the market benchmarks. Index ETFs (or exchange traded funds) were designed with this purpose specifically in mind. While that may not be the “sexiest” investment strategy, many of the new digital investment advisors have fine-tuned this process and incorporated a wide range of value-added services at cost-effective rates.

In addition to avoiding high fees, investing in passive ETFs that track broad-based benchmarks can help you defer a significant amount of taxes. Deferring your tax bill allows you to further tap into the power of compounding. A recent article in the Inspire by Evati blog helps visualize how compounding really is your rocket ship to financial freedom. Deferring capital gains taxes allows you to compound your returns on the amounts you otherwise would have paid to the IRS.

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Here is an example to illustrate. In this chart, the purple bars show the extra growth you would achieve by avoiding the fees you would typically be charged by selecting a group of actively managed mutual funds and the capital gain taxes triggered by the average fund turnover rates.

Click to enlarge

Image Source: Evati, Inc.

The analysis is more fully explained in a recent article found at Inspire By Evati that shows how to build a million dollar portfolio from scratch by focusing on three primary ideas:

  • contribute regularly (and you can start with very small amounts);
  • increase your contributions as you receive increases in your income; and
  • take advantage of advisory services that are efficient with respect to both taxes and fees.

Simply put: start now, keep going, and avoid paying fees and taxes whenever possible. These are the basic building blocks for developing your own personal financial fitness program.

The long-term effects of both compounding and avoiding unnecessary costs and taxes are powerful. A 30-year-old who starts today by investing $2,000 and increases their contribution each time they receive a raise really can chart a course to having a $1 million portfolio by the time they retire. A significant piece of that growth comes simply from deferring taxes and avoiding the fees typically charged by traditional investment advisors and actively managed funds. In that example, the tax and fee savings add up to over $235,000. That type of money really makes a difference!

However, the answer isn’t just about the mechanics and the numbers. We all get busy. Having an advisor that meets you on your schedule (whether that’s 2 am on a Tuesday or 3 pm on a Sunday) can make all the difference. If you are like me and want to deal with things on your time and not have to think about them again until you’re ready, digital money management services actually provide far better service at a significantly lower cost. The list of advantages is long and keeps growing every time another innovative feature is added:

  • Digital advisors are available 24/7 to show you your real time balances, how you are tracking to your goals, or to work with you to set up a new goal (like that once-in-a-lifetime trip to Machu Picchu).
  • They always remember the information you give them. I recently received a letter (by snail mail no less!) from an advisor asking me to update my information. The job my advisor thought I had was four employers out of date.
  • Digital advisors have the patience of a saint: they are always waiting for you, ready to pick up just where you left off, and are always ready to accept your updates.
  • Some of the better services allow you to tailor exactly how often they send notifications and to select the reasons to be notified.
  • Additionally, a digital advisor that is easily accessible on your phone has an ever-growing tool box to show you how likely it is that you will hit your goals and to give you some cool new ways to start saving like “Rounding Up Your Purchase” programs.

Click to enlarge

Image Source: Evati, Inc.

In addition to being simple to understand and use, most of these modern digital advisors can get you started in just a few minutes. With a few taps on your phone, you can set and forget your savings programs until the next time you get a raise, and you can feel confident that your portfolio is constantly being monitored and rebalanced according to your goals. Of course, if you want to schedule another meeting on your calendar, you can also choose to go for some old school service with a traditional advisor. And, if you really like that kind of hands-on experience between the hours of 9 am and 5 pm, I have the number of a travel agent I think you’ll love!

The author of this article is also the CEO and a Co-Founder of the digital advisory firm Evati Advisory, LLC. To learn more about ways to simplify your investing habits and start on your path to financial fitness check out more posts at Inspire by Evati. )

DISCLOSURE: The author is the CEO and Co-Founder of the Digital Advisory firm Evati Advisory LLC.

The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:

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