Cutting The Cord
We are waffling back and forth about getting rid of our satellite tv service in exchange for an antenna and a couple online entertainment services (such as Hulu, Amazon Prime, etc.). Sure, it’s an attractive idea to rid ourselves of a $125 monthly fee and 300+ channels of things we rarely seem to watch. Each time we pay the bill, the more we seem to reflect on how few channels or shows we really seem to care to watch. However, deleting the service seems to cause us both worry of making a permanent decision to isolate ourselves from the world in exchange for being ‘cord cutters”.
It’s silly. We are only talking about an entertainment system, right? The impact to our lives has very little potential of any harm. In addition, if we decide we don’t like our new decision, we can always revert back to the monthly all inclusive service. So, what’s the hesitation? While we remain somewhat fixated on the glory of being independent with all its perks of saving money, we don’t want to spend time trying to figure out a nebulous process.
Cutting the cord seems like such a simple thing to do; buy an antenna, DVR, and subscribe to a couple online providers and voilà, done. Sure, but what if our internet fails, do we miss our favorite shows? Are the online providers providing current episodes of our favorite shows? Will we miss BSU games? Why doesn't somebody make a step-by-step guide? I would happily pay $20, $50, or even $200 as a last time investment to be sure we are ok to go at it on our own.
Ok, of course this is all just a silly metaphor for a much bigger and important issue. Would you consider firing your investment professional? What are the benefits, drawbacks, and/or risks? Is there a guide to a process like this? What if the end result was you discovering whether you actually need or simply want professional investing help? Could this provide closure to the question of whether you should be paying your investment person or not?
Well, there is a guide. It’s called Flat Fee Financial planning. It’s a one-time solution to making a purposeful investment plan using a long term strategy. Then, there is a myriad of education to keep you out of the hands of the wolves. The end result; you’ll be knowledgable, capable, confident, and you will be saving substantial amounts of money. I don’t know anything about cord cutting, but I know a hell of a lot about cutting your broker loose from your money. Here is my method:
1.) Hire a financial advisor/planner for a flat fee. Get your planning done. Cover topics such as estate planning, insurance/risk mitigation, goal establishment, liquidity, savings rates, risk tolerance, account establishment and consideration etc. The advisor should also establish a strategy to help you get all this done. This includes a detailed investment plan with specifics on recommended holdings, time periods, etc. Lastly, the planner should provide a full education on how your plan works, how you should invest (and why), and what to do in case things change.
2.) Take control of your investments while having a coach on your side. Whether this is a newsletter with investment recommendations and commentaries (to cool your nerves), or this is your advisor retained to help you through the first year, this step is critical to help transfer the responsibility to you. Once you know you can stay on track, even when the market is sending bullets over your head, then you are ready for step 3.
3.) Fire your broker. Bask in the glory of being independent. Wallow in the extra dollars you are saving. Rest easier knowing you have confidence and knowledge.
That’s it. It’s really that simple.
Ok, so what are the potential risks and rewards? Let’s go through them:
First, a potential risk is you will discover that you are not interested or perhaps capable of doing your own investing. Ok, so this will help you better accept paying someone. At least you would have peace of mind knowing the relationship with a professional is needed, not just wanted. In addition, this process will put your current relationship on notice. Your current pro might just take notice to treat you a bit better and be more cognizant of your needs.
Second, a potential risk is you will destroy some of your investment values because you might do something stupid. Well, you’ve always had that risk. There was never a time when your broker would not take your instructions and do something stupid for you. You just never knew you’ve been in control all this time. Now, you simply need to focus on the long term aspects of your quest for control and focus on staying invested appropriately, no matter how the markets are doing.
Third, a potential reward is you will save lots of money over the long run and be better suited to make your future better. If you pay 1% per year to your broker either via fees, commissions, or internal expenses on an investment, the effects on long term money are substantial. $100,000 growing at 7% vs. 6% per year has a 30-year accumulated value of $761,225 versus $574,349 respectively. So, you must ask yourself this; is my investment professional worth $186,876 over 30 years? If cutting the expense loose means you might have to spend some time learning and doing, is it worth it? I think most people would say yes.
Further down the expense road is the reality that your current method of investing is likely costing you more than 3% per year. Check out this article: http://money.usnews.com/money/blogs/the-smarter-mutual-fund-investor/2015/03/04/the-mutual-fund-fees-we-dont-talk-about
What’s the impact? Using the same scenario as above, but instead you are charged 3% per year, you would have an ending account value of $324,340 after paying out more than $436,885 in extra fees. Yikes!
So, let’s think about what your time is worth over the next year? Is it worth missing over $400,000 in gains over the next 30 years? Perhaps a bit of planning, training, and education might be worth it huh? What the worst case scenario? If the worst case is you go back to doing what you are currently doing but have peace of mind knowing it is the best option for you, then is that so bad? My suggestion is you follow my step-by-step approach above to cutting your investment professional loose.
As a final note; I believe the investment industry is preparing to see people leave their traditional investment professional relationships anyhow. Many firms, such as mine, are adapting to these pressures by creating new offerings of value to their current and prospective clients. For example, my firm now offers a 1 year, flat rate “Ascension Planning” process where we focus on 3 main points; Purpose, Strategy, and Education. The benefit to the investor is the empowerment to either fire their investment professional with confidence, or to hire one knowing how to manage the relationship and costs. Most good advisory firms are willing to take a client through a process like this.