After 6 years with our financial advisor I decided to close our accounts and move the money to Vanguard. This is a decision I’ve been mulling over for well over a year and I finally decided now was the time.
When we started investing right out of college our advisor recommended American Funds (you can probably guess which firm we were with just based on this). Our investments consisted entirely of Class A shares and we paid a load which is an up-front sales charge on all of the mutual funds we invested in. With mutual funds and loads, as your investment grows and you contribute more money, that load goes down as you hit certain dollar amounts known as breakpoints. I always viewed this as favorable because we didn’t pay our advisor anything in addition to the mutual fund load (they get paid essentially through legal kickbacks from the mutual fund company) so it seemed like a good deal. If we planned on investing long term (which we still do) those loads would eventually become negligible as our investments grew. However, as my knowledge grew along with our investments, I began to see that these mutual funds were still expensive to invest in if only due to the higher than average expense ratios when compared to index mutual funds.
Then in 2016 the company switched to an asset-based fee structure. With this format, you purchase share classes (like I or F instead of A) that do not carry a load. Then you pay your advisor a certain percentage of your total assets to manage your account. The justification behind this change (as a result of some new government regulations) is that your advisor is able to act with a true “fiduciary standard” (i.e. putting your best interest first) by not recommending only funds with a high front load sales charge and earning a kickback or commission. The problem I had with situation is that the fee was 1.35%!!!!!!! And the funds still had higher than average expense ratios.
Until about 6 weeks ago I had always believed you could beat the returns of the stock market. But with an asset-based fee structure, your investments have to earn the return of the market PLUS some to account for the fees you are paying your advisor and the mutual fund. The funds we were invested in averaged an expense ratio of 0.6%. That means our investments had to return 10% (the market) + 1.35% (advisor fee) + 0.6% (mutual fund operating expenses) to total 11.95%. Seems totally doable, right? I thought so to. Until I read a book that changed my investing strategy and likely saved me hundreds of thousands of dollars in future returns. What book you ask? This one. In The Little Book of Common Sense Investing, John Bogle explains how you might be able to earn that 11.95% once, twice, heck maybe even 3 or 4 times. But over 20-30 years? Well read the book for yourself and find out just how unlikely it is. Not only will you not beat the market, you’ll likely lag behind.
A year ago I went into my advisor’s office and told him my plan to switch my accounts to Vanguard. His response….”Ouch.” I went back in a couple weeks later and he showed me convincing evidence of why actively managed mutual funds are superior to passive index fund investing. And at the time it made sense, so I didn’t make the change. Fast forward a year a one significant book later and it’s off to Vanguard we go! Hello index funds and market returns!