How to not get screwed by your financial advisor

A lot of my friends are telling me that they’ve recently gone to see a financial advisor. They’ve all followed the same path: they got married, had a kid, bought a house then went to a financial advisor to help them sort out their money.

I’m doing everything in reverse; I’m my own financial advisor and I bought a condo a few years ago, but no kid and no marriage. One of my guy friends told me I’m like a guy.

I’m feeling like I need to be a little more “settled” before I “settle down.”  That probably makes sense to guys, but not girls, who are reading my blog. I’m still traveling a lot for work , and play, and I have ideas in my head about where I want to be with my career within the next few years, so I don’t feel settled with all this going on.

When my guy friends tell me that mumbo jumbo I tell them they’re crazy and it doesn’t work that way – girls don’t care if guys are settled or not; if a girl wants to be with a guy she doesn’t care if he feels settled, she just wants to be with him

I usually dish out all sorts of advice and don’t apply it to my own life. At least I’m self aware about all this.


My girl friends with kids are a lot more settled than I am; some of them felt their clock ticking I’m sure. I hope my clock starts to tick –  I’m waiting, patiently.

Even though I’m not a mom I do love to troll around all the mom blogs, a lot. There’s a whole slew of them and these moms are WILD. I’m still waiting for Joe Francis to make a Moms Gone Wild video of Moms at bachelorette parties of their single friends. I’ve witnessed this, they’re crazy.

I’ve been reading a hilarious mom blog called Mommy Shorts - see, I’m serious about the trolling. I just learned about the the “Fancy Undergarment Trajectory Chart” on Mommy Shorts. Here it is:

I think something happens to your brain when you’re a mom; aside from not wanting to wear fancy undergarments, I’ve noticed they’ve all turned into “Mama Bears.”

Most of the time my friends behave like their usual chill selves, until someone says something weird about their kid, and then they go ape shit. It’s a mother’s instinct to want to punch anyone in the face who says anything remotely derogatory about her kid. I’m pretty sure I’ve almost been punched a few times.

I think this is why they’re all interested in going to see a financial advisor now; they’re now responsible for another grommet person so they’re not messing around when it comes to protecting their family financially.

It’s music to my ears when my friends tell me they’re going to see a financial advisor. I only wish they would pay more attention to the fees they’re paying their advisor because a lot of advisors are charging my friends ridiculous fees and they don’t even realize it.


You have 2 options: A fee -“only” advisor or a fee “based” advisor.

I like fee-only financial advisors because all you do is pay the advisor a flat fee, which could be an annual, quarterly or hourly fee, a project based fee, a retainer fee where you have scheduled meetings throughout the year, or a fee based on the percent of the assets they’re helping you with.

Fee based advisors make more money off of you because they can charge you a percent of the assets they’re managing for you, and then they can also charge you additional fees they get in the form of commissions for recommending certain investments to you. Fee-only advisors don’t get paid commissions.

You absolutely have the right to know how the advisor is paid before you make a commitment to them, so even after they talk about their fees with you, ask them for a copy of their Form ADV or look it up online to make sure you have it in writing.


Here’s a perfect example: there’s always all sorts of snazzy talk in The Wall Street Journal about different funds you can invest in. So yesterday morning when I was reading the paper while sipping my coffee and digesting the news that John Edwards is a slutty crook, I clicked on a link so I could check out the fees on one of the mutual funds they mentioned.

This is what I saw:

The above mutual fund charges a 1.31% annual “expense ratio,” which is basically just the fee to keep the fund up and running, and then an additional one time 5.0% sales fee for you to buy the damn fund!

A  “front-end load,” like 5.0%, is the sales fee, and you should never ever pay front-end or back-end loads. And yes, most of the time you can get access to these types of funds without paying the sales fee, you just have to invest directly without your advisor doing the transaction for you.

By investing in mutual funds, like the one above, you’re already setting a pretty high hurdle rate during the first year of your investment because the fund has gotta deliver a return bigger than 6.3% (1.31 + 5.0%) in order for the investment to even be worth it to you.

I invest in index funds and pay about 0.20% on average for these funds. I purposely invest in cheap funds because they deliver above average performance.

The math is simple: index funds deliver above average performance for me because I’m not getting hammered with a ridiculously high fee out of the gates. Lower cost = more money in my pocket.

I’m really not *opposed* to fee based advisors, I’d just rather strap a donkey to my back and run the San Francisco marathon while wearing shorts that chafe the insides of my legs for five hours than pay unnecessary fees, and fee based advisors tend to charge these extra fees because that’s how they get paid their commissions.

To put it in perspective for you, if you invested $10,000 in the above mutual fund that charges a 6.3% fee in the first year, you’d make a whopping $25.90 in profit if the fund delivered a 7% return. I’m pretty sure you can’t even go to the movies for $25 bucks anymore.

If I invested in an index fund that charges 0.20% in the first year, I’d make $678.60 if the fund delivered a 7% return.

These are the 2 things that will suck money out of your pocket:

1) A high “expense ratio” that’s over 0.75%. This comes with investing in a mutual fund instead of an index fund


2)  Any sort of sales fee, or “load”

So if you’re seeing a fee based advisor don’t be a wuss, ask them how they’re paid an how many of their mutual fund recommendations usually come with loads. Seriously, if someone was making fun of your kid because she’s not crawling yet, you know you’d slap that person silly, so why wouldn’t you protect your money like that? Your money is going to support your kid any way you look at it, so don’t you want to make sure you’re spending it wisely?

When we’re in our 20’s and 30’s and slowly building our wealth for our families, the best way for us to do it is to invest in funds that have a low expense ratio and to stay away from paying front-end or back- end loads, which are just sales fees. If you’re going to see a fee-only advisor or a fee based advisor, make sure you understand all the fees you’re paying.


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This post was written by Kathryn who has written 18 posts on KATHRYN'S CONVERSATIONS.

7 Responses to “How to not get screwed by your financial advisor”

  1. Sara June 4, 2011 at 7:20 am #

    My favorite post to date – maybe because I’m a Mama Bear myself.
    My favorite line: “My girlfriends with kids are a lot more settled than I am; some of them felt their clock ticking I’m sure. I hope my clock starts to tick – I’m waiting, patiently.”
    You do see the irony of that statement right??

    Am kinda surprised front load fees are still in existence after the Wall Street crackdown – but we have to finance their vineyard vines collection somehow right?
    Let me know when you launch your hedge fund – I want the friends and family fee schedule please.

  2. Epags June 4, 2011 at 10:15 am #

    Great post KC. As you know I’m a bit “weird” myself and have been over planning and “settling into” life stages my entire existence. We recently met with a fantastic fee only planner who was a fantastic person and gave us the insight we needed as we overplay our financial path :) . I found her on the Garrett site you sent me forever ago. If anyone needs a reco I’m happy to pass her info along!

    Cheers to fancie undies and financial plans haha


    • Megs June 5, 2011 at 12:23 am #

      Epags, not sure if you’re in the Santa Monica area or not, but if so, please do pass along the info of your new, fantastic, fee-only planner. Or, if you’re elsewhere, maybe she can recommend someone for me in Santa Monica?

      Cico, umm, sorry to call you out, but are you spying on me lately? Your posts are so on point to the current goings-on in my life, it’s getting ridiculous (and no, it’s not just because we’re the same age, live in the same city and are both doing the reverse path, ha). I seriously just talked to a financial advisor yesterday! And I definitely called him out on the fees and kept asking him to explain more, but I understand the fee situation more clearly now that I’ve read your post. Still, a brief chat with you might do me some further wonders as I’m trying to make a decision of where/how to invest my savings. Do you accept pseudo-advisor fees in the form of coffee/wine/beer?


      • Kathryn June 6, 2011 at 5:09 am #

        Megs! So glad this was useful! I’m down in Venezuela right now, would love to trade drinks for advisor insights when I’m back. Will call.

  3. Brian June 6, 2011 at 7:50 am #

    Hi Kathryn,

    I found your explanation extremely helpful as someone trying to figure out how to invest for the first time. As I’ve looked at a few options, a couple of confusing terms came up – I was hoping you could help explain what they mean:

    1) What is the difference between an expense ratio “before reimbursement” and “after reimbursement”?

    2) What is a Lipper category expense?

    Thanks so much!

    • Kathryn June 8, 2011 at 7:12 am #

      Hi Brian,
      If you invest in mutual funds, the manager of the fund might reimburse certain expenses back to the fund, so then the fee you pay out of your pocket is lower.
      So say the ‘before reimbursement fee’ is 1%, if the manager of the fund reimbursed the mutual fund that you invest in say .25%, you would only pay an expense ratio of .75%. 

      Lipper category ‘expense’ is one of the ways lipper ranks funds, ie by the fund’s expense. So if a fund ranked high in the ‘expense category’ it means the fund has a good rating relative to peers, meaning, low expenses. This one is a bit counter intuitive since high rank means low expense. Hope this helps. Kathryn

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