Lizzy and Lissa break down the hidden costs – financial and otherwise – of financial advisors. Working with a financial advisor can be a great way to advance your financial goals but they also come with fees. In this episode, Lizzy and Lissa share their experiences and thoughts on working with financial professionals.
Lizzy and Lissa break down the hidden costs – financial and otherwise – of financial advisors. Working with a financial advisor can be a great way to advance your financial goals but they also come with fees. In this episode, Lizzy and Lissa share their experiences and thoughts on working with financial professionals.
Please keep in mind that this episode is informational and educational in nature and should not be misconstrued as financial advice. We are sharing our experiences to help educate, but you should consult a professional for guidance as needed.
Main Topics
00:00 Introduction
01:34 Running The Numbers Segment
07:20 Types of Financial Advisors
15:28 Our Personal Experiences
26:32 What Is Wealth Management?
26:50 Big Banks vs. Independent Firms
29:27 Navigating Financial Advisory Services
38:39 Benefits of Financial Advisors
44:55 Diversity in the Financial Industry
47:55 20 Cents Segment
References for Statistics
https://smartasset.com/advisor-resources/how-many-financial-advisors-in-the-us
https://www.sec.gov/newsroom/press-releases/2024-57
https://news.northwesternmutual.com/planning-and-progress-study-2023
Lissa: According to Northwestern Mutual, 37% of Americans work with a financial advisor. Are you in that 37%?
Lizzy: I am not.
Lissa: No.
Lizzy: Which is shocking considering my experience in this industry.
Lissa: You worked in finance for a really long time.
Lizzy: So today we're going to dig into why and why not. Are financial advisors worth it? Let's talk about it.
Lissa: Welcome to Net Net with Lizzy and Lissa, where we analyze hidden costs and empower you to make your own damn decisions in life. Each episode covers a different facet of life, and at the end of each episode, we each give our takes on whether something is net positive or net negative.
Lizzy: I'm Lizzy, a strategist and consultant with over 17 years of experience in finance and investing.
Lissa: And I'm Lissa, a personal finance expert and accredited financial counselor. We're best friends who talk about money.
Lizzy: And everything else.
Lissa: Before we get started, we want to point out that we are talking about financial advisors, investing and the financial industry in this episode. However, this episode is for informational and educational purposes and should not be misconstrued as financial advice. We are sharing our experiences to help educate, but you should consult a professional for guidance as needed.
Lizzy: So first up, running the numbers on financial advisors.
Lissa: According to SmartAsset, around 70% of financial advisors in the United States are men.
Lizzy: No surprise here. Having worked in this industry, that even seems low.
Lissa: It seems low, right? I thought it was 90%.
Lizzy: Well, to double down on that, in the same study it was reported that 77% of financial advisors are white.
Lissa: That sounds about right. Every advertisement I see about financial advisors. According to the SEC, the Securities Exchange Commission, there are more than 15,000 registered investment advisors managing approximately $128 trillion here in the United States.
Lizzy: According to Northwestern Mutual's 2023 Planning & Progress Study, 84% of wealthy people say they have a long-term financial plan that factors for up-and-down economic cycles compared to only 52% of the general population.
Lissa: I like that general population and wealthier like the two. Two categories or you just general pop, gen pop. Well, we know that there are more to life than numbers and statistics, so let's talk about it.
Lizzy: Let's do it. So I feel like there's a lot of education we need to do in this episode to make sure that we're all talking about the same thing, especially for any listeners who are not familiar with the financial industry. So what is a financial advisor? That terminology is broadly used and can encompass a lot of different things. What is your experience? How do you think about what a financial advisor is?
Lissa: Nowadays, I know a lot more, and we'll get into it later in the episode of all the different times, I was confused about it because it's very normal to be confused about it. So nowadays I have this definition of financial advice as being professional guidance when someone is telling you specifically what to do with your money, right? Buy an asset, buy an insurance policy, buy the financial product, or move your money into this thing or that thing.
So that's financial advice. What I believe a financial advisor to be is the person who gets paid to tell you what to do or to do it for you on your behalf. And financial advice is regulated. There are regulatory bodies that regulate what advisors can and can't do. So that's the most broad definition I have. What about you?
Lizzy: It's really interesting and even being in this industry, it is often debated and there's a lot of disagreement. People will throw out the term advisor and you have to get really, really specific. I looked into it a little bit more and legally that can encompass everything from financial planners, investment advisors, registered reps with broker dealers, insurance agents, lawyers.
So there's a broad range that can legally use the term advisor and you'll see that. My experience however, is really referring to financial advisor or thinking of them as the investment advisor. That's who I've worked with being in the investment space for so long. And that also falls into a few different categories and they're regulated differently.
Lissa: And so by investment advisor, what we're talking about is someone who either tells you what to invest your money in or they are managing your money for you. It doesn't have to be all your money, but if you're like, "All right, I got this extra $5,000 or $10,000." Or more or whatever, it can be any number. And someone is saying, "All right, I'll manage it for you and I'm going to invest it in these things and I'm going to report to you every quarter or whatever and tell you how it's doing in those investments."
Lizzy: Sometimes there's an advisor who offers those specific services and things like tax planning or estate planning or looking at their larger, more-
Lissa: Well, I could speak on that.
Lizzy: Holistic plan and some don't. So go for it.
Lissa: So I am sitting for an exam in a couple of months for the CFP, certified financial planner. It is a certification that is run by the CFP board, so certified financial planner board. So this is not like a government agency or anything, but from what I've learned there is the definition of financial planner is actually much more comprehensive than just financial advice. So financial advice and a financial advisor can tell you, "Hey, you should buy this or put your money in a Roth IRA," or something like that.
It's an individual piece of advice. So financial planners technically give advice, but when you go to work with a financial planner who has that specific mark, the CFP, what they have to do in order to give you advice in a planning capacity. So you can go to them for just one-off advice, right?
Lizzy: Sure.
Lissa: But if you're going to them and you're like, "I want a full financial plan." And they're acting as your financial planner, they can't give you advice until they've looked at your entire financial situation. So they can't tell you to put your money in, what did I say? A Roth IRA or they can't tell you to buy a life insurance policy until they've looked at everything because that would be giving blanket recommendations. Not everyone should have that kind of retirement account, and not everyone should have this kind of insurance policy.
Lizzy: So there's a legal and regulatory responsibility to do certain things depending on what kind of financial advisor you are.
Lissa: Which leads to what a fiduciary is.
Lizzy: So in terms of the investment advisor, which is kind of my experience with it, where this is someone who's helping you pick investment products. This generally falls into three different categories of the type of person you'll be working with and the type of firm. So the first is called a wirehouse, and that is a full-service brokerage firm. So they have every manner of advisory services for your investments, and they are affiliated with a large bank. So there are four big ones, Morgan Stanley, Bank of America, UBS and Wells Fargo. The second is called an independent broker dealer. And so they also are a full-service brokerage firm, but they are unaffiliated with the bank so they're independent.
And both of these two types of advisors tend to fall into the regulatory standard of what is called suitability. That means that they have to pick products that are suitable for you, but they don't have that same level of rigor and standard, what's called fiduciary duty, to look at your overall financial and holistic wellbeing.
Lissa: To act in your best interest.
Lizzy: To act in your best interest.
Lissa: So suitability means, "Oh yeah, this whatever financial product can be suitable for your situation." That's one level of rigor. The next is where it's like, "Oh, but this is best for you and this is going to be the best thing in your financial situation in. My opinion a lot of it is subjective, but it is like I can't just try to tell everyone to get this financial product because you're just a salesman at that point.
Lizzy: Exactly. And so that's the big distinction. So there's the suitability and then there's a fiduciary, having fiduciary duty, and you typically see that with an RIA or registered investment advisor. There's a little bit of crossover. Someone can be dually registered, so they can be both. But the big thing, as you mentioned, is how they get paid. So if you are not a fiduciary, it's called a commission-based model. So basically for every investment that I am recommending you in or putting in your portfolio, as your advisor, I get a commission on that.
That's not necessarily bad on the surface because of course they're doing a job, they should be incentivized. However, what that does is it actually incentivizes them to change your portfolio all the time. The more they swap out your products, the more they get paid.
Lissa: So it's kind of almost a built-in conflict of interest.
Lizzy: Exactly.
Lissa: Now that doesn't necessarily mean it's the end of the world and they're just totally trying to screw you over. It just means that there's a built-in conflict of interest. That the more that they switch out what you have in your portfolio, the more they can potentially get a little cut of it.
Lizzy: Exactly. And so that model has kind of declined somewhat in popularity and prominence because of that. Because they are more incentivized to sell you higher-load products. And some of these advisors will be less consultative, it'll be less advice and a little bit more selling. The difference is on the fiduciary side. For a registered investment advisor, they're a fee-based advisor.
So they take a percentage of the total assets under management. So whether you have a hundred thousand dollars that they're managing, a million, 10 million, they will take a flat fee per year. It's often around 1%. It varies by the firm, and it often varies by the total number of assets. So the more assets you have, the smaller percentage.
Lissa: So if you've ever Googled and looked up a financial advisor and you're curious because you want them to help you invest and you see that they charge 1% of AUM. AUM is called assets under management, and so they get a percentage of what they're managing for you. That doesn't mean you technically have to come out of pocket every year or quarter to pay that. It comes out of your portfolio.
Lizzy: And the good thing about that in a way is that your interests are aligned. So the more they grow your money, the more they get paid. And so that is one of the things that you might want to look for and consider. It doesn't mean that's the only way to go, but that's why they're held to a higher standard of care and in some situations are compensated more for that.
Lissa: So let's pause real quick. We've thrown out a lot of terms. You don't have to worry, you don't have to know all of these, at least not all at once. It is a very, very complicated space. So don't get discouraged about investing in all those types of things if you've heard these things and they still don't make sense to you. Because if you don't fully understand what a financial asset is, like a stock or a fund, it's still not going to make sense what these people are doing for you. What are they actually doing?
Lizzy: Exactly. I think it's just important if this is something you want to consider to be aware that these are differences so that you might know what to ask. How are you getting paid? What is your responsibility to me as your client? These are good things because the average person doesn't necessarily know that. And some people I think may skew one way or the other, having more distrust or why would I pay someone to manage my money? And then others might blindly trust.
Lissa: So to kind of summarize, when we're talking about financial advisor, a lot of different people can call themselves a financial advisor. Someone who sells insurance can call themselves that. What Liz is referring to because she's been in the investment world for so long, is majority of the time when we refer to financial advisors, we are kind of talking about investment advisors. But there are those nuances. There are people like financial planners that you can go to on other topics.
I want to figure out my, do I have enough insurance coverage? How am I going to pay for my kids' college education? How can we plan for that? So there are things like that that are loosely tied to investing because the, for example, the plan to retire, the plan to put your kids through school, a lot of times these involve investments.
Lizzy: Almost always.
Lissa: Almost always. Not all the...
Lizzy: And it's not a hard and fast rule because each of these kinds of abilities to provide a certain service, ability to sell insurance to a client, ability to sell annuities, ability to sell mutual funds, stocks. They're all regulated by different licenses. So the individual may have a wide range and have the ability to service you in a lot of different ways, or they may have fewer. So it does kind of depend.
Lissa: So in order for someone to manage your investments or take your money and sell you a financial product, they have to be licensed.
Lizzy: Yes.
Lissa: You'll see these listed as different series licenses. We're not going to define those all for you because they can get complicated.
Lizzy: There are many.
Lissa: You'll hear things like series seven, series 65, series 60.
Lizzy: 6, 63. As well as certifications. Lissa mentioned-
Lissa: Like the CFP. If it's tax specific, you might want to look for a CPA, which is a certified public accountant or an EA, an enrolled agent. There's different certifications and things. So it's not going to be straightforward at the beginning if you're just learning and looking for a financial advisor. It's going to take a little bit of digging to understand what does this person actually do and how are they going to help me with my money?
Lizzy: And some of that comes down to what do you want help with? Do you want help saying, "I am starting here and I want to get here." And everything that encompasses, that might require a more holistic approach. Versus, "I have X dollars to invest. How do I maximize it for my specific goals?"
Lissa: So let's get into some experience now that we've kind of laid the groundwork of what even are we talking about here, like financial advisors. Low-key my first real interaction with one was related to your ex.
Lizzy: I actually told this story kind of recently. This might come off shady, y'all, and I don't mean it as shady as it comes off. But there are a lot of firms, a lot of times they sell insurance, especially life insurance, and they will massively recruit young people, young grads with the promise of making lots of money and really they're multi-level marketing schemes. That doesn't mean that they can't have good products and can't help people, but they will kind of rapidly recruit lots of people. They'll get a few of their licenses to sell those kinds of products. And my gripe with it is that a lot of times those people aren't very experienced.
So they've passed their exams, but they don't necessarily have the years of experience that you might want them to have to make some of these recommendations. So my ex-husband when we were very young, went through this process with one of these organizations. He was always really interested in finance and he was a financial advisor very suddenly. The interesting thing about it is the whole point of it is you have to grow your book of business. You have to get out there and market to people. And he wasn't from here. I've mentioned on a previous episode, he grew up in Paris, so his network was my people.
And that's a really weird position to be in when he's like, "All right, I'm trying to do this professionally." And I'm like, "Oh fuck, you're just going to go sell to all my friends and family." I will never forget that day because it was the most uncomfortable moment. Lissa was just not having it. You agreed [inaudible 00:17:40] you like him anyway.
Lissa: I agreed to meet with him. So I met with him. I met with him for a consult where he could find a little bit about my financial goals or whatever and I was early twenties. I also did not understand what a financial goal was.
Lizzy: There was heavy skepticism, lots of it.
Lissa: I came into it, "What are you actually going to do for me?" He had a one-page document and it showed if you invest this much every month, it's like these TikToks you see nowadays. If you invest every month this amount of dollars, by the time you're 65, you're going to have a million dollars.
Lizzy: It's just a basic wealth compounding model, there's nothing wrong with that. Completely valid. That's a great thing.
Lissa: That's how you forecast what your investments will look like in the future. It's a real thing. But I was like, "I don't understand it. What's the catch? Explain it to me. Draw it on a chalkboard." I think it was chalkboards back then. We have whiteboards. Draw me on a whiteboard how this money's going to grow. I don't understand. It doesn't make sense and I have to commit because if I put $500 into an account every month and I miss one month because I can't make the payment. All of a sudden I lose out on the benefit. So it was an insurance policy, right?
Lizzy: And I actually still have one of those policies.
Lissa: You still have it.
Lizzy: So it was a very-
Lissa: A whole life.
Lizzy: Very, very specific type of life insurance policy that has an investment component. And so if you forfeit, you stop paying, you forfeit your policy, you lose a certain percent of the cash value that you've accrued, so it locks you in. There's other benefits of the actual life insurance policy itself, but you were 22, you didn't need a life insurance policy.
Lissa: I barely understand what these different policies are now that I'm doing my CFP, I barely understand them now. To a degree now I can do some of the calculations, but I needed to understand how it worked or what it was. I don't even remember him saying that. And this is no disrespect to him, it was just we were all young and didn't know any better and he was put in the position to sell something. He wasn't fully knowledgeable on selling. I was really pushing him and I was like,
Lizzy: It was like the worst sales meeting I've ever been a part of. I was right in the middle, my best friend and my husband.
Lissa: I was like, "Explain this to me."
Lizzy: I shouldn't have been there.
Lissa: Because who really understands insurance, right? You probably do.
Lizzy: But because of my experiences. Sure.
Lissa: Right.
Lizzy: So that was your first experience with a financial advisor. What happened next? Where'd you go from there?
Lissa: I did not consider getting any financial advice from an advisor for at least seven, eight years after that. It kind of pushed me away from even thinking about it. So there's two components to me. One, I was barely starting to make more money in my career. I was paycheck to paycheck for a very, very long time, started making more money in my mid-twenties, but still lived paycheck to paycheck because lifestyle creep. I kept increasing my expenses as my income increased. So I didn't actually have a ton of extra money regardless to invest or put into an insurance policy, nor did I know that that was a way to build wealth.
I just thought, "I have a 401k at work, I'm going to work until I retire at age 60 something." And that's what I thought you were supposed to do. Until years later I realized there are many different approaches and strategies to building wealth that aren't confined to one retirement account and that aren't confined to one 9 to 5 job. And that's kind of what led me eventually to now I have an advisor, but there were a couple other times where I talked to financial advisors and they confused me even more and I was like, "Nah, I'll just pass for now."
Lizzy: Sure. So what led you ultimately to work with an advisor?
Lissa: Actually, I kind of stumbled into it. I got bamboozled into it. I actually have two stories. One story, what Liz actually asked was how did I end up with a financial advisor? So I used to use the app, Personal Capital. It's not called Personal Capital anymore, it's called Empower. But Personal Capital was this app that you could sign up for a free account, you can connect all your bank accounts, your investment accounts to see it all in one dashboard. A nice little colorful dashboard with pretty graphs. And I liked it. I was like, "Cool." For the first time I understood what my net worth meant.
What is that number even? I didn't use to track that. Now I do. Your net worth is everything you own minus everything you owe. So it's a number, a dollar figure of basically how much financial power you have, how much wealth you have. So I liked that. So what happens when you use these free financial tools? There's nothing wrong with them, they're legit companies. But the second my net worth went to above six figures or something where I connected all my accounts, so they knew how much money I had, they were calling me and saying, "Set up your free consultation with an advisor."
So I ended up doing it and at that time I had some questions about rolling over funds from a 401k to an IRA. I had all these questions and I found it to be very helpful. The woman that they assigned me to initially, she was super cool. I don't want to say tricked me, but they convinced me to move some of my money to them to manage my investments for me. So they don't manage all of my portfolio, but they do manage my IRA and Roth IRA and a small individual brokerage account, which is a taxable brokerage account, so non-retirement account. So that's been for the past three, four years I have that.
They switched me to a different advisor six months ago. They're just like, "Oh, this woman is moving to another department and you're now with this guy." And I'm like, "Okay, I guess." So there's no real personal relationship with this person.
Lizzy: That's interesting on that point. Depending on the type of firm that you work with, sometimes you'll have that where it's a little more hands-off, especially with what's called a discount brokerage like TD Ameritrade or something like that, where technically you have a rep assigned to you, but you probably don't interact with them at all. However, if you do have a more hands-on relationship with your rep, if they were to move firms, you'll usually move with them. That's that kind of personal relationship and that trust. That's typically what you see in the industry.
Lissa: So that's that story of how I ended up with an advisor right now. I have a quick little funny story from this week. So last week I ended up getting a settlement check, which was a long time coming, maybe I'll talk about it in a future episode. We're talking a five-figure settlement. And so it was a pretty big check. I went to Chase Bank to deposit it and I figured it would take a couple of days to clear. It was this whole thing. It took a week to get it cleared and a hold removed from it for me to actually access the funds. But during that week, I was calling them every day to be like, "Can we clear this check?"
I was annoying them. I was just like, "You guys are a big bank. It's coming from a legit source. Why can't you just clear the funds?" It was this whole thing. You don't need to know that part of the story. So in these seven days, I was calling Chase all the time. I got a call on my phone that said, whatever, JP Morgan Chase. I'm like, "Ooh, they're calling me to tell me that my money's ready." I thought that. I was like, "Ooh, interesting." So I was like, "Who knows? It could be customer service returning my call because I had gotten heated at them."
Lizzy: You blew them up.
Lissa: I blew them up. So I was like, "Maybe it's customer service." No, it was a whole different branch. It was like a local branch. It was a guy that worked at Chase that was like, "Hey, I just wanted to introduce myself to you. I'm here with the private wealth management at Chase Bank."
Lizzy: She got bread now.
Lissa: So what happened is they saw money in my account. They're like, "Oh, she doesn't know what to do with it. We're going to come in so we can be her advisor." AKA manage the money for me and take an AUM fee.
Lizzy: And that's actually just side note, that's a good note is you'll often see wealth manager, wealth management, and that is kind of a synonym for financial advisor in that context.
Lissa: So what they do technically is not bad. You can have your investments managed if you don't want to manage them yourself. But maybe you can go into the difference between one of the big banks advisors versus an independent firm. I think you alluded to it earlier because the conflict of interest.
Lizzy: So big banks are generally going to only sell you products that are on their platform. So you are more limited. They have way more power because they're enormous. And so if you are with Morgan Stanley for example. So a real example, the firm that I was at several years ago, we had funds and the wirehouse that we had a relationship with was Morgan Stanley. So they were able to sell one of our funds on their platform to their advisors, but it was a specific version of it that had custom everything, custom fees, custom documents, custom marketing, because that's how they do it.
And they have enough power to command crazy requirements in terms of their product. So it can be a more streamlined process. The flip side of having all of those resources is they know what the hell they're doing. They have great technology, they have great reporting, is generally a very first class endeavor. It's not just some guy in his living room, but you can be more limited in what you have access to.
Lissa: So anyway, he called real quick in 30 seconds. I was like, "Oh, I can't talk right now. I'm in a meeting." I didn't have any meetings. And he's like, "Okay, I'll try you again in a couple of days." And then the day the check cleared and the hold was released, literally within 10 minutes he called again. He was like, "Do you have two minutes?" I was like, "Sure." And I was just curious to see what he'd say so that I could tell you guys on this episode.
So he went into his spiel of, "We offer all these services, we thank you for being a long-term client with us since 1999." Because I had a Washington Mutual account before Chase, I've been a long time customer of theirs. Sure, you guys have never called me in those 25 years until now.
Lizzy: What a five figure ticket.
Lissa: Not even six figures but five figures, all of a sudden I'm special to you. So then I let him do his thing and he's like, "We have these financial advisory services and we can help you figure out what to do with your money." And I was like, "Okay, sir. I actually have an advisor already." I just said I was a financial planner. I was like, "I do this so I don't need your guys' services." And so he knew real quick that I wasn't going to buy anything.
So we got off the phone. There's nothing... So this is going to happen. The more money you have, the more wealth you build, there's going to be more people coming to you. All of a sudden you're going to get all these postcards in the mail talking about real estate open houses.
Lizzy: And let's be clear, that's not necessarily a bad thing because we always see these stories of, pro athletes is what comes to mind or even lottery winners. You come up on a big check, you've never managed that amount of money before. How the hell are you going to know what to do with it? And so you have to have a lot of discernment in figuring out who to trust. And that's really challenging. But at the same time, at the most base level, you get a million bucks. You don't want to hold a million dollars in a savings account. Why not?
Lissa: Well, obviously one individual account or one bank and ownership type only allots you $250,000 of FDIC insurance per account. But even if money in a bank account is going to lose value due to inflation, so the more money you have, you got to start thinking about where you can not only even out what you're going to lose from inflation, so getting a small return on it, but even more than that, so you can grow your money.
Lizzy: So preservation of your money so that it doesn't lose value over time.
Lissa: Sorry, I can't think of the word.
Lizzy: I got you. Preserve your money because inflation, it averages historically three to 4%. As we've seen the past few years, it went crazy. Sometimes it's 8%, 10%. That means what you can buy with that money goes down if it's just sitting in a savings account. So that's first and foremost. And then ideally growing it, use your money to make more money.
Lissa: So in that scenario, if you're going to get a huge windfall of money, and for me, I got a windfall and I got people calling me all of a sudden. What we want to help you guys do is discern who is, I guess, legit or really in your best interest as opposed to someone trying to sell you something.
Lizzy: And if that is even appropriate for you. You don't have to use one. As I've mentioned, I don't use a financial advisor.
Lissa: Right, let's talk about that.
Lizzy: My experience is a little different. So I've been in this industry, fell into it when I was 18 years old.
Lissa: And when you say this industry, financial industry?
Lizzy: Financial industry.
Lissa: Investment.
Lizzy: Finance and investing, fell into it when I was 18 years old. And I did not come from a background that had any type of financial literacy whatsoever. I had no idea what any of this meant. So I learned a lot. And my first job was at a very small company. I was our third employee and I was there for 10 years. I wasn't even technically an employee for six years. I didn't have a 401k. I didn't have any retirement options. And I always felt like, "Okay, well that's something I will look into when I have money." And I spent so many years just getting by.
So it wasn't really until my late twenties when I went in-house at an investment firm that sold funds where I had a 401k, I now had a really meaningful salary and I had to start thinking about that. For my 401K, I use one of the kind of basic, I guess maybe technically an advisor, the options that they offer. And it was kind of a set it and forget it, but I still had this mindset of like, "Oh, I'm not there yet. When I get there, I will use an advisor." Eventually and when I say I didn't invest, I mean didn't even buy a stock, didn't even know how, which is crazy thinking, I work in this space, so don't ever feel bad about what you don't know.
Literally, I worked in the space for 12 years probably before I knew actually where do I sign up to go buy stocks. So eventually I rolled over my 401k when I left that company and I chose to use a robo-advisor at the time, I think I tend to skew very DIY. Not I think, I definitely tend to skew very DIY and it just felt easier. I don't like dealing with people. And so there are many of them out there. I rolled mine over into a Roth IRA and that has managed my money ever since. It's done well. And then I've since opened other accounts with that same company, just a general brokerage account and a high interest savings account.
Then I started my own business. So my wealth and my net worth was definitely climbing. And then I took a big dive to go off on my own and my financial situation changed. Where I'm at now and now I buy my own stocks and just kind of do a self-directed trade. But were I to get a big lump sum or as my wealth grows, it's something I will absolutely consider.
Lissa: So to clarify, if you kind of want to simplify it into three tiers, there is a financial advisor, basically you have some extra money, you're ready to invest. Maybe you have your emergency fund all tucked away in your bank accounts and you're ready to start investing to grow your wealth. Financial advisor, you're handing them your money, they're going to invest it for you and it'll hopefully grow, right? There's that level and then they're charging you an AUM fee.
Lizzy: And one note on that, just to be very specific, some advisors have discretion, which means that they invest on your behalf doing their fiduciary duty in your best interest, but they make the calls and then inform you of the calls that they make. Other advisors are non-discretionary so they have to get your approval on all the decisions they make. And that's a preference. If you want to be really in the loop and get to make the judgment, you can go for that.
Lissa: For example, some advisors like mine, if you want to invest only in ESG funds, which is environmental social governance. We're not going to get into what it is because there's a lot of debate on what it even means. But if, for example, you don't want to invest in any companies that manufacture guns, right? Hypothetically, some advisors will take that into consideration and you get final say yes or no or whatever. So financial advisors, working with one, there's so many different ways to.
But the gist is you have money to invest and they're going to help you invest it. Robo-advisor is that next tier that Liz mentioned. So there are a lot of companies out there now that are kind of run by tech. So there are algorithms that figure out what to invest your money in. So typically how they'll work is you open up an account, you move money into it, and you kind of fill out your preferences out, your goals.
Lizzy: Your risk tolerance, your goals.
Lissa: Your time horizon, when you are thinking you want this money, how aggressive you want to be. It is like a robot, right? There's not a real robot, but it gets invested for you. Boom, very set it and forget it. And then self-directed, Liz alluded to earlier, is when you're calling the shots, you open your own account somewhere. A lot of people start on a Robinhood or something like that.
Lizzy: That's right.
Lissa: And so there are different platforms, not just Robinhood, but there are so many investment platforms and places you can open a brokerage account where you can manage your own investments, but that would require you handpicking what you want to buy. You have obviously more flexibility of choosing things, but you don't actually do any analysis and you're kind of just going based on what you hear on Reddit or something. It's like, is it better? Could be more risky, could be not, right? So there's those different tiers. On the second tier of the robo-advisor, typically the assets under management fee is lower than what you would with a human advisor.
Lizzy: Definitely. It tends to go in correlation to how much hands-on effort is going into managing your portfolio.
Lissa: And then obviously if you manage your own, you're not paying anyone in assets under management fee because you are managing your own assets.
Lizzy: You might pay some very, very small fees on trading and that kind of thing.
Lissa: So I like explaining that to people when they ask me about investing because I don't think it's this world anymore where there's only one way to do it, where it's just like, "Oh, you need an advisor, you got this million dollar check and all of a sudden you need an advisor." Technically you don't as long as you know enough.
Lizzy: So let's talk about that. What are the costs and the benefits of using, let's say that top tier, that kind of full service brokerage where someone is hand-holding you through it?
Lissa: Pros is someone who has some form of training and education and if they have certifications, like I said, the CFP, there are other ones out there, but at least you know that they've gone through some kind of training, education. And a lot of those certifications also require ethics. So if they sign up and say that they have to act in your best interest, then they have to, otherwise they can get their certifications revoked. And fines.
Lizzy: Significant fines, jail time. These are not toothless regulations.
Lissa: So pros is you have a professional on your side. Help taking this work off of your back.
Lizzy: And a big piece of that is I think not knowing what you don't know. So these are people who are educated so they at the very least understand what to look for even, whereas I think someone just kind of jumping into it might not even know.
Lissa: Well, something that I hear all the time now on the internet with finfluencers and FinTok is you don't need an advisor just invest in this, diversify your portfolio, blah, blah, blah. I don't feel one way or the other. It really depends on the person. But how would you describe that for someone who is thinking, "Oh, I don't want to pay an advisor all these fees?"
Lizzy: Sure. I think it, just like anything, depends on your goals and your risk tolerance because most of the time I would say when people are referring to that, they're talking about stocks or equities is what the kind of broad category is called. And that's a really significant portion of a portfolio generally. But in terms of portfolio theory, investment theory, it's not all of your portfolio. Equities tend to be much more volatile overall. They tend to be higher risk, higher return. Then you have bonds, fixed income, which is more of that "safer, lower risk, but lower return." And when you're thinking of diversifying or a long-term portfolio, you typically want to have both.
And then the third category would be alternative investments, which is really where my expertise is. And this is where you get really creative and it can be things that... The big important thing is that they're uncorrelated to the stock market. So if the stock market crashes, they may not crash or they have varying levels of correlation. And the reason you want these different types of components is so that you're diversifying your risk. So if one big economic event happens, you don't lose everything. And I think not to say that no one diversifies when they do it for themselves, but I think fewer people.
Lissa: They probably diversify the different stocks and the companies they hold, but they might not diversify asset classes.
Lizzy: These are called asset classes. So I think you're more likely to see asset class diversification if you're working with an advisor or definitely with a robo-advisor. And I personally believe that's really important, especially to reach long-term goals. So here's a hypothetical example. You're trying to grow your portfolio for retirement. You've earned millions over 30 years and you are about to retire in a few years. And the timing just so happens that there is a big stock market crash when you are 60. You don't have enough time left to recoup what you've lost.
Your time horizon is really short now if you want to retire. And so that's why you tend to get less risky as time goes on. That's one of the reasons it's really important to diversify if you have a long-term goal. If you want short-term gains, like "I'm trying to get a new car or I'm trying to get some spending money."
Lissa: Flip some stocks.
Lizzy: Or just flip something, that's maybe a reason you would go all in on equities. And there's a big range in between.
Lissa: Major pro is the monitoring. If you're self-directing your investments and you're not paying attention to your portfolio getting out of balance because your strategy is going to depend on how much of what asset class you want to be in among other things. And so that's another benefit of working with someone with the biggest downside of working with an advisor is fees, cost.
Lizzy: The other thing I'll say on the monitoring point is there have been countless studies around investor behavior. No matter how rational people think they are when it comes to money, people are without a doubt irrational. And you may have heard the saying, buy low, sell high, which is when something crashes, that's when you want to buy more of it because it's cheaper. And then when it's skyrocketed and it's performing, that's when you sell because then you've made money. You realize those gains. Without a doubt, people do the opposite every time.
Lissa: I have, I've done the opposite.
Lizzy: I've done the opposite too. And because it's hard. You hear all this news, "It's crashing, it's plummeting, oh my God, flee to safety. I want to get out, I want to get out, I want my money where I can see it. I want cash." And the fact is that that is compounded by the millions and millions of people who do it. And that's not to say that advisors aren't human too and can't do the same thing, but they have more education around it.
They often have structure around them and models around them that kind of prevent falling into that gap. So that's kind of another element that I think the average person doesn't think about. When you are just trading stocks, you are subject to mass mind, right? Group think, that can definitely affect your results.
Lissa: Before we wrap, I wanted to touch on, because some of the statistics we started with at the beginning was how basically white men are the biggest piece of the financial advisory industry.
Lizzy: I got stories.
Lissa: Do you have a story?
Speaker 3: It's story time.
Lizzy: I've told this story before publicly. I was working at a firm and we were marketing two advisors, advisors were our clients. And then they sold our products to the end investor and we made this a video for our brand. I led the whole project and it was very aspirational and I was told by the executives that it needed more white people pictures because that is who their audience was, that advisors are white people. And that led to a very large HR investigation and me quitting that company.
But it's real. It is a real thing. And it was really frustrating in the moment because statistically there is validity to that. The problem was wealthy, white men telling me that with no issue with it. How about we change that? How about we speak to the people who don't fit into that mold and maybe try to proliferate their participation in this industry.
Lissa: Sure, that's probably true right now that white men are the most people who manage assets and are probably the people who have the most assets, but that perpetuates the cycle because if they're only marketing to more white men, then when will a woman see an ad about investing and pay attention to it and say, "Oh, that applies to me too. I should do that." Everyone's just going to think it's not for them. You thought that? I thought that. Like, "Oh, I could do that later. It's..."
Lizzy: Not to mention even just from a marketing standpoint, white men are used to seeing themselves represented. God forbid you show other people and get them feeling represented.
Lissa: Well, that's why I'm glad we did this episode because like I said earlier, there's a lot of terminology, jargon. Hopefully we didn't confuse you even more and that there's actually something you took away from it. But don't shy away from the finance world. Investing, building wealth is possible. There might be more steps to navigate to get there, but there are ways to learn.
Lizzy: And I would say don't let any kind of news headlines or even any of the information we've shared make you think that there aren't really good people in this industry who are absolutely doing their job well and trying to help you reach your goals. I mean, there's a reason the industry exists and makes so much money because overall it is very successful at helping people grow their wealth. All right.
Lissa: 20 cents.
Lizzy: 20 cents.
Lissa: No, that was a lot. 20 cents is the segment of the show, or both Lizzy and myself, Lissa, each get 60 seconds to give our 2 cents on today's topic, whether it is a net positive or a net negative. Where does 20 cents come from?
Lizzy: Because you get the opinion of two dimes.
Lissa: We talked a lot about investing in finance today, but the question is our are financial advisors worth it?
Lizzy: All right. Go. Even though I don't work with a hands-on financial advisor today, I think they're absolutely worth it. I'd probably be shooting my career in the foot if I said they're not. I think they're incredibly valuable the more wealth you have, but not just when you have wealth to start with. And just like anything where you need expert opinion, an attorney, an accountant, a doctor, these are people with specialized expertise. They're regulated and it is their job to help you accomplish your goals. And that can be really hard to do in the midst of your day-to-day life. So for me, it is a big net positive on financial advisors.
Lissa: Thought you might go negative. But cool.
Lizzy: Not me.
Lissa: Net positive. Nice.
Lizzy: All right. What about you? Are financial advisors worth it?
Lissa: So I have this plan that I'm going to do all three that I mentioned. I have money currently invested with an advisor. I actually do use a robo-advisor for a small amount of money, and I have a couple of investments that I manage myself. And so I have this game in my head where in the next three to five years, I'm going to put the same amount of money towards all three to see who comes up with a better portfolio performance.
I don't recommend this for people. I've actually studied this and this is part of what I do. So that's kind of the approach I'm taking. But guarantee, the more money I have, the more wealth I build over my lifetime. If we get into the millions, tens of millions, who knows, maybe a hundred millions, right? The more I have, the more I will want managed because I don't trust myself to do that completely. So net positive, net positive.
Lizzy: You surprised me too.
Lissa: You thought I was going to go negative on the advisors because of the costs?
Lizzy: I don't know because you know a lot on your own.
Lissa: All right. Because I could do it on my own. No, no, no. Net positive. Net positive.
Lizzy: Double net positive.
Lissa: Net positive. I didn't expect that. All right. Remember, this is what we think at this moment in time. Can't no one make the decision but you on whether or not you should get a financial advisor. So what do you think? Are financial advisors worth it?
Lizzy: Hit us up. Let us know what you think. DM us on Instagram at netnetpodcast or email us at hi@netnetpodcast.com, and if you want to follow us individually, here's where you can find us.
Lissa: I'm at WealthforWomenofColor on TikTok, YouTube and Instagram.
Lizzy: And I am at live_well_lizzy on Instagram and TikTok.
Lissa: All references, statistics and resources mentioned can be found in our show notes. This podcast is for educational, informational, and entertainment purposes only, and should not be constituted as financial advice. Remember to always do your own research, consult a professional as needed, and feel empowered to make your own damn decisions.