Advertiser disclosure

Terms and Restrictions Apply
Physician on FIRE has partnered with CardRatings for our coverage of credit card products. Physician on FIRE and CardRatings may receive a commission from card issuers. Some or all of the card offers that appear on the website are from advertisers. Compensation may impact on how and where card products appear on the site. POF does not include all card companies or all available card offers. Credit Card Providers determine the underwriting criteria necessary for approval, you should review each Provider’s terms and conditions to determine which card works for you and your personal financial situation.
Editorial Disclosure: Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed, or approved by any of these entities.

Why Do Financial Advisors Do Crap Like This?


Here’s a scenario that’s played itself out several times since I started writing about personal finance.

A couple, at or around retirement age, whose finances have been managed by various “professionals” in the financial services industry, would like some help making sense of their investment portfolio.

I’d like some help, too. You simply cannot make sense of these ridiculous portfolios.

Why do financial advisors compile these steaming piles of crappy funds and call the heap an investment portfolio? I’m not entirely sure, but I’ve got some ideas.




Fiduciary Schmiduciary


Years ago, I dissected the portfolio of a recently retired couple. It wasn’t all bad. They were in a portfolio of roughly 60% stocks and 40% bonds with a 3:1 ratio of U.S. stocks to international stocks.

An asset allocation like that can easily be achieved with a three-fund portfolio of very low-cost index funds that guarantee you’ll capture the market returns, thereby doing better than the vast majority of those who try to beat the market.

Study after study shows that it’s really tough to outperform index funds over the long-term after accounting for fees. Those that manage to beat the market usually do so by taking on more risk (via leverage or other means) or get lucky with the equivalent of 10 consecutive heads in a coin-flipping contest.

Back to that couple’s 60% / 40% portfolio. It’s now in a three fund portfolio, or the closest thing we could get to one without realizing capital gains unnecessarily (see how we did it here), but before that, they had 28 funds (26 mutual funds and 2 ETFs).

Six of those funds had expense ratios of over 100 basis points (1%), whereas most index funds are in the 0 to 10 basis point range. The average expense ratio of the funds this couple owned was 0.67%.

They were also paying 0.73% of assets under management for the privilege of this messy, poorly-designed portfolio that was clearly underperforming a benchmark 60% / 40% portfolio of index funds. Trust me; I checked.

Between the AUM fees and expense ratios, this couple paid over $20,000 a year to have this hodgepodge of assets. There were actively-managed, tax-inefficient funds in the taxable brokerage account. No tax loss harvesting had ever been done.

Who was benefitting from these counterproductive investment choices? Not the client. That leaves one party.

Did I mention that this was a fiduciary financial advisory firm handling their money?

Advisors are held to either a fiduciary standard or a suitability standard. Supposedly, a fiduciary must put their clients’ best interests above their own, but from what I’ve seen, it’s a weak standard.

Suitability means that any financial moves should be “suitable” for the client. I take that to mean borderline criminal, but not actually punishable by law. Again, based on what I’ve seen.


Everyone Needs A Mortgage-Backed Securities ETF


I’ve seen other portfolios like the one above, and some of them have been worse.

Picture a smattering of funds with hefty front-end loads (an immediate loss of up to about 6% the moment you invest), funds with high turnover in a brokerage account casting off unnecessary capital gains, and IRA and 401(k) accounts with 10-20 funds each, all with overlapping asset classes and high expense ratios. Top it off with a few random annuities, because why not?

Some of these were put together by fiduciary advisors. Some were set up by 401(k) plan representatives.

Funds are bought and sold with little input from the account owners other than maybe a risk tolerance assessment at some point. I highly doubt these clients are asking to be put into 10 different bond funds, a Nasdaq ETF, or a baker’s dozen of costly funds that all accomplish the same goal of owning U.S. stocks. If only there was one fund that could do this. Oh wait… there is.

When I saw the mortgage-backed securities ETF, I didn’t ask why this person owned it in both their traditional IRA and Roth IRA. This isn’t something many people have a hankering for unless they’re longing for the good ol’ days when these beauties helped usher in the Great Recession. To be fair, this particular fund wasn’t around in 2008, but in the four and a half years since its inception, it’s barely eked out a positive nominal return and has a decidedly negative real (inflation-adjusted) return.

No, this individual didn’t need or even want mortgage-backed securities in their investment portfolio, but that’s what you just might get when you trust other people to manage your own money.


They’re Not All Bad


Every industry has good and bad actors. The ratio of good to bad varies, of course, and in the financial services industry, I’m afraid the ratio is rather bad.

That said, there are some good actors out there if you know what to look for.

A fiduciary standard is the bare minimum. It doesn’t mean a whole lot, but if an advisor will only meet a suitability standard rather than rise up to the low bar of the fiduciary standard, that’s a serious red flag in my book. They should have to wear a scarlet “S” on their lapels just be sure everyone knows they choose not to act as a fiduciary.

Investment philosophy matters, too. If an advisor believes they can help you beat the market without taking on undue risk, stay away. If they want you to take on undue risk, stay away. If they have come to grips with the fact that low-cost index funds have been proven to be the most effective investment tool for the masses, that’s a good sign.

Fees matter a lot. I prefer the flat fee or hourly rate model, but assets under management (AUM) fees can be a reasonable way to pay an advisor if there’s a regressive AUM fee schedule. In other words, if the AUM fees as a percentage don’t decline as your invested balance grows, simply decline.

Rick Ferri, host of the Bogleheads podcast, charges $450 an hour to help people with complex, crappy portfolios revert to a simple three-to-four-fund or similar portfolio. It sounds like a lot, but I’ll bet he saves many clients tens of thousands of dollars per year after a one-time fee of maybe a few thousand dollars.

We keep a short list of recommended financial advisors — I recognize that not everyone likes to DIY — and all advisors on our list charge relatively low fees (primarily flat fee or hourly rate), work with high-income professionals routinely, and have an investment philosophy that’s aligned with what we preach here.


So Why Do Some Financial Advisors Do This Crap?


The bad ones, that is. Not the ones who charge low, fair fees, help you invest in index funds, and keep your portfolio simple enough for a second grader to understand.



Making the job look difficult is good job security. If you had to be in charge of your own money, would you know which 28 funds to invest in for long-term success? Would you know which mortgage-backed securities ETF will help make your golden years a little more golden?

No, you wouldn’t, and most people don’t realize that you can achieve your goals with a much, much simpler number of investments that can be counted on one hand.

Do not confuse complexity with effectiveness. There may be a relationship there, but it’s probably inverse.


It Pays the Bills

Most clients with five-figure and low-to-mid-six-figure portfolios, which is the norm, are not going to directly pay thousands of dollars to someone to manage their investments.

They will, however, pay that amount and more in a more indirect fashion, often unknowingly. It’s there in the fine print somewhere, sure, but there’s not going to be a line-item list shared with the client at the end of the year.

If given the option between an index fund that costs 3 or 4 basis points per year to own, has no front-end load, and is very tax-efficient versus an actively-managed, tax-inefficient mutual fund that costs 68 basis points a year to own and comes with a 5.75% front-end taken off the top the instant you invest, absolutely no one would choose the latter, but that’s often what you get when stopping in at the local storefront to get started. Oh, and I didn’t even mention those pesky 12b-1 fees that only exist in the second fund.

Why do people end up buying the second fund when the first fund would be a much better choice for so many reasons? The second fund pays the advisor’s bills; VTSAX and similar index funds do not.


They Don’t Know What They Don’t Know

You don’t need an advanced degree to call yourself a financial advisor. You don’t need a basic degree, either. You do need to do some studying and pass a few tests, depending upon what type of services and products you plan to offer, but it’s an education that takes months, not years.

When you visit Dunning & Kruger Financial Services, you may be surprised to learn that neither Mr. Dunning  nor Ms. Kruger has a degree in finance or economics. They’re just as likely, if not more likely, to have a background in sales and marketing or the military. You might recognize them from church or your kids’ tee-ball league. A trustworthy demeanor and background carries a lot of weight.

A lack of education and understanding may sound like a damning accusation, but when they are clearly making investment choices that a knowledgeable consumer would not, it’s more forgiving to assume they don’t actually realize that they’re doing investors a disservice rather than to figure they’re just morally corrupt.

You should also understand that much of what they know came from a corporate playbook, not from reading dozens of books on sound investing and personal finance.



How to Right Their Wrongs


After releasing the latest version of our free portfolio tracking spreadsheet  (which you can download below), I had the opportunity to dig into one of these ugly portfolios that not even a mother could love.

I thought it might take days to sort through. Maybe weeks.

Three hours later, I had a detailed breakdown of everything they owned, what the expense ratios were costing them, and I had a new plan to move everything over to — you guessed it — a modified three fund portfolio.

With the bond allocation in the traditional IRA, international stocks in a taxable brokerage account, and a total stock market fund filling these accounts and others, this couple could achieve their investment goals while ditching some five-figure annual sum in fees.

Additional asset classes — like real estate, for example — are available but optional.

A complete explanation of the process of righting others’ wrongs warrants a second blog post and perhaps another tab on the spreadsheet, but it’s not hard to do.

I entered all of the ticker symbols and the accounts they were in. I used Excel’s STOCK function to get the current price, and I looked up each ticker on Morningstar (in their free content area) to determine the percentage of U.S. and international stocks, bonds, cash, and expense ratio. I’ve blurred out most of the sheet for privacy’s sake, and this is most but not all of the sheet, believe it or not, but this is what I came up with for the current portfolio.




Once I knew what they had and where, it was pretty simple to come up with a target asset allocation and how to apply it across their existing accounts.

The next steps are for the investor to start moving money to a low-cost brokerage. I typically recommend Vanguard, Fidelity, or Schwab. There are others like Etrade, which is where I have an individual 401(K) invested in a Schwab total stock market fund that I invest in with no trading fees. Anywhere you can invest in low-cost index funds without pointless fees fits the bill.


This article isn’t meant to be an indictment of the entire financial services industry, but I’ve seen enough shady shenanigans to know that no one has your best interests in mind better than you.

If more advisors would clean up their act while cleaning up the heaping messes of portfolios they’ve helped create, it would be a lot easier to trust them.



What crazy crap have you seen from financial advisors? Have you got yourself a messy portfolio? Any plans to fix it?


Share this post:

9 thoughts on “Why Do Financial Advisors Do Crap Like This?”

  1. As a financial advisor, there’s nothing that puts pep in my step quite like ripping apart these “dumpster fire” portfolios and getting clients into a sensible, low-cost alternative.

  2. Subscribe to get more great content like this, an awesome spreadsheet, and more!
  3. 100%. 30+ year financial advisor here. (Hourly, advice-only). I see this all. the. time. (This morning -$400K inherited account with 35 funds in it). It’s like they make sundaes using all the flavors in the ice cream shop. Why? Any or all of the reasons you mention. My guess is it starts with the basic psychological need to justify the fees. The more I can confuse you in a friendly way and sound smart, the more you and I both might believe you need me.

  4. I have passive RE …STR’s I like RE best – but now with the over value – I’m stuck so I need a financial advisor . One who holds my hand is smart and doesn’t over charge . Do you have a list of the best?

    • I don’t know if anyone has a list of “the best,” and I wouldn’t trust that list, anyway.

      We do have a list of vetted financial advisors who have told us they believe in index fund investing, do not believe they can beat the market, charge reasonable fees (primarily flat rate or hourly), and have worked with many physicians and other professionals with similar incomes. You can find them (and their fee structures) here: https://www.physicianonfire.com/recommended-financial-advisors/


    • I don’t know if anyone has a list of “the best,” and I wouldn’t trust that list, anyway.

      We do have a list of vetted financial advisors who have told us they believe in index fund investing, do not believe they can beat the market, charge reasonable fees (primarily flat rate or hourly), and have worked with many physicians and other professionals with similar incomes. You can find them (and their fee structures) here: https://www.physicianonfire.com/recommended-financial-advisors/


  5. I’ve seen a broker go to the Alzheimer’s wing to pick up a patient, take him to Best Buy, have him pay for a laptop, take him back and install it in his room. Then he signed in asking for online statements. Why? So he could keep selling him new issues and other securities requiring investors receive prospectuses. The compliance officer had questioned why so many prospectuses for high risk issues were going to a nursing home.

    I’ve seen a broker do very little trading until an elderly lady took a cruise, or visited her daughter, when the trading exploded. He did that for years.

    I’ve seen brokers forge elderly widows’ signatures to buy private REITs and oil and gas deals.

    If you have a parent with substantial assets who uses a broker, make sure you get copies of all statements and confirms. If the broker balks, talk to the office manager or send an email with your parent’s directions. Review the statements regularly for suitability and fees.

    Diane Nygaard

    • Wow! Not only unethical, but illegal activity, I would say. It’s bad enough to take advantage of someone who has a fighting chance, but to prey on the elderly and ill is disgusting.


  6. Of your three reasons, I think it’s mostly ignorance. I’ve been very surprised how little many financial advisors know given how long they’ve been practicing. It’s like the equivalent of meeting a doc 10 years out of residency with an MS1 level fund of knowledge.

  7. Great post! Totally agree – fiduciary = discloses conflicts of interest. Disclosure is not enough in my opinion. If someone does not take the time to educate themselves on the basics of personal finance and investing – someone who would need a financial advisor – they will have no idea how the disclosed conflicts of interest will impact their portfolio or their wealth.


Leave a Comment


Doctor Loan up to 100% Financing

Related Articles

Join Thousands of Doctors on the Path to FIRE

Get exclusive tips on how to reclaim control of your time and finances.