Have you made a New Year’s Resolution for 2020? And does it in any way relate to money? Most likely not according to various surveys.

A Forsa survey commissioned by DAK in Germany shows, that the typical German does not seem to be much concerned about his or her finances. The top 7 resolutions have nothing to do with money, as they relate to avoiding stress, spending more time with family and friends, acting environmentally friendly (each 64%), getting more exercise (56%), having more time for oneself, eating healthier (each 53%) and losing weight (36%). Only 31% indicate, that they plan to save money.

The British are very similar to the Germans. A YouGov survey points out, that an equal 31% plan to save more money in 2020. At least this New Year Resolution is already in 4th place, after getting more exercise (47%), losing weight (44%) and improving my diet (41%).

U.S. citizens seem to be more concerned with financial issues. As per a recent survey by Ipsos, 51% of those with a New Year’s Resolution have a financial objective, such as saving more money, buying a house or paying off debt.

Surprisingly 49% of Americans as well as 69% of British and Germans don’t consider financial issues to be worth a New Year’s Resolution. And even those, who indicate that they intend to save more money, might not have thought enough about the details. To commit to saving more money is a good start, but without a clear plan on how to invest it, you might as well spend it.

To be sure, money is definitely not the most important thing in the world. People who increase their net worth, don’t necessarily become happier. The opposite can be true.  A subsistence farmer with an intact family, many friends and not too much stress, might be a lot happier than the CEO of a big multinational, who owns several mansions, a private yacht, and frequently dines at Michelin 3-star restaurants around the world.

On the other hand, if you worry constantly about growing pressure at work, high mortgage payments, and the rapidly rising cost of living unmatched by salary increases, then you are most likely not happy. Being debt free and having enough wealth to cover your living cost for a year or more, gives you peace of mind and is therefore not an insignificant contributor to happiness.

To focus your New Year’s Resolution only on financial topics is certainly wrong. A personal Balanced Scorecard with several dimensions such as health, family and friends, career and self-development, as well as finances is a much better approach. But this is a topic for another blog.

For many people it might be life changing, to have at least one finance related New Year’s Resolution. How about: “Spend more time planning and monitoring investments”? This is not a small resolve, as it will require you to spend quite some time doing investment related research. However, the potential benefits are huge. If you take a closer look at your investments, you are very likely to find out, that fees and biased advice have substantially diluted your return over the years. It is important to be fully aware of this, and take all necessary measures to ensure, that your investments generate a sufficient return.


Investment Fees

Many people are not aware, that a large part of their returns is syphoned off by all kinds of fees, that mutual funds, ETFs, brokerages and financial advisors charge. There are sales loads, purchase fees, management fees, account maintenance fees, custodian fees, exchange fees, redemption fees and a lot more. Many of them can only be found, if you read all the fine print, but sometimes they are not even disclosed there.

Assume that you plan to invest on a monthly basis for the next 30 years. You start with 500 EUR per month and increase this amount every year in line with the rate of inflation. If the inflation rate is 2% and the average annual return 5%, then you will have 514,000 EUR in thirty years, provided that you don’t pay any fees. However, let’s suppose that you buy several actively managed mutual funds that each charge 2% sales fees and 1.5% expense fees. In this case the future payout is only 389,000 EUR, which is 125,000 EUR or 24% less. And it can even get worse. If you also use a financial advisor to select the funds, who charges an annual fee of 1% on Assets Under Management (AUM), then the payout drops to 331,000 EUR. This is a whopping 183,000 EUR or 36% less than the payout without fees. Adjusted for inflation your return on investment is in total 2%. If you decide to invest directly in stocks on your own, instead of using the services of others for all kinds of fees, you will only have to achieve an average annual return of 2.2% (instead of 5%) or start with an initial investment of only 322 EUR (instead of 500 EUR) to achieve the same payout.



Fees can also have a big impact on one-time investments. In case you invest 10,000 EUR at 5% p.a., you can achieve a payout of 11,576 EUR. With the same fee levels as above, the payout drops to 10,842 EUR if you invest in mutual funds, and even goes down to 10,520 EUR in case you use a financial advisor. Instead of an annual return of 5%, you only achieve 2.7% and 1.7% respectively, as most of the potential profit is absorbed by fees.


Fee ranges can be huge. Sales fees for mutual funds can range from 0% to 5%, expense fees from 0.8% to 2.5%, and redemption fees from 0% to 2%. If you invest in hedge funds, fees can be even higher. Apart from sales and redemption fees, you usually have to pay a 2% management fee on AUM and a performance fee of 20% on the profit above a specified threshold. Other types of investments come up with equally creative fee structures, that ensure that most of the capital appreciation is syphoned off by your service providers.

As the large majority of fund managers have been unable to repeatedly beat the reference index, investors have in recent years withdrawn huge amounts of money from actively managed mutual funds and put them into mostly passively managed Exchange Traded Funds (ETF). Such ETFs are financial vehicles, that try to replicate the performance of a specific index. They do this at much lower cost. There are usually no or only minimal sales fees, and expense fees range between 0.04% and 0.8%. However, ETFs have their own particular risks, as they don’t consider the fundamentals of their underlying assets. They are great on the way up, but can be accelerants on the way down. Additional risks exist, if you buy a synthetic ETF or one that lends out a large part of its assets. Thorough research is therefore required, before investing in such products.    

Financial advisor fees can range between 0.5% and 2%. If a financial advisor is a great stock picker, such a fee might be justified. However, if the financial advisory firm only invests in mutual funds and ETFs, it is hardly worth the money. Fees will likely swallow most of your returns.


Biased investment advice

Your bank manager or financial advisor is not your friend, even if he or she is always friendly and obliging. Most of them are under heavy pressure from their bosses to increase fees and commissions at all cost, even if that means that you will lose money.

Fees are paid directly by you. When money managers increase their sales (i.d. persuade you to invest more money with them), they automatically earn more fees. Therefore, they are highly unlikely to tell you about alternative investment opportunities, such as physical precious metals or cryptocurrencies, that are not sold by the traditional financial firms. Only bank managers will support your idea to buy real estate, provided that they can sell you a large mortgage, that will generate handsome profits for the bank. Most certainly no money manager will ever address custody, fiat or jurisdiction risk, even though each one of them alone can have a devastating effect on your portfolio. They either don’t know or care about it, or are too scared that you will take at least some of your money somewhere else.

Bank managers and financial advisors are not just interested in fees from you. They are just as keen on commissions from the providers of financial products. When you pay up to 5% sales fee to a mutual fund, the fund takes this money and pays most or all of it to your financial manager, except if you have a fee-only agreement that is fully adhered to. Provided that all commissions were the same, that would not cause additional cost for you. Unfortunately, they are not. It is very likely that your consultant will funnel your money to the fund, that provides the highest commission, irrespective of whether the fund is a good investment or not.

Fees and commissions are not the only reason for biased advice. There are even more sinister motives. Just before the outbreak of the Great Financial Crisis in 2007-09, many financial institutions urged their employees to sell toxic securities to retail investors, in order to reduce their own exposure to these products. It is happening all over again.

If you lose a lot of money, this is not a problem for your bank or financial advisor. They lose some income, as your fees are based on AUM, which will go down. But there are no penalties or negative fees, in case you lose money. There is not even a fee moratorium, until you make profits again. You need to continue paying fees on all remaining assets. And your money manager might even charge higher fees, if your assets under management fall below a certain threshold, that is mandatory to obtain a lower fee structure. Be assured that he or she will offer you some great new investment opportunities, and ask you to provide some more money to offset the losses. This is not surprising, as most bank managers and financial advisors are not investors, they are sales managers.


Deception of regular savings plans

The basic idea of regular savings plans, where you invest a fixed amount of money on a monthly basis in the same securities, is generally good, at least for the retail investor. It helps to discipline you to save regularly, and also prevents you from buying all units of a security at the highest price. However, a savings plan must provide you the option, to get out whenever you want. Otherwise it can easily become a great burden in times of hardship or low liquidity. In addition, you must closely follow its performance to ensure that the plan really creates value.

Have a look at the following example. Four years ago, a private investor commissioned a financial consultant to invest his monthly savings. The consultant allocated the total monthly amount to several funds and ETFs. One mutual fund, that invested in S&P 500 companies in the USA, was among them and received 300 USD each month. The development of this investment is shown below:

Doesn’t that look great? At the end of the first year, there were already 3,575 USD in the account. And the investment value continued to grow by 109% in the second year, 38% in the third year and 45% in the fourth year. Consequently, at the end of 2019 the account contained assets worth 14,955 USD.

Many people, including managing directors and PhDs with limited investment experience, see that the numbers go up nicely and think that everything is fine. However, the numbers above are deceiving. They don’t disclose, that the investor paid 3,600 USD each year, in total 14,400 USD. To get a better understanding of the real performance, we have to calculate total value minus the sum of payments. If we do this, we see that the investment was far from spectacular. Current value minus the sum of all previous payments was -25 USD at the end of the first year, 272 USD at the end of the second year, -499 USD in the third year and 555 USD last year. In total the investment achieved only an average annual yield of 1.9%, whereas the S&P 500 shot up 12.6% per year in the same period.

Obviously, a lot of money was siphoned off by fees. But the return of the remaining money, that could actually be invested, also underperformed its benchmark index, the S&P 500. Don’t be fooled by growing numbers, if you have one or several regular savings plans. Contrary to one-time investments, where you easily see the annual performance, if you compare the value at the end and the beginning of the year, regular savings plans (including insurance) easily hide non-performance. No bank manager or financial advisor will actively inform you about it. Therefore, sit down and do your own calculations. It’s your money, not theirs.


What are your options?

Financial service providers should be compensated in line with their performance. Instead they are usually paid according to the amount of money, that you have invested with them (assets under management). Their focus is therefore not on channeling your money to products with the highest potential profits, but i) to collect as much money as possible from you, ii) to charge you the highest possible fees, and iii) to get the highest commissions from your investments.

Even if your portfolio performs poorly and loses most of its value, your advisor will keep all fees and bonuses from previous years and continue to charge you a nice amount in the future. It’s no wonder, that with 436,000 wealth managers in the USA alone, business for yacht charters, villa rentals, luxury watches and 3-star dining has been great over the past decade.

The best way to avoid unnecessary charges and bad advice, is to invest directly in stocks and bonds on your own (though the latter might not be the best idea in the current market environment). You might not beat the performance of a fund and/or a financial advisor before fees. But as the examples above show, after fees you can outperform them. In various experiments, monkeys and dart throwers have beaten financial professionals, so why can’t you? Of course, it is not recommended to just purchase a stock, because you read a short promotional article on it on the web, or to buy all stocks starting with the letters A, Q and X. But if you allocate a sufficient amount of your time to do your own research, and invest not only in stocks, but also some ETFs and occasionally some low fee mutual funds, you can do it.

Most people claim that they can’t find enough time between their job, their family, their friends and their hobbies, to look after their money and they therefore seek external advice. Bank managers are in general not a good choice, as they focus on products that are highly profitable for the bank, but most likely not for yourself. The same applies to robo-advisors and similar services, that more and more banks and brokerages are offering today. Run away from all kinds of wealth management advisors (with or without “certification”), who offer to advise you free of charge or for a negligible fee. They will only propose securities that pay high commissions and the resulting portfolio will be costly and most likely underperforming.

If you really think that you need a financial consultant and have sufficient funds for it, look for a qualified advisor, who is fully aware of the current economic and financial risks, uses a value-oriented investment approach and maintains high ethical standards. Ensure that you pay an adequate fee, preferably a low fixed amount plus a variable bonus based on real performance in comparison to a benchmark, and not assets under management. Make sure that the advisor passes on all commissions, that are paid by the product providers, to you. Before you sign up, ask about custody risk and read all the fine print.

Please keep in mind, that you don’t need to keep your investments with the financial advisor. You can also ask for recommendations regarding securities and then do the actual investment yourself, preferable at more than one brokerage, thereof at least one abroad. If the advisor is not prepared to agree to such a proposal, it probably means that he or she gets some undisclosed commission after all. In this case looking at other options might be a good idea.

Finding a good financial advisor is difficult and also provides no guarantee for success. Make sure that you discuss each investment proposal and challenge your advisor to give you all the pros and cons. The final decision should always rest with you. We know that this causes additional work, but it is your money that is invested.

Whether you like it or not, money is very important in this world. It enables you not only to buy beautiful things, but can also be a life savior if you get sick or need to escape your home country due to war, environmental destruction or political upheaval. Therefore, it is essential that you spend more time looking after your assets. Don’t claim that working on your career generates more value. Even though it is certainly important, please consider the following wisdom: “It is more valuable to think one hour about money, than to work one hour for it”


Disclaimer: The above is for informational purposes only. It is not an offer or advice to buy or sell any products or services. LBB and its owner do not provide investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.


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