Note: MLP is a German financial advisory firm comparable to companies like Edward Jones in the United States, which operate on a similar commission-based model. However, the business practices of Edward Jones may differ from those described here regarding MLP.
How Financial Advisors Reel Us In
Let’s begin with this: doing something for retirement savings is better than doing nothing. However, whether investing through a financial advisor yields a worthwhile return is a different question. This article is for anyone wondering whether advisors like MLP (or Sparkasse in Germany) are the right choice for managing their financial future.
What do I mean by a financial advisor? I’m referring to professionals from banks or firms like MLP, who earn commissions for selling financial products. Their interest lies in selling products because that’s how they’re paid. Their advice is “free” because their commissions are embedded in the products they recommend. Excluded here are Fee-Only Financial Advisors (more on this later), who don’t receive commissions and instead charge directly for their services.
At first glance, financial advisors seem like a great deal. You don’t have to pay them directly, and they handle your finances. All you need to do is sign the paperwork. What’s often overlooked is that their services aren’t truly free. They cost you in hidden fees and reduced returns. And really—why would someone work for you for free?
Another reason many fall for firms like MLP is a lack of financial literacy. In my case, I didn’t grow up learning about investing. My father warned me that “you’ll only burn your fingers with stocks,” and there wasn’t much money to invest anyway. Then, during university, MLP representatives appeared outside lecture halls, offering goodies like textbooks or exam notes. Their pitch? They could professionalize the rather chaotic finances of a future academic or professional. This was appealing—especially for someone like me, who found personal finance stressful and intimidating.
By outsourcing your finances, you gain what Ben Felix calls “trust-based peace of mind.” It’s a trade-off: either you invest the time to learn how it all works, or you let someone else do it for you—at the cost of lower returns because your advisor and the middlemen take a cut. MLP’s initial pitch often involved small, practical steps: selling liability insurance, perhaps home insurance with bicycle theft protection. From there, the relationship grew as life circumstances changed. Advisors tailored their recommendations to different life phases, from building a career to starting a family. For many, this feels reassuring.
To be fair, not everything about financial advisors is problematic. Building an emergency fund, diversifying your savings—these are sound recommendations. Advisors can even help secure favorable mortgage terms that might otherwise be unavailable. However, the average person lacks the knowledge to distinguish between good and bad advice. Advisors might occasionally steer you away from bad decisions, giving the impression they’re protecting you, while earning your trust. Sometimes, they even flatter your ego by emphasizing how well you’re doing compared to others.
Why Relying on Financial Advisors Can Be a Problem
Commission-based advisors tend to recommend products with lower returns. For example, actively managed mutual funds, which rely on paid managers to make investment decisions, rarely outperform the market in the long run. These funds come with high fees because fund managers and their research teams need to be paid. Advisors also receive commissions for selling these funds.
By contrast, passive funds like ETFs are often a better choice. ETFs come with much lower fees since they don’t involve active management or large research departments. However, advisors rarely recommend them because ETFs don’t generate commissions.
Does this difference matter? Yes, it does. In funds recommended by my advisor, I missed out on significant returns. Consider this example:
• The “Flossbach von Storch SICAV – Multiple Opportunities R” fund charges 1.62% in fees, a 5% upfront sales charge, and a 1% management fee. With an average annual return of 5.46% over 10 years, these fees drastically cut into gains.
• If I had invested €200 monthly in this fund over 10 years, I would have contributed €24,000 but ended up with only €26,394 after all fees—a measly annual return of 0.96%, below the inflation rate.
• Compare that to a passive MSCI World ETF with an 8% average return and a fee of just 0.19%. Over the same period, I would have ended up with €36,440—a significant difference.
That wasn’t my only issue. I had explicitly stated that I wanted a dividend strategy, but my advisor never documented this. My investments remained in accumulating funds instead. Additionally, the supposedly crucial “dynamic” disability insurance adjustments were extremely lucrative for my advisor, as they generated new commissions with every increase. Key details about certain products, like private health insurance options, were also conveniently omitted.
How to Manage Your Finances Without an Advisor
You don’t have to do it alone. In the United States, Fee-Only Financial Advisors or Registered Investment Advisors (RIAs) are a great alternative. These advisors don’t receive commissions and instead charge a transparent fee for their services, ensuring they remain independent. Their fees are typically structured as hourly rates, flat fees, or a percentage of assets under management (e.g., 1% per year).
What makes these advisors different?
1. Fiduciary Duty: They are legally obligated to act in their clients’ best interests, unlike commission-based advisors.
2. Transparent Costs: With no hidden fees or commissions, you know exactly what you’re paying for.
3. Unbiased Advice: Since they aren’t incentivized to sell specific products, their advice is tailored to your goals.
To find a Fee-Only Financial Advisor in the U.S., platforms like NAPFA (National Association of Personal Financial Advisors) or the XY Planning Network can help. These organizations ensure advisors meet strict ethical and fiduciary standards.
Another great resource for those who want to educate themselves is Finanztip (a German platform) or its U.S. counterpart, NerdWallet, which offers accessible information on a wide range of financial topics.
Final Thoughts
Financial decisions are deeply personal and have long-term consequences. While traditional financial advisors may seem like an easy solution, their recommendations are often shaped by conflicts of interest. Taking the time to educate yourself or exploring alternative advisory models, such as Fee-Only Financial Advisors, can save money and empower you to take control of your financial future. After all, no one will care more about your money than you.
