Why we fall for Financial Advisors (and what to do instead)?

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.

estateguru: High fees if you don’t invest

Estateguru announced this year that they charge a €10 fee for an inactive account, and that’s per month! On the price list, it looks like this:

Funds held on your Lemonway account can be used solely for your transactions on the Estateguru platform. As it is a special purpose account, it should not be used for depositing funds without the intention to invest. As inactive accounts create cost to Estateguru, an “inactive account fee” is charged from users who have deposited funds in their accounts but who have not made any new investments on the Primary or on the Secondary market for the last 12 months. Starting in April 2023, the “inactive account fee” was increased to 10 EUR per month for the first year following the 12 month period of inactivity, and will increase to 50 EUR per month thereafter. The fee will be applied monthly if there is a positive balance on the user’s account. If the user makes an investment, whether on the Primary or Secondary market, the account status will be switched to active again and no further fee applies.

I’m probably not the only one trying to gradually withdraw my money, as the majority of my investment has now defaulted.

To be fair, I should mention that I have already withdrawn half of the money I had previously invested. Apparently, I’ve now reached a year without investment, as €10 has also been deducted from my account. Not great. I had tried to activate an automated investment strategy that kicks in once the account balance reaches €500, so I could at least “rescue” some of my money from time to time, but apparently, that didn’t work. This is certainly one way to force your customers into something.

For me, this means I’ll have to reluctantly make one investment per year and then gradually withdraw my money. It will take a bit longer, but so be it. I can definitely no longer recommend Estateguru.

Visualizing overlaps of ETFs in an UpSet diagram

Today, two topics I find particularly exciting come together: data analysis and visualization, and finance. Choosing the right ETFs is a topic that fills countless web pages and financial magazine articles. However, it’s equally fascinating to explore the overlaps between ETFs. Previously, I compared the Vanguard FTSE All-World High Dividend Yield UCITS ETF USD Distributing (ISIN: IE00B8GKDB10) and the iShares STOXX Global Select Dividend 100 UCITS (ISIN: DE000A0F5UH1). I also analyzed the performance of these two alongside the VanEck Morningstar Developed Markets Dividend Leaders ETF (NL0011683594) and an MSCI World ETF (IE00B4L5Y983).

The holdings included in an ETF can be downloaded from the respective provider’s website; I performed this download on October 5. The data requires significant transformation before it can be compared. My R-based notebook detailing this process can be found [here]. For the visualization, I chose an UpSet diagram, a relatively new type of visualization that I’ve used in a paper and another project. While Venn diagrams are commonly used for visualizing overlaps between datasets, they become unwieldy with more than 3 or 4 datasets. This challenge is clearly illustrated in examples like this:

The size of the circles, for example, does not necessarily reflect the size of the datasets. An UpSet diagram is entirely different:

Yes, it takes a bit of effort, but it shows much more clearly how the datasets relate to one another. On the far left, we see the size of the datasets, with the Vanguard FTSE All-World High Dividend Yield having the most holdings—over 2,000. On the right-hand side, we see the overlaps. The point at the very bottom beneath the tallest vertical bar indicates that the Vanguard FTSE […] has 1,376 stocks that no other ETF includes. Similarly, the iShares Core MSCI World has 757 titles that no other ETF contains. In the third column, we see that these two ETFs share 486 titles that the other two ETFs do not include. I find that quite fascinating. For example, I wouldn’t have thought that the Vanguard contains so many stocks that the MSCI World does not.

The VanEck allegedly has one stock that no other ETF contains, but that’s not accurate; that entry was just cash. Otherwise, 81 of its 100 titles are also included in the MSCI World. All of its titles are included in the Vanguard.

It would now be interesting to see how the weightings align. However, that’s an additional dimension that would likely be difficult to represent in an UpSet diagram. Still, it’s necessary to take a closer look at this because the overlaps might result in unintended overweighting of certain stocks. That would be a topic for the next blog post.

Dividend Strategies: Missed Opportunities?

Disclaimer: This is not financial advice or a recommendation!

The article When Chasing More Dividends Leaves You With Less from the Wall Street Journal by Jason Zweig (who, by the way, wrote the commentary for The Intelligent Investor) sheds light on the appeal and associated risks of dividend strategies. Investors who focus on high dividend yields often hope for a steady income stream, especially in times of low interest rates. However, as the article points out, chasing high dividends can ultimately reduce long-term returns. The problem arises when investors blindly flock to funds that offer exceptionally high dividend yields.

Continue reading “Dividend Strategies: Missed Opportunities?”

Export from ING depot: CSV is not the same as CSV

Depot student Dominik has already provided a good overview of how to export data from the ING depot via the ExtraETF workaround. However, not every tool can handle the CSV export properly. For example, DivvyDiary immediately recognized the relevant columns, but the balances didn’t match. The reason for this is that CSV files can vary significantly, as can the data within them. Sometimes, columns aren’t separated by a comma but by a semicolon. And while the difference between 1,000.00 and 1.000,00 might seem minor to us, for DivvyDiary, a 1000 turned into a 1 because the thousands separator was treated as a decimal point.

The solution: As much as I dislike working with Excel, if you open the CSV file in Excel and then save it again as a CSV, even DivvyDiary (and many other tools) can handle it.

The advantage of ETFs with domicile in Ireland… sometimes.

Disclaimer: This is not financial advice! No warranty.

When selecting ETFs, various factors come into play, including tax considerations. In the last article, we discussed what partial exemption means. However, the tax differences between ETFs with different domiciles and their holdings in US stocks are also interesting. This article focuses on two specific and popular ETFs, and even though both contain US stocks, that doesn’t necessarily mean that the ETF domiciled in Ireland will deliver higher returns.

Continue reading “The advantage of ETFs with domicile in Ireland… sometimes.”

New tool for a dividend strategy.

Some tools online offer the ability to see how many dividends are likely to come your way. For example, extraETF provides a tool where you can see what the dividends might look like based on an assumed growth rate (CAGR), a certain number of years, and asset gains.

What I haven’t seen so far is a tool that, starting from a portfolio, calculates the dividend growth based on an assumed CAGR and dividend yield, while also factoring in taxes. That’s exactly the kind of tool I’ve created.

Are neobanks really such a good idea?

I’m a big fan of sub-accounts to keep budgets for different categories well separated. To do this, I’ve tried a few different banks. bunq didn’t work reliably and had very unfriendly support. I used to really like N26, but what I didn’t find very funny was that when downgrading from a more expensive to a cheaper plan, you can’t keep the IBANs for the sub-accounts. Then I found vivid. I hated the app’s color scheme from the start, but the features were okay, especially since I could link different virtual credit cards to different accounts. Unfortunately, the support wasn’t particularly good here either. And now, existing accounts are being closed because vivid is parting ways with Solaris Bank. New IBANs again. So, I’m moving on, or rather, going back to ING. They don’t have sub-accounts quite the way I need them, but I’ll figure out a different way to manage my budgets.

The fact is that with every neobank, you have to pay for the really interesting features, and in return, you don’t always get great support. The ING account might not be as sleek as those of the neobanks, but it’s free, and the support is usually good. I’ll keep my vivid account after upgrading it, but I won’t pay for it. Sometimes, the boring and old-fashioned offerings turn out to be not such a bad idea in the medium to long term.

Is Graham’s “The Intelligent Investor” still relevant?

Benjamin Graham - The Intelligent Investor

Those who have been following my blog for a while may have noticed that I’ve been covering more financial topics in recent years. For years, I trusted an MLP financial advisor, and while I did set many things up correctly because of that, over time, I started feeling increasingly uncomfortable, sensing that he wasn’t telling me the whole truth. Last year, I parted ways with him and MLP after I got fed up with the constant chatter about how great a fund manager was doing his job and how his 2.4% markup was worth it. A consultation with an independent fee-based advisor (note: many claim to be independent, but true independent advisors are paid by the client, not by commissions from insurance companies) revealed just how much my financial affairs were being managed to my detriment. I will write more about this later, but today, I want to focus on one specific area: stocks, funds, and ETFs. And I deeply regret not having read Graham’s book much earlier.

Continue reading “Is Graham’s “The Intelligent Investor” still relevant?”