Meet Sarah: Should She Hire a Financial Advisor?
Sarah, a 32-year-old professional who’s got her life together—mostly. She’s got a decent job, a solid savings account, and a RRSP (Registered Retirement Savings Plan) that she’s been contributing to (well, sometimes). But as she scrolls through Instagram, she sees all these “finance gurus” posting tips on how to build wealth, and she gets the itch to level up her financial game.
After a lot of Googling, she decides it’s time to meet with a financial advisor to really take control of her future. “I’ll pay them to manage my money so I can retire on a yacht at 45,” Sarah thinks optimistically. So, she books an appointment, puts on her best “I know what I’m doing” face, and heads to the office.
Here’s where things get... interesting.
Sarah’s First Meeting: The Pitch
Sarah sits down with her shiny new financial advisor, let’s call him Brad. Brad has been in finance for 20 years, He talks at Sarah with all the financial jargon —about investment portfolios, retirement accounts, and things like “asset allocation” that make Sarah feel like she’s in the big leagues.
Brad tells her that he can help her maximize her wealth. “With my help, you could be looking at a 7-8% return on your investments,” he says confidently. Sarah nods, impressed, feeling like this is the answer to her financial prayers.
But then comes the catch.
Brad drops a bombshell: “In order for me to manage your portfolio, there’s a 1% annual fee, plus any other management fees that might come along with certain investments.”
Sarah, who’s just trying to figure out how to juggle rent and takeout, is a little taken aback. “1%? Is that a lot?”
Brad reassures her, “It’s a small price to pay for the expertise I bring to the table, Sarah. Trust me, this will pay off in the long run.”
The Problem with the 1% Fee (and Why Sarah Should Worry)
Let’s break this down and see what happens when Sarah, with the best intentions, decides to trust Brad with her money.
Sarah’s current situation: Sarah has $10,000 in a savings account earning her a measly 1% interest. Let’s say she wants to move this into a portfolio managed by Brad, expecting a 7% return. She's 32 years old and plans to retire at 65.
Brad’s 1% annual fee: The 1% fee isn’t on the amount of money Sarah invests, it’s on her total portfolio. So, let’s assume Sarah invests her $10,000 and continues to add $5,000 a year. Over time, that 1% annual fee starts to chip away at her returns, and here’s where it gets messy.
Let’s say her investments grow at an average of 7% per year without any fees. By the time Sarah turns 65, her $10,000 investment (with the annual $5,000 additions) would grow to about $820,000.
But with Brad’s 1% annual fee?
Well, that number gets a little less shiny. After factoring in that fee, Sarah’s investment would grow to approximately $730,000, about $90,000 less than it would have without the fees.
$90,000 less.
Compound interest is the real game-changer here. Over the 33 years Sarah’s investing, that 1% fee chips away at her returns in a major way. Sure, she’s still making money, but she’s losing out on the real magic—that exponential growth that happens when her returns are free to compound without interference. That 1% fee means she’s missing out on a lot of wealth accumulation.
The Other Hidden Costs of Financial Advisors
But wait, there’s more! Fees aren’t always as simple as “1% annual fee.” Brad could be suggesting investments that have additional management fees. Maybe he’s recommending mutual funds that charge 0.5%, or some other fancy investment products that add even more hidden fees into the mix. These little fees can quickly add up, turning your “solid returns” into something that feels more like a watered-down version of the promised profits.
Sarah might not even notice the cumulative effect of these fees year after year, but by the time she’s looking at her retirement balance, she could realize that her future wealth was significantly reduced—not because of market fluctuations, but because of fees that ate into her potential returns.
How Much Does This Really Cost Sarah Over Time?
Let’s fast-forward a little. Sarah, now 50, is starting to think about retirement more seriously. At this point, she’s been paying that 1% fee (plus whatever other fees were hidden) for almost two decades. If Sarah had chosen a low-cost index fund with a mere 0.05% fee and let compound interest do its thing, she’d be sitting on a larger nest egg WITHOUT Brad.
If we run the numbers again, let’s assume Sarah’s invested $15,000 a year instead of $5,000 (because her salary has increased over time, as it should), but kept her total fees around the same. With lower fees (0.05% instead of 1%), her portfolio could’ve grown to around $1.2 million instead of $900,000. That's a $300,000 difference!
That’s a lot of extra guacamole money.
But, what about?
Expertise! A financial advisor brings years of knowledge to the table and can offer personalized guidance on taxes, estate planning, and investment strategy.
Accountability! Brad can keep Sarah on track with her financial goals, helping her stay disciplined about saving and investing.
Time Savings! Not everyone has the time or interest to manage their own portfolio. If Sarah’s got a busy career and life, letting someone else handle it could be a major stress reliever.
Through a little research:
Sarah can be her own expert.
She can automate her savings and investments.
She can check her portfolio a few times a years!
The Cons: The Cost of Advice
High Fees: As we’ve seen, even a seemingly small fee (like 1%) can have a huge impact over time. Those fees will eat into your compound interest, and that’s a problem if you’re in it for the long haul.
Hidden Fees: Advisors may recommend investment products with their own management fees, further eating into your returns.
Potential Conflicts of Interest: Not all financial advisors are fiduciaries (those who are legally required to act in your best interest). Some may push you toward certain products that benefit them more than they benefit you.
So, Should Sarah Keep Brad, or Go Solo?
After all this, Sarah decides to take a hard look at her finances and the costs of Brad’s services. She talks to a few friends who’ve gone the DIY route with low-cost index funds and robo-advisors. After some research, Sarah realizes that, while Brad might have been helpful in the beginning, the long-term costs aren’t worth it.
Instead, she opens a TFSA (Tax Free Savings Account), invests in a few low-cost index funds, and sets up automatic contributions each month. The best part? She’s saving on fees, letting her investments grow with minimal interference, and still building her wealth.
Moral of the story? Sometimes the high-cost route isn’t the best choice in the long run. If you’ve got the time and willingness to learn about your options, going it alone or with a robo-advisor could save you some serious cash—and a lot of compound interest.
So, before you book that meeting with Brad, take a step back, do your research, and make sure you’re making the best decision for your financial future. Because no one’s got time for losing out on those sweet, sweet compounding returns.
Sorry, not sorry, Brad.
Okay, but what if Sarah needs more financial advice?
Sarah could hire a flat fee based advisor, rather than a percentage of assets under management (AUM.. AKA your wealth).
What are your thoughts on Sarah’s decision? What would you do?