Who Wants to be a Millionaire?

If you didn’t start saving for retirement yesterday, you should do it today. You may be surprised to learn how little you need to put away to be a millionaire at retirement.

For those of us starting out in our careers, being a millionaire may seem like a goal that’s so far away it may as well not exist. Fortunately, we don’t need to be John Carpenter and cruise through difficult questions on Who Wants to be a Millionaire to attain that goal.

We also don’t need to be making six figures or placing bets on Dogecoin in hopes that Elon Musk’s tweets will send it to the moon.

The two not-so-secret ingredients to achieving that milestone? Time and discipline.

Compound vs. Simple Interest

In order to better understand how time and discipline are our best friends when it comes to maximizing our investment growth, we need to understand how our money earns more money.

There are two types of interest: simple and compound. Simple interest is the type of interest we pay on a mortgage, where the interest rate is only applied to the principal balance of the account. This is why interest payments are much higher in the early years of a conventional mortgage, as the principal balance is much larger than the later years.

On the other hand, compound interest earns interest on top of the accrued interest (hence the “compounding” nature of the term). Savings accounts and investments in our work 401(k), Roth IRAs and brokerage accounts earn compound interest, where the growth of our money stacks on top continuously, “compounding” the amount of earnings we can achieve.

There’s a reason Albert Einstein called compound interest the eighth wonder of the world!

The “Time” Factor: Start Early & Don’t Look Back

How can we use compound interest to our advantage? Start saving early.

If we saved just $10 per day (equivalent to $300 per month), and earned a modest 4% inflation-adjusted return, how much money would we have at age 67 when we retire? The following graph shows what happens the longer we delay our savings.

This is where we see the time factor start to play a major role in getting us to our millionaire goal. Unsurprisingly, the effects of compound interest (as noted by the gold bars in the graph) get increasingly larger the earlier we start to save.

The “Discipline” Factor: Consistency Is Your Friend

Of course, time only works to our benefit if we are disciplined with our saving. Discipline is often considered one of the most important traits needed to build wealth, and our compound interest graph above shows why.

But just how much discipline would it take to ultimately achieve our millionaire goal? Using the same modest inflation-adjusted return projection of 4%, the illustration below shows varying dollar amounts we could save every single day to ultimately end up at $1,000,000, with the blue line indicating the number of years it would take to reach that milestone.

Here, we see the effects of compound interest most notably in the $5 per day scenario: it requires the least amount of initial investment and has the most compound growth, at the expense of taking almost 78 years to reach $1 million.

However, if we can stretch our savings to $25 per day, we can become a millionaire in 42 years. In today’s day and age, this is a pretty standard working career and will definitely require more discipline, but is absolutely achievable.

Slow & Steady Wins the Race

If there’s one lesson that you should learn from this, it’s just that: slow and steady wins in the long run. It’s not flashy and doesn’t make for very eclectic conversations around the Thanksgiving table, but that’s okay. Last time I checked, the tortoise won the race!

Human beings are creatures of habit and the sooner we can develop positive, easily repeatable habits with our finances the better off we’ll be in the long run. The graphics above are an attempt to illustrate this idea: we give up the opportunity to hit a home run in the short term to avoid striking out in the long term.

Regardless which savings path we choose to embark on, it’s just important to pick one and get started. Remember that the choice is not between $25 or $0 today: even if we save $10 per day, using the graphics above, we now know what that will look like over the course of our lives. The simpler we keep our financial lives the better off we’ll be!

In an age of infinite information at our fingertips, it can be very easy to become overwhelmed when you’re trying to make an informed decision. When this decision concerns who you want to entrust your finances with, it’s paramount you make the right choice. I’m going to boil down all the information regarding this decision into 3 important traits you should have in your financial advisor.

On the surface, it may seem like all financial advisors are the same: “They just manage my money right? They have stock picking expertise and can maximize my returns?” Not exactly.

There are really two “worlds” in the financial advisory industry that clients can live in: the broker-dealer world and the independent world. The broker-dealer world is characterized by firms like Merrill Lynch, Morgan Stanley, UBS, Ameriprise, and Edward Jones. The independent world consists of Registered Investment Advisors (RIAs) that follow the guidelines of the state they have a main office in (< $100 million in assets under management) or the guidelines of the Securities and Exchange Commission (SEC; >$100 million in assets under management).

Throughout this post I’m going to be discussing the 3 traits you should look for in a financial advisor and how they operate in each “world” so you can make a more informed decisions on who you want to hire.

• Ensure the advisor you hire is a fiduciary
  • Are there fiduciaries in the broker-dealer world?
  • Are there fiduciaries in the independent world?
• Ensure the advisor you hire is fee-only
  • How are broker-dealer advisors compensated?
  • How are independent advisors compensated?
• Ensure the advisor you hire has the CFP® credentials
  • Do broker-dealer advisors have the CFP® credentials?
  • Do independent advisors have the CFP® credentials?
• The Bottom Line

Trait #1: Ensure the advisor you hire is a fiduciary

Perhaps the most important characteristic in a financial advisor is whether or not they are a fiduciary. According to Investopedia, a fiduciary is defined as “a person or organization that acts on behalf of another person or persons, putting their clients’ interests ahead of their own, with a duty to preserve good faith and trust.”

Are there fiduciaries in the broker-dealer world?

There can be, but it is not a requirement. The firms named above are subject to the “suitability” standard as opposed to the fiduciary standard, where they have a requirement to ensure that an investment or particular course of action is “suitable” for someone in your situation.

Picture two investments: Fund A has an expected return of 10% and has $50 in fund expenses associated with it, while Fund B has an expected return of 10% with $100 in fund expenses, and a broker has determined that both of these funds are considered “suitable” investments for you. The broker bases this on factors like your age, time horizon, and risk tolerance.

Even though both funds are expected to return 10%, a broker may place your money in Fund B if he/she earns an extra commission off of it. This is an inherent conflict of interest that’s present in the suitability standard.

Are there fiduciaries in the independent world?

By definition, all RIA firms are required to adhere to the fiduciary standard. RIAs have an ethical and legal requirement to place client interests ahead of their own.

In the scenario above, a fiduciary would first have to consider more than just your age, time horizon and risk tolerance before making an investment recommendation. Things like debt or emergency savings should be considered first before allocating monies towards investments, and then things like life insurance or an umbrella liability policy would be considered.

Ultimately, if it is determined that investing is in the best interest of the client, a fiduciary would be obligated to develop an appropriate asset allocation (percentage of monies in stocks, bonds and cash) that fit within the “life portfolio” of the client at the lowest cost possible.

Trait #2: Ensure the advisor you hire is fee-only

Another important factor for people to consider when hiring a financial advisor is how that advisor is compensated. We all know the prices we pay at the grocery store and the gas pump, and it should be no different for the people managing our money.

The most common way financial advisors are compensated is based off a percentage of assets under management (AUM). Within this AUM structure, there are two ways financial advisors earn their money, which are called “fee-based” and “fee-only.” There are some firms that charge hourly rates, flat fees or even a retainer fee, but these are less common and will not be addressed in this post.

Fee-based financial advisors are paid directly by their clients and can also earn commissions off products they sell to those clients. Fee-only financial advisors are paid directly by their clients and do not receive other sources of compensation. Before engaging with a financial advisor, be sure to read their firms’ Form ADV which outlines their compensation structure along with other important firm information (here is Praetorian Guard’s Form ADV as an example).

How are broker-dealer advisors compensated?

Most brokers tend to fall under the fee-based model, which would be the broker in the suitability example above. A Morgan Stanley or Merrill Lynch advisor will often construct a portfolio with proprietary Morgan Stanley or Merrill Lynch funds that you’ll be paying commissions on, in addition to the AUM fee. These funds will be suitable for someone in your position, but they may not be in your best interest.

Broker-dealers are not required to disclose this information to you prior to engaging their services.

How are independent advisors compensated?

RIAs are most commonly fee-only, as they are also required to be fiduciaries, but some RIAs operate in the fee-based model. Most independent firms are compensated from their clients directly, and they do not receive commissions or other forms of compensation from financial product providers. If an independent firm recommends a specific type of investment for you, it’s because that investment is in your best interest and the firm is not getting paid anything additional for placing your money in it.

RIAs as fiduciaries also have an explicit requirement to be transparent about the fees they earn. They are required to disclose this information (along with any material conflicts of interest) to you prior to agreeing to provide any advisory services to you.

Trait #3: Ensure the advisor you hire has the CFP® certification

Regardless of what “world” you decide to entrust your money with, it is very important that the advisor you choose has the CERTIFIED FINANCIAL PLANNER™, or CFP®, certification. According to the CFP Board website, “CFP® professionals take a holistic, personalized approach to bring all the pieces of your financial life together. As part of the CFP® certification, CFP® professionals also have made a commitment to CFP Board to act as a fiduciary when providing financial advice to a client.”

Advisors who want to obtain the CFP® marks must have a bachelor’s degree in any discipline, complete Board certified coursework (12-18 months), pass a 170-question exam over the course of six hours (roughly 65% pass rate), and have 6,000 hours of professional experience before they are allowed to use the marks in a professional capacity. These rigorous requirements ensure advisors are qualified to provide holistic financial planning to a wide variety of clients.

Do broker-dealer advisors have the CFP® credential?

The short answer: some do, but not many. The long answer: having the CFP® credential in a broker-dealer environment is a bit of an oxy-moron, as the CFP® profession has a foundation in the fiduciary standard. In the financial advisory space, being a CFP® professional and being a fiduciary are practically interchangeable, so it’s a bit strange to be held to a fiduciary standard in a suitability model. Aside from the apparent conflicts of interest (and it being strange), the CFP Board does not bar broker-dealer advisors from being CFP® professionals.

Do independent advisors have the CFP® credential?

The short answer: some do. The long answer: independent firms and their employees are bound by the fiduciary standard, but this does not mean that they need to have the CFP® marks to be advisors. It is much more common to find CFP® professionals in an independent firm as opposed to a broker-dealer, as they both abide by the fiduciary standard and share similar values and approaches to financial advisory services.

According to the CFP Board website, as of March 1, 2023 there were 94,968 CFP® professionals nationally. The Bureau of Labor Statistics, as of May 2021, showed there were 330,300 financial advisors in the United States, which means that CFP® professionals make up about 28% of all advisors. This percentage is so low largely due to the stringent and time-consuming requirements needed to become a CFP® professional. The workload that is associated with holistic financial planning is also much greater than purely investment management, an approach that is more common in the broker-dealer world.

The Bottom Line

Everyone needs financial planning in their lives, at some capacity. This capacity will change for everyone depending on age, job prospects, or family and health situations as they go through life. It’s better to navigate these difficult situations with an experienced professional by your side, guiding you through the financial wilderness.

It’s imperative to ensure the advisor you select is sitting on the same side of the table as you are, whose interests are aligned with yours. It seems obvious a financial advisor should do what’s in your best interest but we know that is not always the case.

Choosing a financial advisor is not always straight forward and there are quite a few factors at play that need to be considered carefully before making a decision. Hopefully this post helped equip you with the knowledge you need to make sure you have a valiant advisor with you through that wilderness!