5 Reasons hiring a financial adviser might be a mistake
Millions rely on financial professionals to do their investing for them but not everyone knows how to hire a financial planner the right way — or when to say no to one.
On the surface, the rationale for hiring a financial planner or advisor seems valid. People feel intimidated by the whole investing thing. It seems like a jungle out there and, to boot, most people know someone who lost it all with bad investments. Others believe they just don’t have enough time to learn about investing or to maintain their investments on an ongoing basis.
It’s so common, we don’t even recognize it as a mindset: Instead of changing our own car’s oil, cleaning our pools or windows, mowing our lawns, doing our own taxes or our own nails, we get someone else to do it, someone who specializes in that particular endeavor. We tell ourselves we don’t like doing that thing and, besides, they do a better job, so why not get an expert to do it? After all, we can afford it.
So what are the reasons for saying that hiring a financial advisor might be a mistake?
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1. Competing interests
Like it or not, investing will be your ultimate career. Whether you are an engineer, administrative assistant or plumber, there will come a day when you no longer make the majority of your money from that career, i.e., your labor. When that day comes, you’ll derive most of your income from your investments, i.e., your capital.
Many times people hire others to do services like mow the lawn, fix a car, or do their nails. And it may make sense to outsource these services if you aren’t particularly good at them or you don’t have much time to devote to them.
But the fact that it makes sense to hire people for those activities does not necessarily mean it makes sense to hire someone for your very income … because that is what you do when you hire a financial advisor. And the fact is that an advisor may have very different goals for your money than you do.
2. Exorbitant expense
In a service economy, everyone performing a service gets paid for that service. You pay the person doing your nails, your taxes, or your lawn, etc. You also have to pay your financial advisor (whether it be out in the open or in the form of hidden commissions or kickbacks).
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When you consider that, on average, your investments will earn around 8 percent per year, if you are lucky, and an advisor takes 2 percent (or something close to that) off the top, that is huge!
That is a steep price to pay someone for something you can easily do yourself.
And you can.
3. It’s not that hard
Investing is not rocket science. The financial management industry spends billions every year in advertising and other forms of marketing, all geared to create the illusion that this investing business is a vicious dragon, shrouded in mystery, just waiting to pounce on you if you just dare to venture within a mile.
Nonsense.
I’ve already written about my neighbors:
- Jim, making an average income, started out hiring an advisor, whom he fired after only a few years because Jim said he can figure out a few simple investments to see him through. They did.
- Mario, my other neighbor, has a small neighborhood auto shop. He is good with people and working with his hands. He doesn’t want to pay someone to invest in stuff he doesn’t understand, so he and his wife are building up a portfolio of homes they rent out.
- I have another old friend from California who became a millionaire with both real estate and individual stocks. I once asked him if he would consider hiring a paid professional. He wasn’t scornful or anything; but he said there is nobody out there who cares as much about his portfolio as he, so why pay someone to do something he can learn to do himself?
Investing is neither hard, nor all that time-consuming. In my opinion, it certainly is a lot easier than changing my car’s oil. Why pay someone to do what you can do yourself — especially when that cost constitutes a significant chunk of your income?
Investing can be as simple as buying two or three index funds. Boom, you’re done. Why pay someone to do that for you?
Their argument might be that they can bring their professional expertise to bear and make you more money. Here is not an opinion, but a fact: The vast majority of money managers fail to beat an S&P 500 index fund. Again, that is a fact, not an opinion.
That fact leads to the question: Why pay someone to do worse than I can do by investing in the market? And doing that is easy: Simply buy two or three index funds and you are set to beat 70 to 80 of the paid professionals out there … for but a fraction of the cost.
4. Increased risk
All those stories about people losing their money in scams and bad investments? The vast majority of those scams involve financial advisors. You might argue your advisor is different; he is trustworthy. Their clients believed that about each and every one of the scammers. Just saying.
You might think adding a professional advisor in your personal finance equation will reduce your risk, but the truth may very well be the opposite. Actually, you are adding one more layer of things that can go wrong. The less you know about investing, the more vulnerable you are to incompetence at best, or fraud at worst.
Your best defense is simply doing simple, cautious investing yourself.
5. Personality conflicts
When you buy a house, do you call up a real estate agent and tell her what you want, then tell her to call you when she has bought the house and you can move in?
No, of course not. You want to see all the houses which meet your criteria, and you want to be the one making the final decision.
It’s the same with a job: You want to meet your boss and see the place before you resign your current position to take that new one. You won’t simply take someone else’s word that that new job will be the perfect one for you (especially if that person takes 20 to 30 percent of your paycheck each and every month until you die).
Like a house or job, your investments should reflect your tastes and skills. If you are a handyman or a good people person (like Mario), then building a portfolio of rental properties might make more sense for you. On the other hand, if you’re an introvert like Jim, you may feel more comfortable investing in marketable securities which you can research. Any normal person is much less intimidated and much more involved in things toward which they feel a natural affinity. Financial advisors also gravitate to the things they know and the things they make money from, like annuities.
Investing, like I said, is not rocket science, just like finding a job or buying a house isn’t rocket science. Furthermore, just like a job and a house, investing is a vital part of your future. Just like a smart person takes ownership of their own home or their own career, they will take ownership of their investing as well … which is, after all, their final career.
Lifetime cost/benefit analysis
Many things in life boil down to a cost/benefit analysis. I paid Mario $140 today to change our Jeep’s sway bar links (so I can continue to drive on all those rough roads I love to explore). I also paid Jaime $350 last week to remove a 20-year old red maple tree which fell victim to old age and bugs. There is no way I could have done either. The benefit of what they did for me outweighed the cost by a handsome margin. And those were one-time expenditures.
Investing, however, is not nearly that difficult. Why give away a big chunk of my income every month for buying two or three index funds?
As stated above, this is nothing more than an opinion. Respectfully, what do you think?
Do you agree with this reasoning? If you outsource your investment decisions, are you interested to take a bigger role in your future income? If you make your own investment decisions, what advice would you give others to help them be successful?
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There are 61 comments to "5 Reasons hiring a financial adviser might be a mistake".
I agree completely!!
I think that it has been a concerted effort by the financial services industry to confuse and intimidate the small investors and 401K/403B account holders into just handing them the reins and stepping back. The 2007/2008 implosion is the most recent and glaring example of how letting others manage your retirement is a bad idea. You can guarantee that the managers and advisors pulled their money first and then ‘got around to’ notifying their clients that there might be a problem and they should do something. I waited a bit longer than I should have but I unloaded all equities on September 22, 2008 and watched as others lost half or more. The sad thing is I told my friends what I did and they told me I was crazy, their advisor said it was a 10% reset and not to worry. I never did ask them if they asked their advisor when he pulled his money from the market. Actually I NEVER brought up investments with them again, it just hurt too much.
Bottom line: NO ONE cares more about how your investments do than you do. Over time, a good bond index fund and a good stock index fund, both with minimal fees and intelligent rebalancing is the best course for individual investors.
Actually, the earth isn’t round. But I digress.
This article is timely for me because I’m thinking of enlisting a financial planner and am weighing the pros and cons. However, I don’t find these arguments particularly compelling. “Simply buy two or three index funds and you are set to beat 70 to 80 of the paid professionals out there”. Fantastic. And how do I know which of the two or three index funds to buy out of the hundreds of choices? I already know to get out mutual funds and look at index funds and ETFs — but what do I buy instead?
And because some financial advisors were scammers makes everyone in the professional a scammer? Bit of an exaggeration. Yes, there is risk, but we’re constantly at risk of identify theft and fraud simply using a debit or credit card, and someone hacking a database somewhere and getting our personal and financial information. We can lock ourselves up in safe little bubbles or we can learn to use tools in a way that minimizes our risk as much as possible.
I do agree that blindly turning your finances over to someone is a bad idea. But I don’t think enlisting some help is a moral or intellectual failing either — IF you are willing to do the research to find the right person and be actively involved in the decisions.
I’m not sure if hiring someone is the way to go for me. I don’t suppose there’s a second part to this article arguing the opposite point of view? 😉 I would love to hear other people’s thoughts.
What if, instead of hiring a financial adviser to manage your investments, you meet with a fee-based adviser to provide some advice on choosing index funds and what mix you would like to achieve. That way you’re getting the advice you would like by paying an upfront cost instead of paying ongoing costs in perpetuity.
Thanks for your response! This sounds like a good solution. The idea of turning my finances over to someone I barely know is NOT going to happen. On the other hand, I’ve had a self-directed investment account for over a year and haven’t done anything with it because I’ve been too bogged down in the research and too indecisive.
Guess whose new year’s goal is to change all that? 😉
It may seem counter-intuitive, but the more you research, the worse your investments may do. “Why?” you ask. It tends lead to being more active with your investment portfolio, which increases the likelihood of making a mistake. Follow Jeannine’s advice below and you will beat the vast majority of professional fund managers and financial advisors.
The part you should focus on is your asset allocation, which is primarily a function of you age and risk tolerance. If you are fairly risk adverse, the percentage of your portfolio invested in Vanguard’s Total Bond Market Index Fund should be roughly equal to your age. If you can handle a bit more risk, subtract 10-20% from your bond allocation. Of the remainder that is to be invested in stocks, allocate 2/3 to the Total Stock Market Index Fund and 1/3 to the Total International Stock Index Fund (some people prefer a 50-50 split).
Of course, you don’t have to use Vanguard. Other brokerages offer similar low cost funds as well. Vanguard was simply the pioneer for low-cost index funds.
Other than asset allocation, the most important factor in success is consistently adding to your portfolio over time, whether the market is going up or down. Don’t try to time the market. If you can automate your contributions, that would be the best approach.
I’m replying to Beth, because she’s actively considering hiring an advisor. However, this response is aimed more broadly at the article as a whole.
I am a financial planner, and I was honestly surprised to find that Mr. Cowie’s opinion was actually “financial advisors are never worth it.” I feel a little obliged to defend my profession here, so I will offer a few comments of my own.
First, comparing all financial advisors to hedge fund managers is really a misclassification. Hedge funds are financial products, in the same way that mutual funds and ETFs are products. A hedge fund manager is much more like a mutual fund manager than a personal financial advisor.
Next, comparing most advisors’ fees to hedge fund fees is unfair. I absolutely agree that someone who charges you 2% per year to manage only your investments is ripping you off. A reasonable range of fees is between maybe 0.25% (for robo-advisors) and 1.5% (at the VERY high end), depending on the other services the advisor offers.
Now, on to some of the benefits.
Choosing investments and sticking with your investment plan are very different animals. The latter requires a lot of discipline, and not everyone has the emotional resources to watch their portfolio drop by 30% in a market downturn without doing anything. Several people have commented that nobody cares about your money like you do, and that’s right – but the flip side is that you’re more likely to react emotionally when something happens. A good financial advisor moderates her clients’ panic in downturns AND exuberance in rallies, and can help the client take some of the emotion out of all of their financial decisions.
A major service our firm offers to all of our clients is comprehensive financial planning, and I believe that this is really where the value of a financial advisor comes out. If you have a solid understanding of your whole financial life, then you may not need a financial planner. This blog tends to focus on investing and budgeting (and retirement planning, to some extent), but estate planning, insurance (including auto and homeowners, but also life, disability and long-term care if you need it), and taxes are all very important as well. Many people struggle to see their broader picture because it really can get very complicated. A good financial advisor helps simplify these areas and their interaction so you can make more informed decisions. Not everyone needs this kind of help, but you also don’t need to be rich to have a complex financial life.
“Financial advisor” is, unfortunately, a very broad term that encompasses a wide variety of roles ranging from salesperson to investment manager to financial planner. If you’re considering hiring an advisor, look for a fee-only (i.e. the only compensation comes directly from you) financial planner, and ideally one who has a CFP. CFPs are obliged to act as your fiduciary, meaning they must act in your best interest. You should absolutely shop around, too, to make sure 1) you actually need the services offered, and 2) you feel comfortable with the advisor. If you don’t like the feel of an advisor, for whatever reason, don’t hire him. It’s crucial to find someone you’re comfortable with, because the relationship is a very personal one.
I could go on, but this comment is going to rival Mr. Cowie’s soon in length! Hopefully this provides some nuance to the discussion, and also helps you – Beth – frame how to think about whether and how to hire an advisor.
“not everyone has the emotional resources to watch their portfolio drop by 30% in a market downturn without doing anything.”
Which an advisor can’t really fix. The easiest way to avoid that financial roller coaster is to realize that when you are buying, market crashes are a good thing. They are an opportunity to buy low. The only time a crash matters is if you are selling. Financial advisors just exacerbate the problem by focusing people on their portfolio’s current value when that is pretty much meaningless for someone who is not going to start selling for another 20 years.
One of the big advantages of index funds is the confidence that you will match the market. That means when the market goes up again, so will your values. You don’t need to worry about whether you have the right stocks, just the right mix of investments. And if you focus on keeping that mix, you will naturally sell high and buy low as the market goes through its normal fluctuations.
On the other hand, if you have a managed fund of any kind there is the possibility that those losses are permanent. The market may go up, but that fund that looked so good when it was growing fat loaded with oil stocks may not.
Thank you for taking the time to respond to my comment! I appreciate hearing another point of view.
I haven’t decided what to do yet, but have asked some friends and colleagues for recommendations for potential advisors. There are a lot of things I don’t need an advisor for, so that’s helping me eliminate candidates.
“we can learn to use tools in a way that minimizes our risk as much as possible.”
I think the point was that financial advisers are not that kind of tool. The process of using one brings increased risk. One risk is that they will fail to provide good advice. Another risk is that they will have conflicts of interest. Another risk is that their fees will cost more than any value gained from their advice. And, in fact, there is a lot of evidence that those risks are more likely to materialize than not.
By contrast, buying index funds is easier, cheaper, less time consuming and has none of those risks. And the financial return is likely to be better.
I read an interesting post today that commented that if you’re look for an advisor just to help you pick a few index funds then you’re a fool. (Gulp). The main argument of the article was that financial advisors are so much more than that — but those were services I don’t need (like getting out of debt, setting a budget, etc.)
I just want my investments to work harder. (Doesn’t everyone?)
I would suggest Vanguard for your purchase of index funds – Total Stock Market Index, Total Bond Market Index, and Total International Stock Market Index. These three would give you a well diversified, low cost, and simple portfolio. Another suggestion for a retirement account would be one of the Vanguard Target Date Retirement Funds. I would also second an earlier comment regarding visiting and reading the Bogleheads.org website where you can learn much about doing it yourself and indexing. The people who post on that site are very generous with their time and expertise as it relates to investing, managing money, etc.
Just blindly handling your finances to somebody might be a bad idea for your finance either personal or business finance. There are n number of advisers in USA who can provide this service. The main thing is to know the basics of finance. Many of us might not have time to go through the basics and gain knowledge to handle our finance but practice makes a man perfect. Little knowledge of yours and the tricks by financial advisers together can act well for your money.
Choosing an a portfolio of index funds is way easier and more certain than choosing an investment adviser. So the basic message here is correct.
Where you go off track is with this, “If you are a handyman or a good people person (like Mario), then building a portfolio of rental properties might make more sense for you.” A “portfolio of rental properties” is not an investment, its a business. You recognize this when you talk about Mario’s qualifications for the job as a handyman and people person. There is nothing wrong with using your money to start a business, but it is not the same as investing your savings.
For most people there is really only one investment decision to make, at least with their retirement savings; what index funds will give you a good asset mix. You can find plenty of good advice on Vanguard or Fidelity to help you choose an asset mix and index funds to build a portfolio that matches that mix. Vanguard even has a portfolio analyzer that will evaluate your portfolio, identify where it is not diversified and allow you to test changes to improve it.
The other thing is that 8% is not really an expected return, it is the top end of historic returns including inflation. When you adjust for inflation the return is lower. Which makes that 2% an even larger portion of your real return.
However you calculate it, that 2% is a huge cost. At 8% your money doubles every 9 years and at 6% it doubles every 12 years. If you start paying a financial adviser 2% of your savings as you approach 30, you will only have about half as much money when you retire 36 years later. Your money will have doubled 3 times instead of 4 times. That is the “miracle of compounding” in reverse.
Hiring an advisor to me does not mean outsourcing my decisions. I work with an advisor, but he gives suggestions and I take or don’t take them based on my own research. Some of his suggestions are good and things I never would have thought of myself. Some of them are not. What I do like:
He made sure that my inherited IRA got rolled over correctly and that I take the distributions for them on time; he keeps me abreast of muni bond opportunities (which can be hard to sort through unless you want to go with funds); he provides good information and a sounding board, but ultimately I make the decisions.
Great points to consider. We have never hired a financial adviser for these reasons. I prefer to do my own research and maintain more control, and avoid paying fees. I’m sure adviser’s have their place, and our finances aren’t that complicated at this point, but I also prefer to “DIY” as much as I can.
I think a financial planner like a good mechanic are worthwhile but also not for everyone. As you mentioned everything is an investment of capital (time, money, labor, etc…) many of us have the money but not the time or the inclination to spend out time researching investments. My wife loves excel and does a fantastic job of running our household budget but the only thing that loses her interest faster than car parts is researching financial investments. For this kind of person they can in vest their capital doing things that generate money and the investment advisor (a good one) will provide continued updates on your investments be it ETFs,individual stocks or investment of your choosing. Like a realtor you tell your advisor what you are looking for and discuss a strategy that works for you. Then it’s up to you to meet periodically with the advisor to make sure you understand what is happening. If they can’t explain in a wake that makes sense to you then you don’t have the right person.
I could go for that approach!
Good points here.
I think some people may get intimidated thinking investing involves math calculations and financial equations. There might be others that do not want to take responsibility in case there was a bad decision – can point fingers even if you got fleeced.
For those interested in learning easy basics to advanced topics and need advice from people that have done it themselves please check out the Bogleheads forums. Forum threads cover portfolio allocation, review of your portfolio if you need, insurance questions, inheritance, almost anything you may want to find from an Investment professional. Link:
https://bogleheads.org/forum/index.php
I have given a lot of financial advise to friends/family over the years and I have never advised someone to see a financial adviser. The primary reasons for this are as follows:
1. Many the people who come to me for financial advise are older individuals with little or no income/savings. They are not so much is a position to invest and their horizon is too short to make it worth their effort.
2. They have other, more pressing issues that they really need to get a hold of first. Unnecessary bills, no written budget, expensive debt and no sense of what their current financial situation really is.
3. There is an obvious, not bad choice. Most of the individuals I know are in the same retirement system as I am through their employer. The fees are low, the investments are diversified and life is boring.
4. I want people to take the easiest route possible to get them started saving something. People don’t really care about any of this until they have some skin in the game.
A few years ago, on the advise of a trusted friend, I contacted her financial advisor who promptly charged me over $3,000 to go over our financial life. He did a very thorough check on our real estate investments and mutual funds and made some interesting points for us to consider. Although we had told him we wanted to stay with Vanguard, he went all out to sell us on his company and did an extensive presentation on the merits of doing that. We told him we had to think about it and never contacted him again. I always felt that the money we paid him for his initial analysis was probably a savings in the long run. I’m sure we would have ended up paying him far more in commissions, fees, etc. The bottom line, I totally agree with buying two or three index funds in Vanguard for example, as we’ve done, and save a ton of money over the long term!
I agree with all your points – it’s tempting to fall into the financial adviser narrative – especially once you reach the 7 figure net worth. Being that I started investing in my 20’s and have kept control of it all over the years – it would be silly for me to hand over my money to someone and let them siphon it off a bit at a time. I invest in Vanguard funds – because they are the lowest cost, just a few indexes to convince myself that I am diversified. But don’t take my word for it – listen to Warren Buffet or Tony Robbins (highly recommend his Money book). And finally – no one will look after your money as well as you will – nor should they – if you want to keep more of it – take the time. I love the comment that we all become investors in the end (that or employers).
Thank you for writing this up – I am saving it for later.
I would check with your credit union. Our financial advisor is free, however, if you buy any of their products you will have to pay some. It doesn’t hurt to’
check it out. Check with Charles Schwab.
Something that would be nice to do is to buy a mutual
fund and put 50 dollars a month in it or more if you can. Then when you die pass it down to your kids with
the advise to live off dividends and never sell the stock or mutual fund. It is a passed down legacy from my
Dad to me,my Daughter and on to Grandkids. The dividend
check gives you a little amount that you can reinvest or spend on your legacy account you leave for your kids. My Dad didn’t go to high school but he was smarter than most when it came to money.
Hiring a financial advisor may not be for everyone. Neither is putting all your money in index or bond funds sound advice for all.
I have a background in the financial industry and advocate financial planning services. I was never a financial rep, but did hold my Series 7, 9/10, 24, and 66 licenses required to fulfill my compliance responsibilities. I started in the Flash Crash of 2010, and stayed through the Dow surge (over 18,000). I’m no longer on the investment side.
For those who are fee-conscious, you may be surprised what transaction/annual fees you are paying to discount brokerages. There are products out there that charge as little as 1% a year on your total assets despite performance, as opposed to 2%+ for annual and trade fees. But you may not have known about some low-cost products unless you spoke with a financial advisor whose firm offers those products. Furthermore, knowing if this product is right for you is a decision you make on your own. The financial advisor can’t do that for you.
I applaud DIY-ers. I landscape my own garden, make my own household cleaners, and made my own bridal jewelry. But I choose to pay a car mechanic to change my tires, pay an independent HVAC repairman to service our heat pump, and consult with my financial advisor about market volatility and emerging products. That’s where I strike my balance.
I read several personal finance blogs. I hope one day an author will flip the coin and give 5 reasons why it may be a smart move to hire a fee-based financial advisor.
I don’t disagree with your basic premise…that it is more efficient and cost-effective to outsource certain activities. But I do want to comment on a couple of your statements.
“There are products out there that charge as little as 1% a year on your total assets despite performance.”
“Despite performance” is a key part of this statement. FAs get paid even if you lose money. Granted, it isn’t the best approach for maintaining one’s client base.
And in my opinion, 1% is still too high. The average expense ratio for the funds I hold is less than 0.1%. If a person invests $100,000 for 30 years at 7%, the difference between a 1% and 0.1% fee is nearly $166,000. In other words, the investor paying 1% is giving up 26% of their earnings. The majority of Americans could live off that amount 4-5 years during retirement.
“But you may not have known about some low-cost products unless you spoke with a financial advisor whose firm offers those products.”
This sounds like a line straight out of a financial services sales pitch handbook. It takes very little research to build a well-diversified portfolio with much lower expenses than any commission-based financial advisor would offer, all the while, increasing your odds of earning significantly higher returns.
However, I will note that the typical investor has the tendency to get scared and liquidate their investments at the wrong time. So if a person lacks the self-discipline to stand firm during both upswings and downturns, a FA may keep them from making an ill-timed decision.
Understanding efficient investing principals requires a minimal amount of reading of great books like “Four Pillars”, for example. The savings over the long term is tremendous!
If necessary, hire – at an hourly rate – a fiduciary CFP to review your plans.
I agree with your 5 points.
I just can’t seem to stomach handing my money over to someone else. I will always prefer to do it on my own, even if I have to make mistakes and learn on the way.
This article is upsetting. One of the most disappointing reads recently.
It is all about scaring people.
Just like with any profession, priests, teachers, policemen, etc, there are people that fail miserably at their job or intentionally abuse others. That is not to say that all do or even the majority. The truth is the same for “money professionals”.
Also, fees are more transparent than ever. For years people have thought there were no fees or charges associated with 401k investments… Wrong.
But again transparency is very common in 2015. Look and you will find. Plus there should be some fees, are they suppose to work for free? Many are college graduates with annual continuing education and many have the CFP. Fair compensation is due.
If they live in a nice neighborhood then it could mean many different things such as they have many clients, have invested well, or maybe their spouse is responsible.
There is no more risk most likely less with advise. Many invest all in one fund, in their company stock or don’t invest at all. Professionals determine your risk based on questions. They invest based on your tolerance. Again Not more risk, less.
The example of the rich and the hedge funds is factual yet misleading. If they felt the expense was unfairly exorbitant and of no value then there would be no hedge funds right? If you can afford the risk and the investments are successessful, then the fees regardless of the amount are warranted. Again, if they felt the return was too low and the fee to high then they go elsewhere not keep coming back for more.
Many advisors in 2015 charge a fee not a commission therefore the client and advisor share the same interest. If the account value increases then that’s good for both. If the account declines neither are happy. Win win. Lose lose. No hidden agenda or interest.
It’s easy you say…. Lol.
If it were so easy, then the values of savings accounts both taxable and retirement accounts would have much higher values than they do because everyone would be invested and selecting the correct investments and appropriate allocation. The numbers don’t lie.
Investing and personal finance is more behavior than anything else. People don’t save enough, overspend, postpone planning too late, want to retire too early, don’t allocate enough, jump in and out when things get bumpy, and so on.
Most people could benefit from advise.
Again I think this article stinks. Many need help, even only one time to get started.
These types of aricles will only paralyze those that need help.
It’s easy to lambast financial service reps in hindsight of the crash. People need an enemy. That’s why this article garnered so many ‘clicks’ and comments.
In spite of the crash, financial service careers continue to grow because more people are saving for their future in the wake of diminishing pensions.
I forgot to say I agree with your comments, Amy B.
” Fair compensation is due.”
I think you missed the point. The compensation you are “due” is based on the value of your services. The point was that a financial advisor’s services are not very valuable. They are as likely to lose you money as they are to make you money.
Of course most financial advisers are not crooks. Neither are most car salesman. But they are a business and they need to be compensated. That money has to come out of your pocket somehow. You wouldn’t trust the car salesman to get you the best deal on your car or to avoid unnecessary costs.
“transparency is very common in 2015. Look and you will find.”
Transparency is not universal. Which means you need to know where to look or just trust that whoever you hire is being transparent. As an example, you may be paying a fee up front to a financial planner who is also getting a commission on the funds recommended. Or you may be paying a percentage to the planner, but the funds recommended are also charging you management fees so that your total costs are much higher than what it appears.
In short, choosing an advisor is a lot like trying to choose individual stocks. There is less risk, less research and less knowledge required with buying index funds than there is to carefully choose a financial advisor.
“Many advisors in 2015 charge a fee not a commission therefore the client and advisor share the same interest. If the account value increases then that’s good for both. If the account declines neither are happy. Win win. Lose lose. No hidden agenda or interest.”
This statement doesn’t make sense Amy. Once the fee is charged, the financial advisor has nothing more to win by increasing the account value. Commission-based services have a bad rap, but that’s actually a sure fire way to make sure your advisor is constantly fighting for you to make the most money from your investments. Just like William Cowie was trying to get across, the trouble with this scheme is that you are constantly paying out a decent chunk of your earnings. My opinion is that you get what you pay for. If you pay a flat fee, you get very base level service. If you pay commission, you will get a much more attentive advisor (although this may or may not translate to better returns). Flat fee = transactional business (i.e. you and your money are just numbers, once the transaction is complete you mean nothing to the advisor and they are on to the next transaction), commission = relationship building.
Just to be clear, commissions are based on the amount in the portfolio, not on the returns on that investment. There is some skin in the game for the advisor on a commission, but not much. Their commission goes up if your savings go up, whether that money is new savings or returns.
I suspect that no matter how they are compensated, relationships are the cornerstone of a financial adviser’s success. That is why they define your “risk tolerance” as determined by your emotional state rather than your financial situation.
I completely disagree. Unlike doctors, attorneys or CPAs, there are no meaningful, uniform licensing requirements for “financial advisers” or their ilk. The fact they may owe you a fiduciary duty means nothing, Madoff owed his clients a fiduciary duty, attorneys who steal from their clients breach their fiduciary duties. If you have no way to insure yourself against the theft of your funds the answer IS simple, manage them yourself. Worst case a lot of regulated AND insured entities DO offer real protection against embezzlement and without that you may as well play craps in Vegas.
Madoff was a broker, and therefore not a fiduciary–he was legally obligated to recommend appropriate investments, but not fiduciary (act in best interest of the client). This article is making no distinction between commission motivated so-called advisors, or the bogus fee-based (commission plus charge you a fee) and fee-ONLY advisors, who are paid by the hour or by a percentage of assets managed, depending on their business model. And there IS at least a base-line standard–the CFP designation, which requires passing a rigorous 10 hour exam (and half flunk) and maintaining yearly continuing education. I’ve known several CPAs and attorneys who didn’t pass it. Look for a CFP, a fee-ONLY fiduciary, and then trust your own good judgement. If you’re going to do any investing, you better be able to trust your own judgement.
Maddoff was a crook. It didn’t matter whether he had “fiduciary responsibility” or not. Again, the key to understanding this issue is that however your investment adviser is compensated, they are unlikely to pay for themselves. You are going to end up with less money and increased risk.
I think the real issue here is three fold
1. Not all advisers are fiduciaries (aka required by law to put the clients interests ahead of their own or their company),
2. Does your adviser recommend index funds versus actively managed funds? If a portion or all of their money is from commission as opposed to upfront hourly fee’s then they likely advise clients to have actively managed funds which typically have worse returns over the long haul than index funds.
Why are the returns less than low cost index funds?: in a nut shell its because fee’s and taxes reduce the return. i.e. the the net benefit (in returns) of active management doesn’t compensate for the higher cost. Which is why guys like Warren Buffet recommend index funds for the average investor.
3. And finally hidden fees. Although its true that laws following the financial crisis have tried to eliminate hidden fees its also true that there is cost buried in portfolios that the owners don’t know about or understand and that advisers and the companies they work for profit from those fees. Which by anyone’s analysis makes for a perverse set of incentives not the clear win/win, lose/lose that was laid out.
I am a DIY investor and have been pretty good at it over the past 10 years. Investing is my passion and I really love it.
I know a few CFP / CFA folks that I trust and I chat with them every once in a while to get their opinion. My conversations with them have been very fruitful.
Here is the key take away – you are the captain of your investments – whether you do it yourself or hire a financial adviser. The adviser is there to advice and you are the one to call the shots.
Yes, I agree with the DIY approach. However, I don’t see any harm in consulting a financial adviser once in a while at a fixed flat fee to see what suggestions they might have. Ultimately, it is your call whether you want to pursue what they suggest. There is no escape from doing your homework.
If you are super lazy, and have absolutely no interest in learning about investing, consider something like Betterment – you can read more on my post at – http://stretchadime.com/betterment-best-roi-for-your-time-and-money/
I agree that a person can DIY their investments, and I see a lot of people by-the-hour who plan to do just that. However, I also see them the next year, and a significant proportion have either not implemented, implemented only part of the investment recommendations. or got tired or scared. A good asset allocation plan has a lot of interlocking parts, and if you don’t carry out the whole plan you paid for (or didn’t understand why you should)you’ve thrown at least some of your money away. No roboadvisor is going to be able to help you implement, or explain, or remind you why you should take action. An advisor who is managing your accounts will get it done. (and a true fee-only ADVISOR will act as an advisor on a lot of financial issues that have little to do with investments or selling some goofball product).
How is a lot of people wasting money on advice they don’t use is an argument in favor of spending money on more advice. They would have been better off spending the time setting up a Vanguard account and creating a mix. Of course a financial adviser is going to have a hard time staying in business just setting people up with a Vanguard account and showing them how to use it to manage their own investments. They NEED it to be more complicated than that.
Ross, you’re missing the point. Many of your responses have been along the lines of “it’s easy so everyone should do it.”
What Danielle and I are trying to say is that even though it may be “simple” conceptually, most people _don’t actually follow through_. It’s easy to pick an asset allocation. Is it easy to rebalance diligently for the next 20 years? Is it easy to buy on the way down? Is it easy not to chase recent winners? Behavioral finance research (and our experience) says again and again: NO!
I applaud your ability to do those things, but you’re making an assumption that, because you can do them, everyone can, and that’s simply not the case. That realization is actually what moved me toward pursuing the CFP designation in the first place. I really like helping people, and I really like thinking about financial concepts, and most other people don’t.
As I said in my first post, and Danielle alluded in hers, this whole article and the subsequent discussion are stemming from the fact that the term “financial advisor” is so broad as to be almost meaningless. A better discussion, and a more helpful article, would be one that taught people how to tell the difference between a salesperson and a fiduciary.
Also, I don’t want to make broad generalizations about salespeople. Most are honest people, and their job is to sell you something. If you’re aware of that, then usually there’s no problem. If you think they’re “on your side,” you end up where a lot of other commenters have been.
I have been a 100% DIY for the past 10 years and have been pretty good at it. Betterment is part of my portfolio and it has performed very well at an extremely low cost. I have a 5 year history with Betterment and have been very pleased with their customer service.
Like I said, I have a lot of CFA / CFP friends and I respect them a lot. I consult them when I have a question and they are more than glad to share their thoughts / advice.
My main point is this: At the end of the day, after receiving the advice, the final decision on what you choose to do with the advice comes down to you. You are the captain of your fiduciary ship. If it sinks, you can’t blame your adviser. You have no one else to point to but the person you see in the mirror.
I hired a financial adviser because I wanted someone to take an overall look at our finances; tell us if we were on-track for retirement and advise how to set up our finances to take care of our handicapped son. We were in mutual funds that were the latest and greatest 20 years ago and I knew it was time to replace them. I had inherited a good chunk of money wanted to make good choices with it. I was out of the loop about investments. What I got was a portfolio of mutual funds (and to the adviser and his company’s credit, it is a pretty good portfolio), quarterly meetings and lots of fees. We just fired him.
Although we had told him we wanted to stay with Vanguard, he went all out to sell us on his company and did an extensive presentation on the merits of doing that. We told him we had to think about it and never contacted him again. I always felt that the money we paid him for his initial analysis was probably a savings in the long run.
For me, the main reason to let someone else invest for me is to take off the responsibility from myself. It’s much better to let someone else lose your dollars… You feel less guilty
I don’t prefer to do my own research. We have hired a financial adviser for these reasons. .
Dear oh dear. You need to get out more. Your profile of a typical financial advisor is no longer the only option. Google : fee-only, CFP and fiduciary advisors, read some Michael Kitces. Stop living in Mad Men world.
Your typical financial advisor was never the only option but it is still typical. To avoid that “typical” advisor you need to do a lot of research. And even then, you need to evaluate the actual value of the advice compared to the cost. If you are a typical investor, your money should be in low cost index funds. Paying an advisor to tell you that just an added expense that reduces your return.
Remember the “miracle of compounding” means that paying a $100 fee to an investment advisor now will cost you $1600 in retirement savings at an 8% return over 36 years.
You need to do SOME research but not A LOT of research to find a fee-ONLY advisor. Not as much research as you are going to do if you decide to manage your own investments. Just got to Garrett Planning Network or NAPFA.org and you’ll find links to a lot of fee-only advisors (full disclosure, I’m a member of both).
The 2% you quote is outrageous, and I don’t know any asset manager who charges over 1%, and that is generally for smaller accounts (where the most work is). But investment advice is only a small part of what a true financial advisor does (as opposed to a commissioned salesperson, i.e. stockbroker or insurance agent or fee “based” “advisor”). Besides looking at everything in their financial life (risk coverage, college, withdrawal strategies for retirement, optimizing Social Security claiming, spending, and on and on)I believe my chief value is extricating people from all the stupid investments they’ve been sold by stockbrokers and insurance agents, or chosen themselves based on some hot tip or fear, and then keeping them invested in a portfolio that makes sense, without jumping the gun over temporary bad news or celebrating too much when the market is good. Then, every plan has to be evaluated regularly to see if it is still working properly or needs to be adjusted. Sometimes I wish I had an advisor myself!
I bought my first stock 34 years ago, and my first mutual fund a year or two later. I’ve belonged to investment clubs for many years. I thought I knew what I was doing when I took the CFP training, but I quickly realized that good financial planners/advisors have a wealth of training and access to information and software that is just not available to the consumer. The real cost of doing it yourself–buying precision software, belonging to professional organizations that update expertise constantly, subscribing to a raft of newsletter, paying for education to learn and expand knowledge of all the areas and products available–would far exceed the cost of AUM charges. I know, I pay them every year and we’re talking 5 figures at least.
Can you manage investments yourself? Sure. Of the last 100 people I’ve seen, two were doing a darn good job already. But they still needed hourly work to handle retirement plans.
“The 2% you quote is outrageous, and I don’t know any asset manager who charges over 1%, and that is generally for smaller accounts (where the most work is).”
2% is the average for fees, some people pay more, including the fees charged by managed mutual funds and 401(k) plans. So it is probably not fair to ascribe all of that cost to having an adviser.
The reality is that all those terrible investments were likely sold by someone pitching their “advice”. In short, you can spend a lot of time and money trying to avoid bad advice or you can create a Vanguard account and put your money into low cost index funds that will cost you a small fraction of the amount you will pay to an adviser. For most people, if the adviser suggests anything other than low cost index funds they are doing the investor a disservice.
And yes, there are reasons for getting advice about financial issues other than investing your retirement savings such as inheritance,insurance etc. But then find an advisor who actually has specific knowledge and experience in those areas.
One thing not mentioned here is how much you have to invest. If you only have $10,000 to invest, even if you are only paying a financial adviser a flat $100 fee once a year for an annual review, that is still costing you 1% of your returns. And there are still all the other management fees associated with individual mutual funds on top of that.
I thought this was a great article. I couldn’t agree more that it isn’t that hard, but when one really has no idea where to start it is a bit like moving through the weeds – so many companies, so many choices to pick through, so much “noise” out there. I would suggest a follow-up article with some actual suggestions for those two or three index funds mentioned as “all you need”. More specific direction on doing it yourself would be helpful for those just getting started with doing it yourself. Myself, I strongly recommend Vanguard Mutual Funds.
Nice post. However I think the main problem is confusing investment management for financial planning which are completely different entities. I think most people would benefit from a fee for service (so no conflict of interest) financial planner to look at the big picture such as making sure maxing out retirement plans, 529 plans, having term life insurance, disability insurance and putting assets in a trust for example. The article is totally right on as no need for professional investment management for most people. People who panic and always sell at the bottom and buy at the top for example may benefit from a financial adviser to buffer their money from themselves. Overall most people will do better with low cost index funds and passive allocation funds in terms of investment management.
Like the author pointed out, it’s not rocket science. Financial management is based on three components: a financial plan; asset allocation & location; and tax advice/management. Once you have the basics in place: asset allocation & location and you rebalance annually, financial plans should be purchased on an ‘as needed basis’ by fee only advisers. Never allow a financial adviser who provides the financial plan to also manage your assets. Always have those components separated. Once you get comfortable in your abilities, manage your own assets. The best investment you can make is educating yourself on personal financial. There’s a wealth of books, magazines, DVDs, etc.. in the library. After getting burned by a financial adviser that churned our accounts, we now self manage. The only advice we need is tax management.
I fired my financial advisers years ago. To wit:
1995: Put $20k into a hybrid mutual-bond account with a F/Adv I grew up with as a friend.
1997: It’s worth $34k. Better than owning a mint, say I. Dump another $20k into it.
1999: Get married, pre-nup everything (turned out to be a good idea). Account is worth ~ $63k and growing fast. This is at the time my main retirement vehicle.
2001: Sept 11 WTC falls, 2 airplanes in terror attacks. Adviser friend fails to contact me with advice to move my money sideways into a money market.
2002: By Spring, the account is worth $33k, about half of it’s peak value. I call friend adviser and ask WTH, over.
His reply? Who could have foreseen 2 airplanes flying into the twin towers… I should be happy that I only lost X amount, others have lost much more. I ask him why he didn’t call me with ADVICE (his job, so I thought) and tell me to move the money when it started sliding horribly?
His answer? Oh, you want a managed account. We only do that for investors with a million dollars or more.
So folks, if you are stupid enough to cede control of YOUR money (5 cents, 5 dollars, $50,000 or whatever), make sure of what you are getting when you do it. When the money was rapidly escalating in the late 1990s, F/Adv told me all the time “Look how much money I have made for you.”
When it tanked, all I got was “Who could have predicted [insert excuse here]?”
Bottom line, and somebody already said it: YOU are responsible for your retirement, how it is funded and the vehicle you choose to get there. DON’T fall for charlatans that use glib language with charts that they DO NOT GUARANTEE will pay off for you.
Folks, YOUR dart board is just as good as (or better) than the proxy that will make money off you (whether you make money or not, they get a chunk and yearly residuals).
Get smart. Manage your own money.
-cc
I think people should manage their own money. But I think your advisor was right. Unless you were ready to sell permanently, there was no reason for you to move your money “sideways”. To the contrary, that just makes it more likely that you would have missed out when the price of stocks recovered. He should have called you to suggest “now is a good time to buy.”
The adviser was silent and that is the sin. They eat (very well) off of you and the least they can do is to look at the market, trends and other relevant information and then CALL you when a crisis arises.
Why pay an adviser that doesn’t advise after the sale?
Sure, sooner or later the dogs that lost “come back.” But will I live to see that?
The adviser was worthless and that is why I fired him.
The “dogs” weren’t permanently lost, they were lost only if you closed the door to them returning by selling. The mistake people make is thinking that the current market for stock determines their long term value. The market is priced on short term expectations, not what the stock will be worth in 10 or 20 years when you are ready to sell.
There are many facets to this and it’s hard to make a blanket statement about financial advisers.
Several things to consider that are just my two cents:
* You need to know how your adviser is paid. A fee-only adviser will not have that inherent conflict of interest of a commission-paid one. That’s not to say that commission-paid is bad, but you need to know how much they are getting and ensure it’s worth the services you are getting in return.
* Below a certain asset level, you probably don’t need an ongoing adviser. Paying for a one-shot financial plan on a fee-for-service basis, and then re-hiring the planner to update it periodically, may be a better option. If you understand asset classes and how to use index funds, investing is probably the easy part. The harder part will be planning for unforeseen events, taxes, estate planning, etc.
* I agree completely that an index/passive investment approach with a focus on asset allocation (rather than market timing or stock/fund selection) is the way to go for long-term investing.
Again, just my two cents here, for what it’s worth. I am not a financial adviser but I work for a firm that does both one-time financial plans and ongoing adviser services on a fee-only basis and we are appalled by some of the crap that’s out there (both in terms of investments and financial hucksters), which is often why people do come to us.
While I agree that some of the following reasons are valid. It is important to see what services your adviser offers. Some advisers are paired up in teams where they are experts at tax, investments, insurance and estate planning. If you can find someone you trust in the areas you feel less competent in its not a bad idea.
In addition, if you are dealing with advisers they should only work with someone who has a CFP designation.
I think it’s OK to hire a RIA who has a fiduciary duty to help you with your finances.
I do some personal finance consulting myself on a fee only basis to help people resolve their money problems and questions. A lot of times, people just need a sounding board.
S
Dear Cowie, I have to give credit where its due cause your article reasons for not hiring a financial adviser is well thought out, well explained and easy to understand. You do seem to have some valid reasons why not hire a financial adviser some I totally agree with, some I don’t. I have always thought it a good idea to seek advice from people are more competent in a certain area of investment or even finance management to avoid any avoidable mistakes. In my own case I will only work with a financial advisor if I completely trust them.keep write always a fan of your posts.