How to Hire a Financial Planner (or Not)
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.
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?