This is a guest post from Financial Uproar. If you like what you see here, please consider subscribing to his RSS feed or following him on Twitter.
As a DIY investor, I have a strong dislike of financial advisors – perhaps too strong. As far as I’m concerned, there’s nothing that an advisor can do for a client that a reasonably educated person can’t figure out by using a search engine and a few minutes of their time.
Ditch your advisor
In my view, one of the first steps to maximizing your investment returns should thus be to fire your financial advisor. Here are several reasons why – and yes, I realize that I’m painting with broad brushstrokes here.
1. Nobody cares about your money as much as you do
The reality about your financial advisor is that he views you as nothing more than a number. Sure, they want you to be satisfied, what business doesn’t want happy customers? Yet the secret to their success is having a large number of accounts to manage. If you’re one of 500 clients to an advisor, do you think that advisor really cares if you take your meager retirement savings elsewhere?
2. Compensation is way out of whack
My problem isn’t so much with the amount of compensation per se, but rather with the way many advisors are compensated. For example, if you buy a mutual fund with a front end sales charge, your advisor may be getting most (if not all) of that charge. In other cases, advisors get paid a percentage of assets under management.
If somebody has a portfolio consisting entirely of mutual funds, why should an advisor get paid ten times more for a $500, 000 portfolio than a $50, 000 one? Does it take 10 times the amount of work? If it doesn’t, then why is someone getting paid like it is?
The other problem I have with the compensation is the lack of disclosure that the investor gets. If you ask 100 people with limited investment knowledge how much their advisor gets paid to manage their account, how many would even be close to being right?
3. He drives a fancy car
Let me say right away, I have nothing against people driving fancy cars. If that’s something that’s important to you, then knock yourself out.
Your advisor is probably facing some sort of pressure to look the part of being successful, whether it’s from his superiors or just from inside his own head. Yet we all know that, financially speaking, driving a fancy car is just a waste of money.
So let’s summarize the hypocrisy of the whole situation. Your advisor advocates making better choices and saving more, yet wears expensive suits to work and drives home in a BMW. Sounds like a classic case of do what I say, not what I do.
4. Most mutual funds are a bad idea anyway
While I’m an active investor, I would recommend most people just buy index funds. A basket of well diversified exchange traded funds will get you a market return, which is pretty much guaranteed to beat most actively managed mutual funds in the long run. The reason for this is simple. Fund managers can’t consistently beat the market long term because they have to beat the market plus their management fee.
Just do it
I want to encourage everyone reading this post to explore investing on their own. There are tons of books, websites, etc. out there that can guide anyone through the process. It’s just a matter of getting started.
Oh, and if you do end up sticking with an advisor, make sure you’re on the same page when it comes to investing philosophy, and also make sure you know exactly how they are being compensated.
23 Responses to “Why You Should Fire Your Financial Advisor”
We just posted a similar post. too many people simply hand over their money and dont pay attention. It is a bad idea. We aren’t saying that all financial planners are bad, but we are saying pay attention to what’s going on with your money.
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David, wasn’t your house foreclosed upon? This leaves me wary of any financial advice from you!
I charge a flat fee; depending on what you mean by “large,” my fee would likely be at or below 40 bps. My increases are inflationary in nature rather than asset-based. Also, Portfolio Solutions (www.portfoliosolutions.com) charges less than 40 bps. Good luck in your adviser search.
@Hrant – It is exceedingly rare to find a professional at that rate. Your best bet will be finding a flat fee arrangement with a fee-only or fee-based investment advisor. You would need to negotiate an initial and ongoing fee and be sure that the fee increases by the rate of inflation rather than the amount your portfolio gains. In addition, this agreement should come with an investment policy statement that clearly details responsibilities of both parties as well as compensation, termination, etc.
Where does one find advisors who charge .4pct or lower for a portfolio and who re-balance every 6months/or 1year? I have a sizable portfolio, and have been unable to find a good manager for the long term. Please advise names and phone numbers of some w/long term experience. Thank you.
It’s been some time since I revisited this thread, but I had wanted to respond to Petunia’s comment. She stated that if any advisor mentioned CVLI as an asset, she’d cease the conversation and the relationship. By the way, if an advisor neglected to share his views when deemed appropriate, they could be held negligent. Petunia has a deep bias against Cash Value Life Insurance to summarily reject even a suggestion. Moreover, the bias is one that comes from simply being uninformed. There was a time in my career, when I may have thought the same. However, my education was not then, nor is it now complete.
I would even agree now to an extent, in that as a cash builder, many policies are not designed with many things essential to it working, such as the concept of non-direct-recognition. If anyone is not sure what this is, learn first before you make uninformed judgements. Let me suggest that the subject has been researched by Ibbotson Associates, and you may take their word for it, not mine. I also suggest another read that an open mind should find informative, and could finally allow Petunia to shed the bias, supported falsely by some such as Dave Ramsey and Suzy Orman. Check out “Bank On Yourself”, the best seller by Pamela Yellen. In fact, if you prove her wrong, you can go for the $100,000 challenge that has yet to be awarded. By the way, Petunia, are you in the business? Just wondering.
I’d rate the people who can handle their own financial future intelligently at 1/10. The others could benefit from a financial advisor who works by the hour, not on commission. Most of my siblings can’t even comprehend what a “required minimum distribution” is on their inherited IRA’s since our mother passed away – this after explaining it multiple times. My brother, who I expressly warned against taking a lump sum distribution on his inheritance did just that and hasn’t a clue, still, why he just lost thousands of dollars on it.
Some people need advisors and I would judge the person more harshily who doesn’t REALIZE it than those who do.
It is very simple really, yes a minority of people can manage their money successfully, but even they benefit from good independent advice.(you should do a great deal of research to find a strong advisor since he/she will need to be independent and hopefully be working for you for many years, donÃ¢ï¿½ï¿½t just go to a bank. ItÃ¢ï¿½ï¿½s a fact that a large majority of people don’t manage their money due to either lack the knowledge and/or time.
The advisor should work on a flat fee structure on absolute returns and should be advisory as opposed to discretionary management which will give the client some control. Also remember having an advisor is important even if you know what you are doing simple because they have access to institutional rates and as result it would be more expensive or not always possible to have good exposure to certain assets on your own. Of course if they charge you on each transaction and have hidden fees or wide spreads on their own products like almost all the banks do then this is not valid. Hence the need for independent advisors with strong connections to a number of major institutions. Personally people should have a very active relationship with their advisors if they are serious about their portfolio. You should never allow anyone to make all your financial decisions no matter how qualified they are. ItÃ¢ï¿½ï¿½s your money, you earnt it and its your retirement so question and make sure you understand why you should sell this and buy that and if it really is necessary to do so, many private banking clients would do well to remember that.
This conversation went off the rails with the initial post, but has been fun reading nonetheless:)
It is stupid to claim that all financial advisors are bad. However, it is also a fact that most clients are intimidated with their financial advisors due to one or more reasons. Many financial advisors are authoritative or simply arrogant in nature. They bully their clients, yell at them and treat their money as if it were his. Some do not take the client’s risk tolerance, time frame and investing philosophy into account. It is also not hard to find advisors who do not consider themselves to be answerable to their clients. They do not have time to discuss important details with you, cannot return your phone calls and you always have to hunt them down. Finally, there are advisors who refuse to take responsibility for the wrong advices they give which can really hurt.
Hey if you’re willing to take the time to become more knowledgeable about your finances and willing to increase your risk and reward level then by all means go ahead and let your planner go. However, if you’re not willing to put the time into learning about your investments and the market in general then perhaps you should rethink your strategy. Painting a home isn’t necessarily tough but I tend to let a professional do it so that it’s done right.
Oh, I see, there is no index for cash value life insurance. What a terrible oversight.
If I sat down with an advisor who told me my portfolio needed cash value life insurance, that would be the end of the conversation and relationship. It is precisely this sort of “advice” which gives financial advisors a sleazy reputation.
Interesting post and discussion. My take is somewhat in the middle. I believe a lot of people can be taught how to manage their assets with low fee/low turnover index funds. I believe they need some instruction in terms of asset allocation, location of investments etc. Thus, I manage assets at 0.4% for a year or so and then client is on their own. They still need an hour of consulting from time to time because they tend to get emotional in volatile markets and buy too aggressively in up markets and vice versa.
I do find some people can’t do it themselves and need a permanent manager. They should find a fee only manager that utilizes index ETFs.
Meg is right to draw a distinction between a planners and investment managers.
Two points worth making: 1) The author is making the mistaken assumption that everyone else is like him (or her). This just isn’t the case. Most mechanics and do-it-yourself car buffs scratch their head and wonder why the rest of the world would ever pay to have their car serviced and yet most people just don’t have the time, inclination, knowledge or confidence to do it themselves. 2) The author likely suffers (as most investors do) from illusory superiority (http://goo.gl/ET9z). You don’t know as much as you think you do about any subject and that includes investing. If you pick the right financial planner (and in the author’s defense, finding one who is competent, experienced, unbiased, and doesn’t have an overly inflated ego about what a fair price is can be a very difficult task), you can help overcome a lot of “not knowing what you don’t know.”
One more point I bet even with the Fee and expenses associated with a financial planner those investors do better then those who don’t simply because of bad behavioral finance choices.
As a finance major, Series 7 holder studying for my CFP and having worked at Fidelity I think an advisor is needed for most people.
I was at Fidelity in October of 2008 and in March of 2009. As most know those were two pretty bad months and the amount of panicked phones calls from people selling were unbelievable. I mean yelling to get out of the market panicking. I feel bad for all those I couldn’t talk out of selling in March.
Needless to say all of the points neglect the most important of them all. Behavior. Most people need a barrier between them and there money, A financial adviser is a good barrier who hopefully will be able to talk investors out of doing something stupid like selling at the bottom or buying at the top.
Whew! I surely stirred up a nest, but that’s the great thing about open forums that invite comment.
First, let me say that reviewing my own missive after reading the comments, I agree that my tone could be taken as somewhat defensive, even hostile. For this, I apologize. Thanks, Ethan, for illuminating my untoward diction. Eric, while not intending to so do, I can see how it can be seen as hostile. I assure all that I hold no rancor towards to the original writer, or those who may disagree with my opinion.
Ain’t America great? We have the freedom to let our thoughts known. In this anonymous virtual world, it is easy to forget that real people are on the other end.
Mike, while index funds are central to many portfolios, it is too much when it excludes other investments that may have negative co-relation, and thus bring unnecessary volatility.
Ibottson and Associates, Inc., portfolio allocation advisors using Modern Portfolio Theory, have joined with Morningstar to introduce a new “asset class” in constructing the fixed portion of one’s portfolio.
Largely dismissed as a piece of a wealth portfolio is Cash Value Life Insurance. Because these are low in risk, and carry the additional leverage of a death benefit, and tax-free distributions, it was determined that in a moderate (54% fixed, 46% equity) portfolio, by using CVLI as 20% of the fixed portion, performance went up and volatility went down.
As tax increases loom ahead of us, it makes more and more sense to have at least two buckets of funds available at retirement: one taxable, and one not. In the case of CVLI, the assets are generally available tax-free anytime before retirement, without pesky 10% penalties.
I would recommend sticking with a mutual company instead of a stock company, because the policy holders are the owners. therefore management is not pressured to meet stock holders’ expectations of dividend return. Instead, the dividends go directly to the owners (policyholders).
Moreover, in the last few devastating years, these companies generally did well compared to the rest of the financial industry. It is not always easy, but dividend histories can be found that average 4-6% IRR over time. One would have to find taxable investments that average 6-9%, and in the current market, CD’s and money market funds are far from that.
Creativity is also a trait of successful planners. OK, I hope everyone enjoys this one, but please, keep those letters coming!
I am a big fan of having a simple low-cost plan and re-balancing regularly. I think it is far superior to anything that any advisor can do for you, and at a fraction of the cost.
However, after years on personal finance message boards and reading pf blogs, I keep coming to the unfortunate conclusion that most people do not seem to grasp the most basic investing tenets. If an advisor helps people avoid big mistakes (such as cashing out after market corrections), they are probably better off than going it alone.
I am rather perplexed that a planner would state an investor can have too many index funds. Surely the planner is aware that there is an index for any asset one would like to purchase?
I’m a Certified Financial Planner as well, and I have to say that I lean towards agreeing more with this post. (In fact I wrote a remarkably similar one on my blog here: http://wealthisgood.blogspot.com/2010/03/why-you-dont-need-traditional-financial.html
The fact is that many financial advisors – including CFP’s, CPA’s, and attorneys – offer much needed guidance especially in the realms of estate planning, tax planning, and insurance. You almost certainly need those advisors.
But what you almost certainly don’t need is somebody to babysit your investment portfolio (and even that is a loose term because once you set it up they probably don’t look at it again until about a week before your annual review). If all your broker/planner/advisor does is pick mutual funds for you than you are almost certainly wasting your money paying for them.
All they do is pick one of their company’s standard asset allocations, based on whatever you proclaim your risk tolerance to be, and they stick you in 8 or 9 mutual funds that correspond to it. That’s it. From Ameriprise to Smith Barney, that’s the procedure. Depending on how expensive the firm is, you may get any number of fancy charts showing your progress or even a few lunches at the club out of the deal, but you won’t get any better returns than the market or than your 22 year old son who set up his own IRA at Fidelity.
You don’t have to have a CFP or a finance degree to do it; the market has been so commoditized that setting up a retirement portfolio is only marginally more complex than opening up a bank account. Are you going to pay somebody 1% of your assets to choose a checking account for you?
Yeah I think this guest post was a bit too belligerent. I get the point but you’re generalizing way too much that you come off hostile.
I think that both the author and David are overreacting. There is plenty to pick on in the article:
1. The author bases his recommendation on what people are, in principle, capable of doing rather than on what people actually tend to do. Yes, there’s nothing magic about investing. But the average person still sucks at it. A *good* advisor is a returns booster to most investors, not because they are applying magic but because of the planning and the discipline they add to the investor’s behavior.
2. There is no perfect compensation scheme. I’m guessing the author would recommend paying by the hour so that you aren’t getting “taken”, but as David correctly points out that doesn’t lead to a relationship in most cases, and a true relationship is what many people need. The most valuable advisor contributions may not happen without one.
3. The author admits he is painting with broad strokes, and he’s right, and it makes for a poor net result. The mutual fund company rep who does nothing but “advise” people to buy active funds with a 5.75% front-end load and 2% expense ratio cannot be meaningfully grouped with an independent, full-service, fiduciary advisor who uses only index funds with an average expense ratio of maybe .3% and charges 1% of assets under management with significant scaling at both ends of the spectrum. There’s just nothing that can meaningfully be said about those two people at the same time.
4. The author is an active investor, but thinks most people are better off in index funds. The fact is that the author would almost certainly be better off in them as well. If he is seeing outsized returns it is likely only the result of outsized risk (probably risk he can’t see), which – if appropriate to his situation – can be achieved without adding the manager risk of active funds or active trading.
Plenty to disagree with. But David’s response can only be characterized as immature. Ad hominems, passive aggression, hyperbole and lack of charity abound. He is hardly making the case for one to trust an advisor to provide discipline and rationality to the investing process. And, as Mike points out, there are some red flags in his own advice. Index funds aren’t an asset class.
To the above commenter:
Under what circumstances could an investor have “too much” index funds in his or her portfolio? Or, said differently, at what point or in what situation would an alternative become a better option?
Please note immediately that, as a Certified Financial Planner, naturally I have considerable bias against this writer’s views.
Having been in this business for thirty years, I have come across many who are indeed educated and proficient in developing a retirement portfolio. Good for him.
This doesn’t justify his idiot supposition that most people should fire their adviser. If they are not getting their money’s worth, yes, they should. Better advice would recognize that most DIY’ers fail miserably. They cannot possibly have the time and knowledge to bring to the table that someone professionally qualified has.
Pointing only to cases where a broker makes more on commissions than did his investors’ accounts, sure, this feeds into the public’s ire against “big money” and Wall Street. The reality is that most FA’s are on Main Street, not Wall Street. Most of us don’t try to have the flashy image, and fancy cars.
In fact, asset based fees are the fairest to consumers, in that an adversary relationship is generally removed: since compensation is based on the pot growing, it is in both parties interests to grow the pot. Some charge by the hour, and you get what you pay for. But the deeper and long lasting relationships come from being an advocate for your client. “No one cares about your money the way you do”. True, but as in the above situation, the fortunes of both client and adviser are linked.
The vast majority of clients, both of the professional and blue collar variety, are generally at a loss when it comes to investing and other financial matters. Understand that I intend to give complete service to clients, which means looking at the whole picture. This includes wills, estate, insurance, retirement, investing, and human capital. Does this fellow know what human capital is? Could he give advice (even to himself) on the myriad plans of long term care, home property and life insurance? Is he aware how these things all affect each other?
I am happy that he has a nice portfolio. His advice to use indexed funds is correct, but so pedestrian, he must have read this on the first page of Investing 101. I give the same advice often, but not in a vacuum. One can have too much of these in one’s portfolio, like any other asset.
His analogy is similar to saying that since I took first aid in Boy Scouts, and read a lot of medical literature, than I should fire my doctor. That is my choice, but to recommend it to others is blatantly irresponsible. I would lose my certification if I gave such generalized and incorrect advise. I wonder if he even has a will?