Even though I spent three posts on my experimentation with a financial advisor, which ended with me enrolling some of my money with Vanguard’s Personal Advisor Services, I thought I’d contradict my actions and write about why most of us don’t need one.
I’ve actually met with several different financial advisors both for myself and for my parents’ retirement planning. What’s cool about meeting with financial advisors/planners is the initial consultations are free (except for your time of course). The first meeting is generally a getting to know you and you handing over all your financial information. Definitely ask them how your information will be used and protected. Even though they shouldn’t be asking for your social security number or exact birthday, they will end up learning a lot of detailed information about you: your name & age, address, occupation, employer info, salary, account balances, debt etc. As I wrote before, its very much like a full physical exam with a doctor. You’re getting financially naked. The second meeting is usually their presentation on how they plan on managing your money and they’ll also give you an overview of where you are financially. I highly recommend meeting with different financial advisors. You can learn a lot from these meeting. Just don’t invest with them.
Why? Because of the following reasons:
Fees, fees and more fees. The industry “average” charged by most financial advisors is 1% of assets under management (AUM). That means for every $100,000 you invest, you’re paying $1000 to them and this is usually off the top. Your advisor takes his or her $1000 cut and leaves you with $999,000 to invest and this fee is taken yearly. If you know anything about compound interest, that 1% off the top of your investment every year makes a huge dent in your overall earnings over time. This doesn’t even include the expense ratio of an actively managed mutual fund they’ll probably use (add another 1-2%) or fees associated with trading individual stocks and bonds. All these fees are taken out of your investment and earnings.
Conflict of interest. Most financial advisors face a huge conflict of interest, because they earn their money as a percentage of how much you invest with them. The more you invest, the more they earn. Instead of managing your money with your best interest in mind, trying to meet your financial needs and risk tolerance, they might be tempted to manage your money for their best profit. After all, if they recklessly lose half your retirement savings with bad investment strategies, its not their money.
I also found out advisors get commissions from many different companies they have relationships with. This is not upfront information. I had to ask them point blank, “Are you getting paid for selling me this?” Sometimes they are also insurance brokers in disguise. Whether its a mutual fund company or an insurance company showcasing various products from index universal life insurance to annuities, there’s always something new and shiny to sell you. Be wary. Take the information and do your own research. Never commit on the spot. Check them out on FINRA broker check. Google their name. I googled the names of advisors I met with and I found out some pretty interesting information on them. I stalked them on Facebook too. Afterall, do you want to invest your money with a guy who’s drinking from a beer bong? Hate to be all judgey, but I don’t. Also keep in mind that you may be able to buy that same insurance product elsewhere cheaper.
Don’t get me wrong. There are good, trustworthy advisors, but the problem is, its hard to find one. Like many professions, the range is wide and varied. Just as there are many different kind of doctors or lawyers, with different specialties and skills, ones who are looking out for you and ones who are dicks, so are there many different kinds of financial advisors and no good way for the average person to know who’s legit and who’s shady. Moreover, even if you do find a good and trustworthy advisor, acting under a fiduciary duty to you and your money, it doesn’t mean they can give you enough value to justify their fees and commissions. The truth is most portfolio managers and actively managed mutual funds do not outperform the market. So how is a financial advisor going to make-up for the fee(s) they charge when you can buy the entire market through Vanguard and just create a lazy portfolio?
So that sums up why you probably don’t need a financial advisor. Feel free to share your experiences with financial advisors, the good, the bad and the ugly.