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.