Bank Deal: Earn 1.00% APY on an FDIC-insured savings account at Barclays.
This is a guest post from Evan of My Journey to Millions. Evan is a fellow personal finance blogger, who is also an Attorney and works as a Director with a New York Financial and Estate Planning Firm. If you like what you see here, please consider subscribing to his RSS feed or following him on Twitter.
Like 10, 000+ other people, I subscribe to FiveCentNickel, so everyday I get the newest post in my Google reader. When I saw the title “Why You Should Fire Your Financial Advisor” come up on my screen the other day, it immediately piqued my interest. The post was written by the guy who runs Financial Uproar, a self-proclaimed DIY investor. The main reason that this post grabbed my attention is because I work in the financial industry every day.
That post contained four main arguments as to why you should fire your financial advisor:
- Nobody cares about your money as much as you do
- Compensation is way out of whack
- He drives a fancy car
- Most mutual funds are a bad idea
I think the main problem with these arguments really comes down to the author’s competence, both in daily finances and investing. Unfortunately, I don’t believe everyone is as focused as him on investment and money management.
While it’s true no one cares about my money as much as I do (except maybe The Wife), that doesn’t mean that everyone is good at it. You don’t have to look very hard to find one person after another who can’t manage their day-to-day finances, much less an investment portfolio.
I’m pretty sure that no one cares about my car as much as I do either, but I don’t pop the hood and play with the flux capacitor. That’s just not something that I’m good at.
I’ll come back to the compensation issue, later, but I wanted to note that I actually want my financial advisor to drive a nice car. Maybe “fancy” isn’t the best word for it, but if any professional in my life showed up in a POS, I would get worried.
Moreover, while the author of the original piece presents actively-managed mutual funds as the primary tool of a financial advisor, that is an extremely narrow view of the industry. And even if you agree with him that most investors are best served by holding a portfolio composed entirely of index funds, many investors need some help when it comes to identifying the right mix of holdings.
Compensation of financial advisors
And now for the big one…
Before we can even discuss whether their compensation is fair or not, you have to decide whether or not it’s true that not everyone is cut out to handle their own investments. If you think that everyone can (and should) handle their own portfolio, then any level of compensation is egregious.
As a tongue-in-cheek example of what I mean, I believe that pretty much everyone can tie their shoes, so charging a fee for that (no matter how it is structured) would be unfair compensation. Am I right?
If you’ve spent much time reading about finance, then you know that the financial industry gets hammered by bloggers, authors, pundits… Just about everyone. But let’s take a closer look at the numerous ways that advisors can get paid:
- Hourly fee
- Flat fee
- Fee for assets under management
I really don’t believe that any option is better or worse than another. Yes, strong arguments can be made for fee-only advisors but, in general, the bigger problem is that the various options aren’t typically fully explained to the client.
Consider, for example, a typical 22 year old with a relatively small investment portfolio. Should that person choose an hourly rate of $100 to $300, perhaps with a large retainer up front, akin to an attorney… Or would they possibly be best-served by choosing an advisor who’s paid on some sort of a commission?
Advantages of a financial advisor
Just to be clear, I don’t think everyone needs to meet with a financial advisor, just like I don’t think everyone needs a personal trainer to oversee their exercise program. At the same time, however, it’s sometimes nice to meet with a professional.
Off the top of my head, here are a few advantages of working with a financial advisor:
- Advice on asset allocation
- Cash-flow analyses
- Retirement income analyses
- Estate tax planning
- Tax loss harvesting
- Providing a buffer against emotional decisions
Yes, while most of these things can be achieved on your own, even some of the most money-savvy people sometimes drop the ball. If you think that an advisor would suit your needs, then you shouldn’t let anyone scare you into dropping them.
Moreover, if you’re currently a DIY’er but you think you might need some additional help, you should definitely consider asking around for recommendations. Once you have a few names, go ahead and set up an initial consultation with two or three of them to see what they have to offer.