Thursday, April 4, 2013

Rule #27 No Financial Advisor.

”Everyone has the power to follow the stock market. If you made it through fifth grade math, you can do it.” – Peter Lynch

We had a financial advisor that came highly recommended from a fairly high-net-worth friend of ours.  We gave him a try for a couple years and it didn't work out. We lost significantly more money than we made, and then on top of that paid this person 1.5% of our portfolio value each year to manage our money.  I'm not a fan of paying someone to lose me money.  I can do that myself for free.  We've since moved on to an investment style that's a better fit for us and doesn't require a lot of "management" on either our side or a "professional's" side.  I'm not philosophically against Financial Advisors in general and it would be wrong of me to say anything bad about them based on our experience because we have only had one in our lifetime and it was at a time when the economy was moving into a recession.  With that said, for our investment style, paying for an FA for portfolio management is not a good deal.  Our style is to buy solid blue-chip stocks that pay safe and growing dividends and then hold them forever.  Because our plan is to buy the stock once and hold forever the only cost we incur is the commission price to buy the stocks in the first place.

If you have the confidence to go it alone, and I am not making any recommendation here that you do that, there is a lot of information on the web to help you build a solid portfolio on your own.  A basic "couch potato" style portfolio can be constructed fairly simply and get you similar returns to one a FA will build for you with minimal Management Fees.  Many FA offices are however great for offering one-stop shopping for many other types of financial instruments such as life insurance, estate planning, tax planning, purchasing annuities etc.  We got our life insurance from our FA and we feel we got it at a reasonable price, but thats not enough reason to woo us back to letting them manage my investment money going forward.

Here are the main reasons we dont use a financial planner:
  1. I need to know where my money is and what its doing at all times - this is more about me and not about the advisor.  I generally don't trust others to look out for my best interest... I believe that is my job.
  2. I don't believe in across the board diversification in our portfolio... so that rules out many mutual funds or ETFs.  I like to invest in what I understand. Investing in big diversifed funds makes it difficult for me to understand whats going on.
  3. Most Financial Advisors do not outperform the market.  There have been lots of studies done out there that suggests that upwards of 70-80% of advisors either match the market or do WORSE.  (as stated before beating the market is not my goal anyhow but I threw this in because it matters to most people)
  4. Management fees slowly erode your portfolio value.  Many Advisors charge 1-2% management fees over and above any fees the mutual funds themselves charge you.  Compounded over time this melts down your profits.
  5. Most Advisors dont get paid based on the performance of your portfolio.  If your portfolio loses 10% in one year, they still get their management fee.  
  6. Many advisors work for a company that restricts the products they can sell you.  You could argue that they are essentially salespeople for the products they sell.  Try going to an advisor who works for Company X and ask to buy mutual funds from Company Y.  Most won't or can't do it.
  7. I know what I want to be invested in and what investment vehicles I want to stay clear of.  It makes no sense for me to go to an advisor and tell them what to buy for me.  The feeling is probably mutual.  I would think people like me would probably drive Financial Advisors nuts!
  8. Our investment style doesnt' require 'management' or annual 'rebalancing' so why pay someone else to do it? 
In short, I don't think hiring a Financial Advisor is good value for us.

There are other reasons to be cautious about when giving your money to FAs but those would involve discussing things like "fiduciary" responsibilities etc, which I would prefer not to discuss here.... but I would add this: Some Financial Advisors do not put your interests first, and some do.  Stay away from the ones that do not.

Now these are the main reasons I prefer not to use a Financial Advisor.  I'm also a bit of an anomaly because I have the time, energy and keen-ness to do my own research and the confidence to buy and sell my own stocks.  If you don't have the time, energy or keen-ness to do all the work on your own, or to pull the trigger when it comes time to buy or sell stocks, or you need some hand-holding when the market is correcting, then a Financial Advisor might be in order.  I know a few who do a good job and will be upfront with you about how they get paid, what you can expect from them by dealing with them, and are quite open to challenge.  If you do go to a Financial Advisor, make sure you ask lots of questions around how they get paid.

The biggest challenge I have for others is: Is the cost of an FA worth it to you once you know: how they operate, how they get paid, what products they can and can't sell you, what incentives they themselves have to recommend you buy/sell a product, and how much time / desire you have to work on these things if you were to do it yourself?  If after you've addressed these points and you still prefer a professional to manage your money, make sure you get a good advisor - one who looks out for you interests.  If you do go it alone, make sure you are comfortable with your own abilities, understand your risk tolerance and have the ability to manage that risk.  We have found it to be quite financially rewarding. 

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