"Trust me. I'm good at this."
If you had a friend who had come out ahead each of the last 5 times he went to Vegas, would you feel comfortable giving him your life savings to use the next time he went? Of course not.
So why do we let financial advisors take our savings to Vegas, so to speak?
Admittedly, there probably are investment managers who have a genuine ability to earn above average returns without incurring above average risk. (Name your favorite: Buffett, Swenson, etc.) But they’re generally going to be very busy doing just that.
They’re not going to be available to take your phone calls. They’re not going to sit down with you to determine your appropriate asset allocation, how much money you’ll need in order to retire, or how much it will cost little Jenny to go to college in 14 years.
Any financial advisor who tells you that he can do both is either misinformed or misleading you. (In most cases, I’d bet on misinformed.)
Ben Graham on Financial Advisors
While reading Bogle’s Enough last week, I came across this delightful explanation by Benjamin Graham as to what a financial advisor’s job should be:
“A well-trained financial analyst can [justify his existence] by adhering to relatively simple principles of sound investment ; e.g., a proper balance between bonds and stocks; proper diversification; selection of a representative list; discouragement of speculative operations…And for this he does not need to be a wizard in picking winners from the stock list or in foretelling market movements.”
So what, according to Graham, should financial advisors be doing?
- Helping clients with asset allocation decisions,
- Selecting a “representative list” (that is, a group of stocks that will mimic the returns of the overall market–now made effortless via index funds), and
- Discouraging speculative operations.
And what should financial advisors not be doing?
- Trying to “pick winners from the stock list,” and
- Trying to “foretell market movements.”
Sounds like a good financial advisor to me.
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{ 16 comments… read them below or add one }
Another great post Mike. Thanks for spreading the word about financial planning in a manner that everyone can understand.
Sounds like a worthless advice to me.
Would you really pay someone for that advice? Doesn’t matter if this is sound (or poor) advice. Paying someone for it? Who would do that?
The world has changed and sometimes the old methods continue to work and sometimes they don’t. Methinks this particular advice is outdated. But then, that’s my opinion and I don’t try to sell this advice, so have no need to push it.
Regards,
I’d want to add to Graham’s second bullet on the should be doing list the words, “at the lowest possible cost.” There are still advisors that sell index strategies with 5 to 10 times the expenses of the lowest cost available options.
An advisor can help with asset allocation decisions and selecting index funds for a reasonable one time fee rather than having you finance that advice over the life of your investments.
@Brian, I think it was a good job spreading the word about investment advice, but I would not characterize it as financial planning, which is more about delaying consumption in my opinion.
@Mark Wolfinger,
It looks like you sell different advice. Perhaps that why it sounds like worthless advice to you.
Why would someone by your books? Doesn’t matter if it is sound (or poor) advice. Paying someone for it? Who would do that?
I agree! Financial advice goes well beyone picking the perfect stock!
The biggest area that people often overlook is their budgeting skills (which is one area were financial advisors spend very little effort) and insurance needs.
When I first graduated college, I even had a “financial advisor” try to push whole life insurance on me!
Oh well, I do my own financial planning now (mostly by reading personal finance blogs)!
The trouble is that many turn to a financial advisor for the wrong reasons.
People are intimidated by investing and they turn to advisors to buck up their confidence. But confidence can only come from inside. The average person does not need to be an expert on all aspects of investing. But he must be confident that he understands the fundamentals.
If you don’t possess confidence in your understanding of the fundamentals, I think that talking to an advisor may even be dangerous. The temptation is always there for the advisor to try to sell you something and the advisor knows the emotional hot buttons that need to be pushed for him to be successful doing so.
People really do need reassurance, though. I think that’s why many go to advisors.
Rob
I touched on this in my last blog post. I had some problems resulting from my misguided expectations about what my “financial adviser” was going to be doing with my accounts. It turns out I had a salesman, and not really an adviser, but that distinction was primarily the product of my own ignorance at the time.
First, before choosing an adviser a person must know something about investing. If they don’t, then stick with a savings account or an index fund. Second, have goals. Need money for retirement? Want to go risky with your extra money? Saving for child’s college fund? Third, check up on your adviser. Research, research, research! Fourth, if your adviser only knows how to lose money or doesn’t want to talk to you then get a new adviser, DIY, or get out the market! EDUCATION IS KEY!!! I might do a post myself on increasing financial literacy….hmmmm.
Dylan: Agreed, keeping costs reasonable is essential.
Dave: I’ve actually got that post included already in my roundup for tomorrow. It makes an important point.
Rob & Jermaine: Absolutely. Going to a financial advisor without having any background information whatsoever is very likely to result in poor advice and/or being sold a front-loaded portfolio of high cost funds. Always good to have a little knowledge before going to meet with any expert (whether financial advisor or car mechanic).
NC: I once had a “financial advisor” try to sell me whole life insurance before I was even out of college. I tried explaining that I had no fixed expenses and nobody at all relying upon me for income, so I didn’t see the need. He didn’t seem to understand.
Great spotlight.
However, my experience tells me that there is a huge difference between a money manager and a financial adviser. The money manager only deals with investments. A financial adviser helps clients navigate to reach financial goals. Investments are only a part of that in my opinion.
Neal/Wealth Pilgrim: Yep. That’s pretty much my point. The person who is sitting down with you helping you determine a way to reach your goals is busy enough with that responsibility.
Any advisor who also makes himself out to be a money manager/stock picker/fund picker/market timer is probably overconfident in his ability to do so successfully while managing all the client-related tasks.
Great post, Mike – however, as @Welath Pilgrim alludes, what you’re describing might be better described as a money manager or perhaps an investment advisor, although those activities would be a subset of a financial advisor’s duties.
I think to round out your list of things a good financial advisor does, you’d need to include things such as: help navigating the landscape of tax laws, understanding risk and risk avoidance tactics, laying out a long-term view to reach your goals – a much more comprehensive point of view, in other words. Investing (choosing an allocation, etc.) is only a part of the picture. Discouraging speculative activities and education are also part and parcel of the financial advisor’s duties.
Thanks again for a thought-provoking post…
jb
One other thing worth noting is that the successful investment managers that you mentioned: Buffett and Swenson, those guys are truly “active” investors in that they don’t just invest capital; they actually get involved in the operations of many of their investment assets. This is why they’re to busy to also be advisers to individuals.
On the semantics of title, there is no universal definition of “financial adviser.” It’s like “healthcare provider.” There are lots of activities and titles that fall under both. I think we all agree that a financial advisor advises on more than just investment issues. However, while it is investment advice, I would characterize “Helping clients with asset allocation decisions” as being outside the scope of simply being an investment/asset/portfolio manager. Those decisions are often based on factors outside of the investment portfolio.
I will agree with some of what has already been said. I *good* financial advisor should educate their clients, first and foremost. Sometimes a *good* financial advisor should say, “Whoa, you have too much credit card debt to be buying stocks. Let’s work on that first.” Of course, there is a difference between a *good* financial advisor and a profitable one! LOL
Great post! I’d add that seeking out hourly fee advisors who work independent of a product company will put you at better odds of finding someone to work with over the long haul. I despise captive agents, whole life pushers, and the like. Independent, fee based financial advisors will hold FINRA Series 7, 65, 66 and those that are principals (on the hook for any misdeeds of the reps they oversee) hold FINRA Series 24 licenses. You can check your prospective advisor using FINRA’s BrokerCheck. This will give you some limited information on their current Broker/Dealer/Registered Investment Adviser (this is the company they do business through), the licenses held, their previous employment, and any complaints they have on their record.
Beyond this, you should get a copy of the advisor’s ADV Part II which details fee schedules, etc. Often these are overstated on the fees compared to what the advisor actually charges.
Also, as to cost, the transition from commissions in the 1990s to ‘fee based’ after the tech collapse is a JOKE! Advisors went from getting $50 or $200 per trade to charging a percentage of assets held (for some it was a pay raise). I did this percent fee for a while, but then converted to an hourly rate. Think about it. What extra decisions/work goes into a $1 million portfolio versus a $100,000 portfolio? Not much. That’s why hourly is the way to go.
Also, there are far too many sources of financial planning online to go immediately to an advisor. Exhaust resources online first, then go to an advisor. You’ll have a more productive conversation and the expectations will be more realistic.
Sorry about the soap box, but there are so many that call themselves ‘financial advisors’, but very, very few of them conduct business as an advisor…most are just salespeople.
Mark Wolfinger – Ouch, but I have to admit, I kinda agree. Maybe I’d buy them a soda pop for the advice? But, not much more.