I probably won’t make any new friends with this one, but since this year is already 4 of the worst years in U.S. history rolled into one, with 6 months to go, [email protected]# it. Gotta keep it 100, as they say.
There are legit certified financial planners out there that I am sure do good work and provide value to their clients and reflect positively upon the broader financial advice profession. If you are one, I commend you for your good work. However, there are even more bad ones – and for a large majority of the population, it is worth seriously reconsidering whether you should be turning over the management of your financial assets to a financial advisor – and instead aim to become your own financial advisor. Here is why…
At Their Best, Financial Advisors are a Crutch for a Critical Life Skill
Learning the tenets of personal finance and investing is a life skill that all capable individuals should begin developing and investing their time in from the moment that they reach adulthood (and, ideally, before). I’ve often been dismayed that intelligent and capable individuals spend 40, 50, and even 60+ hours per week toiling away at incredibly difficult jobs, in the pursuit of making money, only to then invest zero time on money management. What a waste!
I put personal finance and investing up there in its contribution to a successful adulthood with essential life skills such as minding one’s health (exercise, diet, and mental health), personal communication and building relationships, and developing a marketable skillset. Is there another skill that you could develop that has a better return on your time investment?
Turning that critical life skill over entirely to someone else serves as a crutch – at best. And in the hands of the wrong individual, it can prevent the crucial development of this life skill, cost you a lot of money, or worse.
Being a Proficient Amateur Investor has Never Been Easier or Cheaper than Right Now
Think about this for a moment: just 30 years ago (pre-Internet) EVERYONE who wanted to invest had to have a financial advisor or know a stock broker in order to do so. If lucky, you had a phone number for a guy, and on a good day, they’d call you back to orchestrate a stock trade. A lot has changed in most of our lifetimes. It is truly now easier and cheaper than ever to learn how to invest on your own and then actually do it. Here’s a small sample of the evolution that we’ve seen in just the last decade within the industry that has catered to amateur investors:
- There are many easily accessible and great online investing platforms to choose from (e.g., for starters: Vanguard, Fidelity, Schwab, Ally Invest).
- In just the past year, most investment platforms have shifted to free trading, driving down costs for amateur investors.
- Thousands of mutual funds, index funds, and ETFs have dramatically lowered their expense ratios to 0.5% and below, driving down costs for amateur investors.
- There are more free resources online and great books to learn from than ever before.
- You can learn whatever you would like about any particular investment in just a few clicks.
The investment industry was built around the financial advisor model, but with all of these advancements, it simply is no longer necessary – yet it still persists.
Choosing & Managing Investments are No Longer Value-Adds
In the pre and early Internet era, I’m sure that many financial advisors provided a lot of value in finding information and using that to invest appropriately. However, as the Internet has made amateur investing accessible, easy, and cheap – passive investment options catered to amateur investors have proliferated.
And, passive investing is where it is at (even though it’s “boring”). Very few professional mutual fund managers – most with massive knowledge, experience, technological resources, connections, and budgets – outperform the entirely passive indexes they aim to beat (and you have easy access to). In fact, over the last 15 years, only 8.4% of active fund managers have outperformed the S&P 500. Why would you think individual poorly resourced financial advisors would consistently fare any better than highly resourced fund managers?
I think a lot of people choose to turn over their assets to financial advisors with the belief or hope that they will be able to use their wisdom to outperform the markets. Over the long run, few will. And even more will underperform precisely because they are desperately trying to outperform.
Financial Advisors Often Have Conflicts of Interest
The U.S. Department of Labor (under President Obama) had worked on implementing a fiduciary standard that would have required financial advisors to always act in the best interest of their clients in regards to retirement account investment allocations. The wealth management industry fought the fiduciary rule in the courts and won, after the Trump Administration chose not to defend the rule.
Why did the wealth management industry fight the fiduciary rule? Because slinging subpar investments with commission kickbacks is lucrative business! The simple fact is that many financial advisors are glorified salespeople that receive a commission for investing client assets into subpar, high-kickback funds. That’s the business model. The industry didn’t want to change that (for the detriment of their clients and the reputation of their industry).
I previously compiled advice on how to limit financial planner conflict of interest and how to choose a financial planner to help avoid these situations, but why even play that game when you don’t have to?
Even Good Financial Advisors Cost Money (that You Don’t Need to Spend)
Even if there is an absence of conflicts of interest, financial advisors often come with some sort of combination of commission, management, hourly, or per-session fees – all to help you do things that you can legitimately do on your own. According to a number of different sources, financial advisor fees typically break down as follows, by model:
- Percentage of Assets Under Management (AUM): 1% – 2% per year
- Hourly Fee: $100 – $400 per hour
- Fixed Fee (Includes a Capped # of Hours or Sessions): $1,000 -$3,000
And that is on top of any expense ratios and sales load fees levied for the various investments chosen. While 1-2% does not sound significant, Vanguard calculates that over 25 years, $100,000 in investments earning a 6% annual return, would lose $170,000 (40% of the total investment gains) to a 2% annual fee.
There’s no such thing as a free lunch, as they say.
Financial Advisors Come and Go
Financial advisors change jobs, change careers, and are mortal human beings just like the rest of us. The odds that you will work with the same financial advisor from the moment you onboard with them for the rest of your days are very slim. There is one consistent variable in your asset management – you. So why not learn how to do this on your own, so you can take it with you?
OK, ready for the industry blowback…
Disclaimer: the caveat if you get rid of your financial advisor and become your own is that you actually invest time to learn, do the work, and are consistently add to your investment assets over time.