We’ve discussed previously how financial advisors don’t generally ascribe to the Hippocratic oath. People don’t go to work on “Wall Street” for the same reasons that other people become firemen and kindergarten teachers. There are no essays where they attempt to come up with a new way to say “I just want to help people.”
But there is another reason financial advisors aren’t doctors. Financial advisors like to compare themselves to CPAs, attorneys, physicians and other professionals who spend years in training and pass difficult tests to get advanced degrees and certifications. Most advisors, if they took a test at all, took one that required little training and even less experience. Yet they still use lines such as “You wouldn’t let just anyone operate on you, would you?” or “I’m like your family physician for your finances. I might send you to a specialist for a few things, but I’m the one coordinating it all.” These lines are designed to make us feel good about trusting them with our hard-earned dollars and, more importantly, to think of personal finance and investing as something that “only a professional can do.” Unfortunately, believing those lines can cost you hundreds of thousands of dollars and years of retirement.
A more apt comparison, perhaps, would be something such as this:
“I don’t need a professional to mow my lawn, why would I need one to manage my finances?” Just because there are people who would like you to pay them to mow your lawn, doesn’t mean you NEED to hire one. It just doesn’t take much knowledge to run a lawnmower, set it to the right height, and make straight lines. I know, I spent a few summers doing it. My training, like that of many advisors, lasted just a few minutes.
You don’t hire someone to pick out your groceries, select a restaurant for you, pump your gas, clean your house, shovel your driveway, plunge your toilet, organize your garage, plan your vacation, or pick out your furniture. All right, it’s possible you DO hire someone to do some of these things for you, but only because you feel your time is better spent doing something else. Unfortunately, when it comes to your finances, YOUR TIME IS NOT better spent doing something else. It takes so little time to design, implement, and manage a simple yet successful portfolio, that the amount you save/earn by doing it yourself, make these the most profitable hours of your year.
Let me explain. If you have a $500K portfolio, and your investment costs are 2% as a result of your advisor’s fees and the management fees of the investments he has put you in, that is equal to $10K per year. Let’s say it takes you 10 hours a year to manage your portfolio. (I’d say 5 hours a year is closer to what I spend, but I’m being generous.) That’s about $1000 an hour. I don’t care what field of medicine you’re in, there’s nothing else you can do that consistently makes you $1000 an hour. That’s after-tax too! Sure, you have to put in some time up front educating yourself, and you have to design and implement a portfolio, but after that’s its pretty much on autopilot. And as that portfolio grows to $1 Million, $1.5 Million, and $2 Million you’re now making $2K, $3K, and $4k an hour.
So the next time you hear an advisor’s sales pitch, ask yourself if you’re hiring a trained professional like a doctor, or someone like a very expensive house cleaner.
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So true…
Just wish i had realized it sooner.
Completely agree with you on this article. It doesn’t make sense to give away 1-2% of your investable net worth each year especially as your assets grow with savings and wise investing. Also, I think it’s rather enjoyable to learn about personal finances and investing. In addition, only you will have your own best interests at heart(not necessarily true for financial advisors).
This is a misinformed commentary. The author clearly hasn’t enjoyed the benefits of a highly competent, sophisticated advisor who has offered returns that exceed those of the general market. Just as there are good doctors and bad doctors, the same can be said for advisors. It is true that there are people who misrepresent themselves in the industry, and it is up to an individual to do their homework and choose someone who has a proven track record with regard to outcomes, ethics, and customer service. As I often tell my patients, ‘you don’t know what you don’t know’, which is why you need the assistance of a professional to help you navigate the complexities of whatever you are endeavoring to manage in your life, whether it be your health or your finances.
I would guess that there are many opportunities the above contributors have missed due to their attitude that would have resulted in much greater benefits than saving the 1-2% on their overall portfolio. But of course, they wouldn’t know that! :)
Perhaps these individuals do have the extra time to spare monitoring the market on a daily basis (to do this properly to ensure you are not losing opportunity or to confidently dodge a disaster requires doing that 2-3 times per day for 5-10 min which equates to at least 10 hours per month, resulting in hundreds of hours per year spent ….you are fooling yourself if you think you can do it right in 5 hours per year….if you can, you don’t have a very sophisticated portfolio and likely are getting mediocre returns). I personally do not have the time to do this in my busy practice with the multiple and extensive demands on my time.
I think the bottom line is this. Any service has a value. You just need to determine the level of personal value that it has for you. Assuming you do your homework and have the opportunity to choose a high level advisor who is well respected in the industry and who has a proven track record for their clients, do you really want to do it yourself, invest your valuable and limited time and make less? I don’t. I will happily continue with my Bay Street advisor and continue to see my assets grow consistently and at great rates that most people I know haven’t been able to achieve on their own.
Ahhh…the dream of successful active management. It lives on. Is it possible? Sure. Is it likely? No. No interpretation of the data suggests that it is. If there are these “high-quality” advisors out there, why are they wasting their time running your $1 Million portfolio instead of a $1 Billion hedge fund? They wouldn’t. So, let’s assume the best advisors are running the biggest portfolios. How does the record look? On average mutual fund, pension fund, and hedge fund managers underperform the relevant indices…before expenses and taxes. The longer the term and the more managers/funds used, the worse the performance gets in relation to the indices. Rather than ending up being “mediocre”, they end up outperforming the vast majority of active investors, especially after considering expenses and taxes.
Simple can be surprisingly sophisticated. When the world’s acknowledged most successful investor suggests buying primarily index funds, you’ve got to wonder if there’s something to it.
The arguments you espouse are those continually put forth by advisors who want to make 1-2% of your money reliably every year, no matter their performance. “Every service has a value.” “You need to monitor the market every day, multiple times a day to avert disaster (despite the fact that disaster in the markets only shows up every few years.)” “You don’t know what you don’t know.” “You should spend your time in your practice and let me do all the heavy investing work.” These all try to capitalize on the investor’s fear (and greed) that there is a magic investing method out there that somehow produces continual outperformance and most importantly, that HE isn’t using it.
The chief value of an advisor is in keeping the investor from shooting himself in the foot due to his own fear and greed. Yes, a completely unsophisticated investor may benefit from handholding to develop a reasonable portfolio and taking an appropriate amount of risk, but that’s awfully easy to learn how to do on your own. The value is not in trying to beat the market. That effort is much more likely to backfire.
Some people feel their advisor is giving them market-beating returns. In my experience, most of these people don’t know how to calculate their returns, or how to compare them to an appropriate benchmark. Once they do, they are generally much more disappointed in the returns produced by their advisor, especially after expenses. Even those few whose returns turn out for a few years to be beating an appropriate benchmark leave you with the question- lucky or good? Unfortunately, it takes decades to really answer that question, and by then, you’re too late. But mostly, if you’re carefully monitoring, you realize after a few years that your advisor is now underperforming and switch to a new advisor, only to see the pattern repeat.
It’s okay to use an advisor, and to be willing to pay for the service you value. But you should realize the price you’re likely paying for the service, and the value of the service you’re likely getting. The service likely isn’t “only choosing the good stocks” and beating the market. And the price is usually far higher than realized. Consider an investor whose advisor costs 2% a year. He invests $50K a year for 30 years. The advisor manages to match the market before expenses (no easy feat over 30 years), so after expenses, he gets 2% less than the market (let’s say the difference between 6% returns and 8% returns.) How much money did the “service” your advisor provided cost you? $1.7 Million, or $57K a year. More than you were investing in the first place. That’s a pretty high cost.
So if you this is what you’re paying, you’d better be darn sure your Bay Street Advisor is really outperforming an APPROPRIATE benchmark by at least 2% a year year in and year out. Perhaps he is, but I doubt it.
“Any service has a value.” Of course, but that value can be zero, or in the case of financial advisors, more likely negative.
I would love to see some data on the out of sample performance of financial advisors, performance predictability, risk adjusted returns after fess, expenses, and taxes. I have asked many people, including advisors, and no one has been able to come up with any evidence on their performance.
Hard to pay someone thousands of dollars a year on faith that there work is worth more than negative thousands of dollars.
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