Taking Responsibility

I’m a self-confessed financial moron. Well, I’ve been working hard on that, so I’m all the way up to idiot. Anyone taking advice from me without checking every concept for themselves is simply nuts. So please, consider what I say here to be at the very most an index for your own investigations. If you take my “advice” as some kind of intelligent and actionable wisdom, then you are making a foolish, terrible, and likely very expensive mistake.

How’s that for a disclaimer?

So here’s what I’ve decided so far in my research.

  • Financial advisors are too expensive, often give bad advice, have serious conflicts of interest, and don’t do the work you need them to do anyway.
  • The common notion about the financial benefits of  sharp fund managers and financial experts delivering superior results has been proven to be untrue in the long run.

Who Do You Choose?

Some financial writers claim that fee-only advisors can help you and have no conflict of interest–they are legally barred from having any conflict. That may indeed be true in some cases, but having an advisor collect a fat fee from you is no guarantee that they aren’t steering you wrong to their benefit. You need to understand the difference between fee-only and fee-based. And when you are sitting in a financial advisor’s office you will be sold to–that’s no time to be investigating their fee structure.In theory, you can select a Fiduciary advisor who has specific responsibilities to put your interests first, but even then there’s wiggle room–they must disclose any conflicts of interest. Disclosure represents wiggle room. Your failure to act on full disclosure is not the advisors fault.

More importantly there’s no guarantee that they will pay the kind of attention to your investments that will keep you out of trouble in the future. Theoretically the reason you are engaging an advisor is that they can outperform you. In truth, your selection of an advisor will probably be more influenced by how good a sell job they do on you, or how much your friends and family trust the person, than any clear understanding of their fee structure, real performance, philosophy and integrity.

In other words, good luck, you’re going to need it.

Advice Costs Too Much

Paying the typical fee of one to one and one half percent of investments under management to an advisor might seem trivial, but as we’ll discuss later, if you don’t want your nest egg to evaporate before you die, you should live on about 2-3 percent of your investments. Giving half of that to an investment advisor for mediocre advice and performance suddenly seems pretty expensive. But the reality is that most advisors will be steering you into investments that benefit them, especially if they are receiving commissions that comes from the expense ratio of the funds they recommend. Take a look at those expense ratios and you might find that your advisors are costing you between 2.5 and 3 percent. That’s what you are supposed to live on when you are retired. That’s all of it. If you are also taking, say three percent from your nest egg, then you’re pulling out four to six percent. That moves you well into the territory of people who run out of money before they kaack. I hear McDonald’s may be hiring seniors.

The good news is that following a really well researched path for investment with nearly no fees and very little expense ratio is fairly easy. The bad news is that you have to do the work yourself. I don’t think you’ll find a financial advisor that will take you where you need to go for a modest fee. I could be wrong. In fact I know I’m wrong. For instance, you can use Vanguard’s financial advisers for .2 percent per year. But you can also do it yourself and probably use vanguards free services to do the heavy lifting. If you do everything in the lowest cost way, you could wind up with a total fee and expense percentage of about .09%.  So, for example, if you had one million dollars with a typical financial advisor, and they were collecting fees and steering you into actively traded funds that they collected commissions for, your total expense ratio for funds under management might be 3 percent, or $30,000 per year. If you managed your own investments using something more like a Boglehead (explanation later) approach, your total expense would be $900 (not including taxes).

If your investment advisor was so brilliant that they delivered double the performance of the world market you would just about break even on expense. Except that they would probably be trading a lot, and generating a lot of capital gains. If your advisor isn’t paying close attention to your tax situation with every trade, then the gain will be decreased dramatically. And the simple truth is that no one outperforms the market forever. In fact they very rarely do for more than two or three years.

Do They Really Do The Work?

In my experience, the more senior the financial advisor is (you want to be working with the main dude, right?) the less attention they will actually pay to your account. If you observe their actions carefully, you can usually tell that when you sit down together in that fancy conference room, and your guy opens your folder, that’s the first he’s seen of it since the last meeting. For the most part, people you have never met are working on your stuff, and they’re doing one-size-fits-all work on your account, if they do anything at all. If they aren’t doing much, that’s the good news. Generally if they leave your account alone they won’t be actively damaging your savings. But what are you paying all that money for?

If they’re moving money around they will likely generate some taxable event. You might expect them to pay attention to your overall tax situation, and give you the best strategy for moving money from one entity to another, but often it’s a general decision, and your individual needs are considered only peripherally. I’m sure I’ll get comments that say I’m completely off base, but a financial advisor with a hundred clients is small spuds–how much of their attention is going to be applied to the long and short term tax consequence of their actions. They have your permission to trade without contacting you. They will do so. It won’t always be good for you.

In the next article I’ll talk about alternatives. But in the meantime, Google the word Bogleheads and do a bit of your own research.


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