The Biggest Misconception about FA's..............

[FinanceDude]

In observing the philosophy of this and other forums, I have come to a conclusion. The main reason folks don't use advisors that I hear drumbeated over and over again is "he charges me a fee/load and can't even beat my Vanguard Funds"!!!

As an advisor, I was told day one that if I "sold on performance" I'd have a really short career. I don't recall EVER promising a client I can "beat the S&P 500 or any such nonsense. You can count the number of guys on ONE HAND that consistently do that: Bill Miller, Peter Lynch, and maybe Buffett.

The biggest question I ask myself everyday is:

Do I provide value to my client, and can I make a positive difference in their financial life?

If we base an advisor's value on PERFORMANCE, which is easy and requires little thought, then the fact is none of us are worth it. I try to motivate/push/encourage/provide reality checks to folks who need it. Granted, this board is a motivated FIRE type of crowd, but defintely the EXCEPTION NOT THE RULE.

Getting the number of folks who can retire comfortably from 5% to15% of the American public would be the larger goal. And this is the area where I think advisors can help. After all, if we leave it up to personal motivation, the US will be at 5% of all Americans FIRE'd in 50 years, 100 years, etc.

The biggest beef clients have is the cost they incur to pay an advisor. I am sure folks on here and elsewhere think salaried advisors are the only way to go. However, the reality is, a number of FAs get in the business to make money, and the $35-$40K a year they pay the Vanguard and Fidelity reps doesn't make many of us that motivated to work for them.

First, the financial magazines took shots at FA's because they charged too high a commission, accused all brokers or churning their books, too many loads, etc. Now that I and a lot of the industry have moved to fixed fees, the mags don't like that either.

I guess there is no answer. I'll be hopefully getting my CFP by this time next year, but I doubt that will result in a flood of folks dying to pay me an hourly rate.....................

 

[maddythebeagle]

I try not to respond to folks that think they need to post 8-9 posts a day since they usually flame out....but with all due respect, your're kinda a noodge...

 

[frayne]

If we base an advisor's value on PERFORMANCE, which is easy and requires little thought, then the fact is none of us are worth it.

Glad you said this, as I agree wholeheartedly.

 

[runchman]

FinanceDude you must have pretty thick skin to hang out here!

Some are just convinced that everyone can and should do it themselves. Well for some people it just doesn't work that way.

I just built a beautiful cedar deck/screen room this summer, because I have the ability.

I suppose I could post on some woodworking forum about how useless builders are, how anyone with half a brain can learn to use a hammer and saw, and how you are obviously an idiot if you spend extra money to have someone else do this for you. After all, no reason you can't learn this, it isn't rocket science.

But I don't, because I realize that not everyone has the inclination to go this route. Is investing so much different that we can't accept that some want help, and maybe, (gasp!) they might even do better paying a bit extra for an advisor than they would on their own?

And yes there will be crappy advisors out there, just like there will be crappy doctors, crappy car repairment, crappy engineers, crappy whatever. Talent falls on a bell curve for advisors just like it does for any other profession.

FinanceDude, keep helping out those clients that need the help.

- John

 

[brewer12345]

FD, I think a lot of people do it themslves because they can and you see lots of hostility to FAs because the profession has a lot of bad apples. Simple as that. Don't take it personally.

 

[FinanceDude]

I try not to respond to folks that think they need to post 8-9 posts a day since they usually flame out....but with all due respect, your're kinda a noodge...

Calling someone a noodge indicates "due respect"??.............

 

[yakers]

Well, lawyers and used car salesman have a reputation, why?

IMHO there are 3 kinds of FAs. The first are actually decent & useful. When I was 30 and knew nothing about financial matters I had a FA recommended by a LCdr I worked with, these folks were in Monterey, CA and specialized in military & civil service customers. I paid all of $250 in 1980, which was a lot of money for me at the time. These folks made a complete plan including life & car insurance, told me to buy a house, set up some mutual funds and more. They would meet with me periodically and update my plan. They chose Oppenheimer funds at the time, which were OK and now use American Funds which I also think are OK for loaded funds. Although I now would rather manage my own ‘portfolio’ I still recommend these people to individuals who do not want to manage their own resources. These folks get paid by the hour or by a % depending on specific arrangements. They are competent and ethical but ultimately all I can say is that they are better than doing nothing about financial management.

Then there are the basically competent FAs employed by institutions. My MIL has her portfolio ‘managed’ by Washington Mutual. I cringe but I will not get involved and shift the management over to myself as life is too short to deal with her complaints. What they did is to recommend appropriate annuities, income funds, stock funds and stock holdings but only their product. I explained it to my MIL as: “say you go to a Ford dealer and you need a pickup, a car & an SUV. Well, they are doing the best they can if they provide their best (Ford) vehicle in each category. But they are not necessarily providing the actually best vehicle on the market.” But at least their selections were basically appropriate. Probably by numbers most FAs work in these kind of institutions including banks, insurance companies, credit unions and other financial service entities. Although these FAs ‘can’ provide their best I house product, it does not mean that they will. The company may incentivize them to push annuities, churn accounts and provide poor performing (but not legally inappropriate) products.

Then there are the miserable cretins who will sell anything. They are incompetent or worse and they do not know what they are selling or why but will sell anyway. These are often out of brokerages, insurance companies and are sometimes independent agents. I see the worst of these pedaling 403b products to teachers. I’m going to stop now, I *really* don’t like this group.


Ultimately I think it is hard to be a competent, ethical, well paid FA, there are just too many inherent conflicts of interest to overcome . There are so few in this category (Rick Ferri, Larry Swedroe?) that it is about the percentage of athletes that succeed in professional sports. Good luck.

 

[HelpMeRhonda]

Nowdays, to a large extent an FA's value is similar to a tax preparer's value.

I believe people use a tax preparer for two general needs:
A. Time, simply too busy doing what they get paid to do or want to do.
B. Complexity, their situation is beyond the effort they can or are willing to fully understand / study in order to prepare the tax return.

In my opinion services of an FA fit a simliar set of needs.
A. People who are too busy doing their profession. From a business decision, it's cheaper to pay someone to manage assets while they continue their own profession.
B. Assets are significant and require advanced knowledge of investing to correctly defersify, etc.

In the case of this forum, I'm not certain the above reasons are compelling enough. Most are retired and have time. Most are motivated to do the learning requirement to manage their own. Because, they are able to reproduce FA services for themselves and have time to do so, the value of an FA is marginal at best.

I bet the majority of posters do their own taxes as well.

 

[mickeyd]

Here's the clash as I see it FD, when an investor meets with a financial advisor he expects to get advice that benefits only him. The reality is that the advisor needs to make money from this investor in order to keep the doors open to his shop and to feed his family.

The advisor has to decide who is first in line for the investor's fees/commissions etc. Logic tells us that the financial advisor will probably select the path that produces the most $ for his situation, which may or may not be the best for the ignorant investor. I have heard many advisors indicate, in public, that this is not true, that the client's needs come first. In private, they will always agree that it is all about making the most amount of money as possible for their business and family. This is quite understandable, as this is why they get up out of bed and go to work each day.

I see a similar conflict with mutual fund companies that are owned by the public. Who do they owe first allegiance to, the individual mutual fund investor or the stockholders in the company? The stockholders of course!

 

[FinanceDude]

If we base an advisor's value on PERFORMANCE, which is easy and requires little thought, then the fact is none of us are worth it.

Glad you said this, as I agree wholeheartedly.

If I can get my client's money to a beta 15-20% less than whatever index it can be applied to, with reasonable return assumptions, I am good with that..............

 

[FinanceDude]

Here's the clash as I see it FD, when an investor meets with a financial advisor he expects to get advice that benefits only him. The reality is that the advisor needs to make money from this investor in order to keep the doors open to his shop and to feed his family.

The advisor has to decide who is first in line for the investor's fees/commissions etc. Logic tells us that the financial advisor will probably select the path that produces the most $ for his situation, which may or may not be the best for the ignorant investor. I have heard many advisors indicate, in public, that this is not true, that the client's needs come first. In private, they will always agree that it is all about making the most amount of money as possible for their business and family. This is quite understandable, as this is why they get up out of bed and go to work each day.

I see a similar conflict with mutual fund companies that are owned by the public. Who do they owe first allegiance to, the individual mutual fund investor or the stockholders in the company? The stockholders of course!

Absolutely, and a HUGe conflict of interest for the individual............

 

[MasterBlaster]

Conflicts of interest and very high fees aside...

I believe that FinanceDude has a valid point in that many people would be well served with some good financial advice/evaluation.

It just may be that, for many, the high fees offset some of the dumb decisions that many people make with their investments.

Still, the problem that I see most is that many Americans go heavily into debt to buy a bunch of crap that they don't need much to their long term detriment. Maybe a good whack upside of their head would set them straight. In this manner, just maybe a FA can help a few change their wayward behavior.

 

[LOL!]

Is investing so much different that we can't accept that some want help, and maybe, (gasp!) they might even do better paying a bit extra for an advisor than they would on their own?

Yes, the answer is that investing is alot easier than woodworking. It is so easy that the government thrift savings program can do it really well without screwing it up. What tends to screw it up is all the noise provided by FAs.

 

[My Dream]

Yes, the answer is that investing is alot easier than woodworking. It is so easy that the government thrift savings program can do it really well without screwing it up. What tends to screw it up is all the noise provided by FAs.

Now you see LOL, and dont' laugh, to me woodworking is much easier than investing at this point in my life due to the fact that I've had much more experience with wood. I've been trying to figure it out for months and I don't think I'm even a quarter of the way there. Be it as it may, give me something that I can work with my hands whether it be welding or building a house and to me that comes a lot easier. The reason I went with a FA is when I was self employed I just didn't have the time. As of the beginning of 2007 I hope to manage our own funds for reason's I won't get into right now.

 

[retire@40]

...If we base an advisor's value on PERFORMANCE, which is easy and requires little thought, then the fact is none of us are worth it. I try to motivate/push/encourage/provide reality checks to folks who need it. Granted, this board is a motivated FIRE type of crowd, but defintely the EXCEPTION NOT THE RULE.

Getting the number of folks who can retire comfortably from 5% to15% of the American public would be the larger goal. And this is the area where I think advisors can help. After all, if we leave it up to personal motivation, the US will be at 5% of all Americans FIRE'd in 50 years, 100 years, etc....

When you first meet with new clients, do you tell them you are there more for the purpose of motivating them to invest than giving them better investment performance?

I just wonder if the financial advisor is going the way of the travel agent. At one point, you had to use a travel agent to fly. Now you can just log into Expedia, Orbitz, Travelocity, Priceline, etc. and find the best rates yourself. Now you can buy any type of fund you want directly from the mutual fund company, and with companies like Vanguard, for much less expense.

I understand that some people "just don't get investing" but many times I think those people are looked upon as suckers who are put in investments they would not have chosen themselves had they "got investing."

I don't blame the financial planner for this. He's just trying to make a buck while being bound by his broker/dealer to meet his sales quotas. I blame the system itself that is almost designed this way on purpose.

 

[haha]

Ultimately I think it is hard to be a competent, ethical, well paid FA, there are just too many inherent conflicts of interest to overcome . There are so few in this category (Rick Ferri, Larry Swedroe?) that it is about the percentage of athletes that succeed in professional sports. Good luck.

Hey, don't forget Bernie Cornfield and Robert Vesco!

Ha

 

[saluki9]

When you first meet with new clients, do you tell them you are there more for the purpose of motivating them to invest than giving them better investment performance?

I just wonder if the financial advisor is going the way of the travel agent. At one point, you had to use a travel agent to fly. Now you can just log into Expedia, Orbitz, Travelocity, Priceline, etc. and find the best rates yourself. Now you can buy any type of fund you want directly from the mutual fund company, and with companies like Vanguard, for much less expense.

I don't blame the financial planner for this. He's just trying to make a buck while being bound by his broker/dealer to meet his sales quotas. I blame the system itself that is almost designed this way on purpose.

I don't think the industry is going that way. The mistake that many people make here is discounting the value of advice. If you're the kind of person who is a true long term investor and isn't bothered by bear markets, never panic sells, and doesn't listen to cocktail chatter then you probably don't need an advisor.

The fact is that most individuals do far worse than the indexes. People sell at the wrong time, make decisions based on emotion, or simply have no interest in learning about investments. Doesn't make them bad people, they just have other priorities. For these people we do a great service. Do we service clients who just want access to DFA funds, sure, but we don't charge them the full fee.

The value is the advice, and the advice isn't about beating the market.

 

[Texas Proud]

Finance Dude....

As people have said, the problem is what is recommended... my sister's FA got her to invest in a 403(b)... which she would not have without some kicking from him.... BUT, she is in funds that cost 1.25% plus!!! And they have a 'fee' if you leave in less than 10 years!! Did he tell her this NOT....

But, she is 'OK' with it as she said she would not have anything if he had not come by to sign her up...

Now that I know, I am working with her to unwind her high fee funds and move to cheaper funds, but she is stuck with not many options where she is at...

And BTW, the funds did not perform anywhere as good as mine at Vanguard... so she is has a double hit on her money..

 

[runchman]

Be it as it may, give me something that I can work with my hands whether it be welding or building a house ...

What a coincedence, I just recently bought a TIG welder and am having great fun pushing molten metal around.

 

[FinanceDude]

Yes, the answer is that investing is alot easier than woodworking. It is so easy that the government thrift savings program can do it really well without screwing it up. What tends to screw it up is all the noise provided by FAs.

Too bad the rest of us can't invest into the TSP..........and won't be able to for the foreseeable future........

Our 401K at my firm is in ING.........they're not terrible, but our choices leave something to be desired.........

Can't do ROTHS...........so I am paying off my mortgage in 4 years and DCA'ing (dirty word? ) in a taxable account.......... 8)

 

[Hamlet]

I think that the biggest problem for most people is that if you are qualified to tell a decent FA from the hordes of crooks that pretend to be a FA ( include insurance salesmen and stockbrokers as well), you are probably pretty close to being qualified to do it yourself.

How does someone who is financially illiterate determine who is qualified to give them advice about money?

How does someone who is financially illiterate determine that they are being charged a reasonable amount for the services provided?

 

[haha]

What a coincedence, I just recently bought a TIG welder and am having great fun pushing molten metal around.

Runchman, did you go to some classes, or just look at the pictures and start out?

What welder did you buy? 120 or 240 v?

How did you choose the arc welder rather than gas?

Thanks,

Ha

Apologies for heading OT

 

[Anansi]

There are lots of bad lawyers, bad doctors, bad contractors, etc. too and it takes either intelligence - or dumb luck - to find a good one of those just the same as with a good FA. Some people do get ripped off and some people here may never need the services any of one of these, but that doesn't mean they are worthless to everyone or that they don't help many people enormously.

 

[runchman]

Runchman, did you go to some classes, or just look at the pictures and start out?

What welder did you buy? 120 or 240 v?

How did you choose the arc welder rather than gas?

Thanks,

Ha

Apologies for heading OT

Ha,

I've had an oxy-acetylene for some time, and a mig for quite a while, and just recently broke down and bought a tig. I then sold the mig...anyway, I got an htp invertig201 which is a 220v model. HTP is a 30 minute drive from me, and a better bang-for-the-buck than miller, hence my decision.

Pretty much self-taught, did some welding back in high school which was a while ago now! If you have some mechanical aptitude, it really isn't tuff to learn. Maybe if you're making a nuclear reactor it's a different story, but for hobby stuff anyway my skills are good enough. Drop me a line at runchmanATcomcastDOTnet if you want to chat about it further...

- John

 

[unclemick]

Hindsight being what it is: I've often pondered how much I'd have saved in time and money - starting in 1966 with a good mentor/FA rather than my somewhat expensive school of hard knocks/learning by investment mistakes.

heh heh heh heh - sigh!