Do you use or have you been thinking about using a financial planner to manage your investments?
We don’t, and I personally haven’t been very intrigued about hiring one. I’m sure there are some great ones out there, but I’m not sure how I’d find a great one, how I’d know it if I had, and if we’d have a portfolio sufficiently interesting (that is—sufficiently mammoth) to be able to hire him or her (or maintain enough of his or her attention).
I also feel like we ought to be able to figure out enough to manage the amount of investable money that we do have. Reading personal finance books, magazines, and blogs has so far reinforced that thinking for me: personal finance is not rocket science. Which is a good thing if it’s true, since I have a pea brain that would not cause anyone to mistake me for a rocket scientist.
There are also lots of folks who think that, if many professional money managers running mutual funds can’t beat the market, there’s not a whole lot of use in trying to hire a financial planner to try to beat the market.
While I’m piling on, I also believe that there are lots of bad financial advisors out there, who aren’t really all that good with their own money (let alone yours) or who have fee structures that motivate them to push certain products that may not be in your best interest. Lots of them have given me the feel of a sleazy salesperson, circling like vultures, calling just a few too many times and just a bit too often to try to get a lunch meeting, and otherwise not taking not-too-subtle hints that I'm not all that interested.
And how much you are really paying for financial advice—and what kind of gains you are truly realizing—may be hard to figure out if you don't really dig deep. Money magazine ran an article titled, “How Much You Really Pay for Advice” in its July 2008 issue—that I think is quite worth checking out. It’s a column from an anonymous writer known only as “The Mole,” described as “a certified financial planner and certified public accountant who—in the interest of fairness—thinks you should know what goes on behind the scenes in financial planning.”
I know—very sexy, intriguing, and well, almost tabloid-style, as personal-finance magazines go.
Anyway, The Mole helped a client decipher the true cost of investments that he had made through a financial advisor:
For one recent client, I had the sad task of estimating that he was paying 4.7% a year for an annuity, broken down as follows: 1.6% to his adviser, 1.6% on his funds and 1.5% in insurance costs that provided virtually no benefit.
Why is it so important to know your total costs? Because they eat into your return. If stocks beat inflation by five percentage points and bonds by one point, then an equally weighted portfolio will earn about 3% annually after inflation. If you give up 2% in costs, you’ve surrounded two-third of your real return. Taxes will grab the rest.
So in The Mole’s illustration of returns, at 2% in total costs, you are just breaking even. So the person paying total costs of 4.7% on the investments recommended by his advisor is likely to have a negative return.
Hmm. That sounds bad.
Check out the article, “How Much You Really Pay for Advice,” for the full read and more on how The Mole suggests you delve into your total costs on professional financial advice.
If you have been meeting with financial planners with the intent of hiring one—or been using a financial planner—I’d love to hear your experiences. Are there some good ones out there that you think have been worth the costs?
We have worked with the same financial planner for 22 years now; I'm very happy. I could do the investing and tracking and all on my own but I like having someone to bounce ideas off of, to help my husband and I compromise on our differing perceptions of risk (we change places at various points) - and most of all, I LOVE that she convinced my husband, 22 years ago, to contribute to his company's 401k. I had not been able to despite the match the company was providing. Thanks to her intervention (she laughed hysterically, thinking he was joking, when he said he wasn't contributing), we are on a good path to retirement/college savings/general investments. I may pay more for that advice, but in the end, we would not be where we are without that first push and those regular meetings/calls to stay on track.
Great post! I will be venturing over into the world of investing (well technically I do now with my 401k)as soon as all be debt is gone!
I'm on a plan to wipe out my debt fast, then I'll have all the money that usually goes out to creditors to sock away in investments every month!
You can read about my personal story of getting out of debt at:
moneyminutes.blogspot.com
As soon as I'm debt free the blog will transform into an investment blog and track what I'm doing, how I'm doing it, and all that fun stuff!
Great advice on the financial planner though, I had been thinking about that, but think now I'm going to try my hand at it myself, I don't need people taking even more money away from me! I work too hard to make it already!
Jesse
Warren Buffett once mentioned that Wall Street is the only place that people ride to work in a Rolls Royce to get advice from those who take the subway.
I intend to write a post soon to discuss about such financial fees. 4% is really ridiculous.
Jeff
Yes, financial manager, yes!
The guy who manages my large IRA was managing the endowment of the city's chamber music society at the time I was on that institution's board. The national economy hit a large pothole, much as it is doing now (just on the local level, every bank & savings & loan in the city failed during that now half-forgotten adventure). The endowment fund not only did NOT lose money, incredibly it made money.
Fast-forward to 2008: My 403b, which is not managed by his firm, has lost $30,000. The IRA: gained $2,000, according to the current statement.
Thanks for all of the comments! For those of you who do love your financial planner, is that person the only one you've ever used for financial planning? How did you find him or her?
I did the first comment: when we bought our first house, we used my 401K for the down payment (that should have convinced my husband, right?); we knew we would get hit on taxes so we asked several folks for tax advisor recommendations and the same name came up a couple of times. We met with her and she strongly advised us to meet with a financial planner; recommended the woman we've been working with -- who turned out to be someone that several friends were also working with. She's with a company I had never heard of until I met her: Waddell & Reed; so far they've done well for us. And yes, she does sometimes propose investments I am uncomfortable with, but she will drop them if we're uncomfortable. She likes to understand why we're uncomfortable and our answers to her have ranged from "I got messed up with one of those policies years ago" to "we don't like the fees" and she's cool with that. BTW, my husband's companies have often offered (through 401k providers)a free analysis of our investments, etc and I have taken advantage of those. Generally, all that does is confirm that we are on the right track but it's a good -- and free -- check on the approaches we are taking or considering. Good luck.