Personal Finance 

Why I Don’t Use a Financial Adviser

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In the December 2011 issue of Smart Money, there was an article about how Generations X and Y don’t use financial advisers. Gen X/Y is sitting on potentially $12 trillion of investable assets but aren’t using financial advisers. Smart Money cited a variety of reasons, from the stock market gyrations of the dot com boom to the housing bust to the recent Great Recession. With so many different factors involved, it’d be impossible to pin down why an entire generation or group of people do or don’t do something.

I don’t know why other Gen X/Yers don’t use financial advisers, but here’s why I don’t.

What exactly do they do?

When I go to the grocery store and buy a carton of eggs, I know I’m giving the store about two to three bucks for a dozen eggs. I give them money, they give me eggs, I go home and I eat the eggs. It’s a straight forward transaction.

With a financial adviser, what exactly am I getting? I pay them a fee and they “manage my money” right? What exactly are they doing? What am I getting for the fee I pay them? They can’t guarantee a return and if they did, I wouldn’t believe them!

Maybe the adviser asks me questions to help plan my financial goals – I’ll want to save up to buy a bigger house in 5 years, I’ll want to buy a new car in 7 years, I’ll want to save for my kids’ college in 20 years, etc. That’s not something the adviser does on his or her own, that requires a meeting with me and my lovely wife right? Well I can plan my future out right now on a piece of paper. How much do you need to save in 5 years for a down payment on a house? In 5 years, you can throw all the investment projections out the window… divide the sum you need by 5 and that’s what you need to save each year. Then put that money in a CD and do something else. I don’t need to pay an expert to help me do that.

Index funds & dividend stocks

I invest in a collection of Vanguard mutual funds and blue chip dividend stocks. Every so often I throw in a few companies I really like, like Apple and Southwest, but for the most part I keep things simple. I do this because investing is boring. I don’t want to read financial statements or pore over income statements and balance sheets. My analysis, for the most part, looks at return on equity, dividend coverage (when it applies), and my gut feeling. I scan the first few pages of glossy annual reports and I read news about companies.

What can a financial adviser do for me? I’ve talked to one and they talked about asset allocation (after they talked about life insurance). I don’t care about asset allocation. That 120 minus your age thing is all made up anyway. The problem with asset allocation is that it’s always missing something. You want to be 80% stocks, 20% bonds? How much will be domestic vs. international? Large cap vs. small cap? Ultimately, there isn’t a right answer. If you have $5,000 to invest, it’ll cost you more in commissions to reach some magical asset allocation than what you save in terms of risk because you’re diversified.

I don’t mind being conservative

How many people got rich because of investing? You could name a hundred people and I can name a few billion who haven’t. The reality is that you get rich through your effort, whether it’s because you started a business or you work smart and hard at your job, and you want your money to keep pace with and perhaps beat inflation. You just don’t want your hard earned money to lose purchasing power. Sadly, at least today, putting it in the bank isn’t enough. So what you need do with your savings is figure out a way to get a return that exceeds a ballpark figure of 3%. Actual inflation may be higher or lower but 3% is a good benchmark.

Can a financial adviser help me find a mix of dividend stocks, index funds, and CDs to reach that 3%? How much will he charge me?

I don’t hate financial advisers

I actually think financial advisers are great because they can help people, who otherwise have no ability to do so on their own, get on financial track. Financial advisers are a lot like personal trainers. You can get fit without a trainer but your likelihood of success goes up significantly if you work with a professional. The cost is in the fee and if you get a good trainer or adviser, it’s totally worth it.

Another analogy that works well is this – everyone should know how to change the oil in their car (and replace a flat tire with their spare!). That doesn’t mean everyone needs to change their oil every time, sometimes it makes sense to take it someplace to get it done because they’re faster, they handle cleanup and disposal, and it’s a better use of your time. But knowing how to change your own oil is crucial.

What’s your feeling about financial advisers?

{ 25 comments, please add your thoughts now! }

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25 Responses to “Why I Don’t Use a Financial Adviser”

  1. Shorebreak says:

    People are hesitant about utilizing a financial adviser because most advisers are not interested in the client achieving investing success. It’s always about how much in commissions, fees and company incentive awards can be had by pitching various products to the client.

    • Jim says:

      That’s a bit unfair, I don’t think most advisers think like this.

      • Shorebreak says:

        A 2012 survey from public relations giant Edelman finds the financial sector ranks lowest of all industries in public trust. Even below politicians.

  2. I wonder if Smart Money figured the fees financial advisers would extract, and the additional fund management and transaction fees they’d facilitate, if they took the $12 trillion of Gen X/Y money under their control?

    Thanks, but as you suggest, I’ll stick with a small basket of Vanguard funds and ETFs with fees in the vicinity of 0.20%. When an academic study proves to me that I’d be better off–after fees and taxes–by hiring a financial advisor, I’ll surely take a look!

  3. GC says:

    The younger generation is tech savvy and can access the info on their own but the older generation does not. They need more help and a good HONEST advisor is well worth the money. Most don’t know how to compartmentalize their money into short, mid and long term goals and get the appropriate amounts and investments in each. They don’t know how to develop an income stream at retirement and make it tax efficient. If everyone knows all that, then no, do your own research and select your own investments, but a lot of people do not want to do that. And how long would you go to work and not get paid? Everyone deserves to get paid for their work. There are a few bad apples out there that are more concerned with their commissions and taint the image of many good advisors. Just like there are poor teachers, preachers and writers…..and yup, I’m an advisor.

  4. zapeta says:

    I don’t use an adviser because I have such a pitifully small amount of money to invest so most aren’t interested, and I’d rather keep more of my tiny amount of money than pay it in fees.

  5. flip says:

    Im with zapeta. I have a pitifull amount of money to invest to be giving a share of it to financial advisors plus the fact that the advisor is off the hook for his performance.Im also with shorbreak in that i dont really think advisors are interested in your success. In order to utilize an advisor you need to be a large investor where the fees paid are minimal compared to your account.

  6. Interesting article. As an adviser myself, I consider my role to be that of both facilitator and accelerator to those who work with me. I can help people get better results in faster and easier ways than they can generally do so on their own. I can also make people aware of potential pitfalls that they may not be cognizant of now or may not be doing anything to avoid in the future.

    For anyone who is happy with their current financial plan and outcome, whatever you are doing right now is great and I congratulate you. If you regularly educate yourself on new financial topics and consistently deepen and widen your knowledge of putting your money to work for you with considerable success, join me and advise others!

    Most people do not see themselves in the paragraph I wrote above. We live in a world where all kinds of poor short-term financial planning runs rampant with catastrophic results for those involved. Many of us will struggle constantly just to keep ourselves and our families at a middle-class level of health, education, shelter, and comfort.

    I don’t know how to change the oil in my car. I take my car to a mechanic I trust, who will perform necessary checkups and repairs as well as let me know when larger safety issues loom on the horizon. I could take the time to learn more about car maintenance; instead I’ve chosen to learn more about money in order to afford having my car maintained by someone who specializes in that field. We all make choices about which topics interest us most, and it’s always good to find specialists in all categories to assist us in moving forward.

    • Jim says:

      Do you think my analogy of a financial adviser being like a personal trainer is accurate? Based on your comment, I’m thinking it’s pretty spot on.

  7. C. Dowling says:

    Likely you’re preaching to the choir here. I agree with you on almost all counts, although I tend to get a bit too interested in investing at times.

  8. RickBlaine says:

    Twelve years ago I gave a FC my life savings to manage; six months later I had 100 percent minus my age in savings. The head of the firm couldn’t understand why I fired him! I take responsibility for my own investment choices now.

  9. Miserly says:

    I not only do not like financial advisors, I also do not like money managers or fund managers. With a little work and a lot of diligence, you can use their information and invest in good quality stocks through a discount broker, and achieve a rate of return that is both steady and secure.

  10. I like the analogy to a personal trainer but not to changing your own oil. It’s not worth my time to change my own oil when I can get it done and more for $30 down the street.

    But I do agree that you can easily do what financial advisors do. I don’t think everyone can(or wants to) learn to change oil or fix a headlight, but everyone can learn how to manage their money. And I know people care about their money 🙂

    • ledondo says:

      FAYP — Speaking of investments, a car is a big one for most people, and that $30 oil-change place could severely shorten the lifespan of yours. I am a former professional Volvo mechanic. A good mechanic does a lot more than just get through the job as quickly as possible when they are under your car. Here’s some good info: Sludge is Prevented

      I believe you might agree with me that most professionals – FC’s, mechanics, etc. – have knowledge and experience that more than make up for their higher costs in the long run. That’s how it should work. But people need to make the effort to reach at least a basic understanding of their investments and what can strengthen or weaken them if they want to get the most out of the relationship. It’s a lot easier to trust (or find a reason not to trust) a professional if you can follow along with what they are saying. The internet makes this easy. Unfortunately, it also makes people feel more confident in their knowledge than they usually ought to be after 20 minutes of clicking through the web.

      Meanwhile, aren’t there financial professionals who charge minimal fees OR a percentage of the profit, whichever is greater? Seems like that would keep both parties happy because both share an interest in maximizing YOUR profit.

    • Rambling wreck says:

      HE didn’t say you should change your oil every time or even any time but you should know how.

  11. Anonymous says:

    Vanguard and Dr. William Bernstein and the Yale Unconventional Portfolio on MarketWatch
    mean no extra advice is needed.

  12. I personally don’t use one but know a ton of people that could benefit. I think the best clients for financial advisors are the ones who wouldn’t do anything to save or invest if not coached by a professional.

  13. Scott says:

    I agree with pretty much all of this. And by pretty much all of this, I mean all of this. Even the comments. Financial advisors are great for people that don’t have the knowledge, discipline, or time to figure out basic investing on their own, but for those of us who have a vision, discipline, commitment, and a little time, they just don’t seem worth it (at least not yet in my current situation).

    I want a financial advisor to teach me something I don’t know. That’s worth my time and money with them. But if they are just going to regurgitate some standard statements of advice I could find on my own, then what’s the point? Bottom line – you’ve got to prove, without a doubt, that you’re smarter than me when it comes to financial matters. Then I’m all yours, hook, line, and sinker.

  14. Shorebreak says:

    “In search of lost profit after the financial crisis, JPMorgan Chase pushed investors to buy its own mutual funds even when competitors had better-performing or cheaper options…”

  15. Sadie says:

    Years ago as result of company benefit paying for a financial analysis, I felt safe working with broker from this firm who identified seemingly “some unfamiliar (obscure?) mutual funds” for IRA investments. Note: That was in the days prior to accessing internet frequently as I was employed with little time to access more frequently. (Some of these funds were not listed in daily newspaper; consequently no easy method to identify if up or down at a glance) other than logging on to broker website. Having questioned some of these investments which continued to tank, in 2008 I transferred all funds to Vanguard/Fidelity for easier access to status. Downside to transfer was “outrageous broker charges” which I still refuse to thoroughly review. A TRAVESTY as some invested funds were already defunct! No doubt a troubled economy led to some of this!

    I would love to find FP who has my interest at heart instead of a broker who advises based on their comission. As I age, I fear the day will come when I can no longer make changes as needed & spouse has no interest/knowledge in doing so; he simply allows me to handle! Upon investigating local planners, most require 1% or more; considering most interest rates pay less, I ask myself “Why pay 1% to FP when majority of safe investments are paying less than this. So I continue to use CD laddering for cash, US Savings Bonds – I bonds & need to make changes in my Vanguard/Fidelity funds to maximize IRA funds.

    NOTE: I was certainly glad I did not submit other stock holdings, CDs, etc. to this broker who “wanted it all including cash management for biz holdings” to manage for me else my investments would be worth much less today!

  16. Tom Campbell says:

    I agree. You can look at for great financial advice and make your own decisions. I don’t think it’s boring at all though. It is very interesting.
    I think advisors try to make it seem comlex to collect their fees.
    Investing in Savings Bonds is like investing in a bankrupt company though.
    US brings in $2 trillion a year and has a $15 trillion debt! To put that in terms of a family, it’s like the family makes $20,ooo a year and spends almost $$40,000 and their debt is $150,000! And that doesn’t even take into account medical and retirement. We are so screwed!
    Invest at least part of your money in silver, it has true value.
    I have a $100 trillion dollar bill from Zimbabwe sitting on my computer. Our money(US dollars) could soon be just as worthless!

  17. Dave says:

    I think people should go to NAPFA at look for an advisor if they need one. These advisors have sworn to put consumers interests ahead of their own, and do not accept commissions, only fees paid by their clients.

  18. Brien Shanahan says:

    As a member of GenX/GenY, I agree with many of these points. Our generation tends to think we can do a lot of work ourselves, with a bit of help from Google searches. We’re often distrusting of any kind of sales pitches and therefore more doubtful of advisors’ value proposition than advisors’ typical clients — the baby boomers and their parents.

    But after working with financial advisors over the last few years, I’ve learned that all advisors are definitely not created equal. A lot of the complaints listed in this article pertain to stock brokers not fee-only fiduciary advisors. But the fee-only crowd needs to do a better job of reaching the younger generations and demonstrating how they can help. This often means getting on social media and having more of a Web presence. They should do case studies of instances that they’ve helped clients of different ages and life situations and use these to help them reach similar prospects.

    One area that I definitely agree with across the board is that advisors’ investment minimums are usually too high for younger clients. We can’t afford a 50K or 100k minimum investment and few advisors make exceptions, even though it would begin a client relationship that could bring in many more assets as the young client’s wealth grows.

    • SD advisor says:

      Consider that we constantly try to reach out the younger generation, but trends of that market teach advisors that there is time better spent elsewhere. I just sat down with a 20-something in the Navy. Instead of investing and saving to buy a home, he wants to dump $10k into a Toyota Supra. The kids just don’t have the wherewithal yet to put saving ahead of spending. It’s a waste of time for advisors in general.

      As for everyone else, feel free to be do-it-yourself with your investments just as we do with our cars, electrical, plumbing, etc. I think the internet has lulled too many folks into a sense of over-hyped pride of “I have the internet! I can do anything!”. Well, have at it sparky. Just don’t cry when your stuff doesn’t work.

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