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?