I often hear from readers about their advisor relationships. Some wonder how they should go about choosing an advisor. Others already have one, but are concerned about the quality or expense of the advice they’re getting. Some readers are inclined to leave their advisor, but don’t know how to make the transition.
This is a do- it-yourself (DIY) blog and that’s where the bulk of my experience lies. However many who wind up doing it themselves started with financial advisors. And, even the most experienced and confident do-it-yourselfer may want a second opinion on major decisions like when to take Social Security or how to buy an annuity. Then there are a few who, by reason of temperament or interest, simply shouldn’t, or don’t want to, manage their own money.
So, when do you need an advisor? How do you find one? How do you know if they’re any good? How do you evaluate their costs? And how do you go about leaving one? Though I’ve never had a paid advisor, I’ve known a number of them, personally and professionally. So here are some thoughts based on my experience….
Doing it Yourself
Do you need a financial advisor? My answer for most people, most of the time, is: Manage your own money.
The primary reason to do it yourself is that nobody can care about your savings the way you can. You are the one who traded the days and years to earn it, and only you can truly understand what it’s worth to you. You are committed, you are impartial, and you are cheap.
Financial advisors are usually smart, aggressive, and personable. They get paid well, while you take on the risk. Their results are never guaranteed.
For an organized individual with at least some interest in investing, I don’t see much merit in a full-time advisor. You can learn to invest by reading those you trust, then jumping in with small amounts of money. Afraid of the stock market? There are a number of simple steps you can take to master investing fears.
However, certain personalities or situations may make it difficult to effectively and safely manage your own assets. If you tend to be impulsive with money, or just aren’t interested in investing, a good advisor could be valuable. And, even if you manage your own money, you will need information and guidance from others, both at the start, while you are learning the basics, and when you encounter complex financial decisions.
So, where do you go? Who can you trust? As in most fields, it makes sense to learn from those with experience, who have already accomplished what you want to do. That’s one reason I’m writing here about my experience in retiring early, and recommend other similar blogs on my Resources page.
Everyone must rely on some financial institution to hold their assets and execute their instructions in the market. And those institutions are usually, though not always, a reliable source of financial advice. So where should you turn first? There are just a few companies that I can personally recommend with confidence….
Financial Services Firms
While there may be other companies with honorable management and good customer service, two rank above the rest in my book because their unique client-owned business structures all but guarantee that customers are rewarded first:
Vanguard is the nation’s largest mutual fund company and home to its oldest balanced mutual fund. The management company at Vanguard is owned by Vanguard’s mutual funds, and thus by those funds’ shareholders — who pay only what it costs to operate the funds. This structure eliminates any conflict of interest between investing clients and owners. They are the same. It also means that profits tend to flow to clients’ benefit. Many Vanguard funds also incorporate penalties against short-term trading, paid to the fund. It all adds up to favorable incentives and lower costs for you, the client.
USAA is uniquely structure as an "insurance exchange" under state law. Clients or members, again, are like owners. Profits are retained or returned to members. USAA requires you to have some military connection in your family to join, and prides itself on operating with "military values." In my personal experience, this is more than just a slogan. The company thrived during the recent downturn because of its conservative investment policies. Customer service is exceptional: USAA won the 2011 Self-Directed Investor Satisfaction award from J.D. Power and Associates. I’m most familiar with their banking and insurance services, where costs have been from competitive to superior, in my experience.
There are two other companies, for-profit, that stand out to me:
Charles Schwab is a discount brokerage with a strong focus on customer value. They are inexpensive, offer an excellent web site, and conservative, sensible analysis of the market. I’ve had an account with them for well over a decade. They’ve never surprised me with inappropriate fees, and, though they have their own investment products, they usually promote them in an accurate, low-key manner. They offer a broad range of funds with no loads or transaction fees. They also have offices in most sizable cities, where you can meet with a broker in person, if that is important to you.
Fidelity is a discount brokerage with a similar profile to Schwab. Though they are a 60-year old company, they are privately owned, which means no shareholder pressure for short-term performance. They’ve been ranked #1 for overall online broker by Kiplinger for two years running.
So those are four solid choices. If you don’t have an account with at least one of these four companies, or another that you trust completely, then go online to one of their web sites and open one today.
There are, undoubtedly, other trustworthy organizations out there. But these are the ones I can personally recommend. And I would definitely steer clear of most banks, particularly large national banks identified with Wall Street. In my experience, banks are expensive, rigid, overly conservative with your choices, and overly risky with your money.
So you’ve decided on a company to hold your assets. But what if you don’t want to manage your own money, or you want the attention that only an individual financial advisor can deliver? You’ll have a head start if you begin with one of the companies identified above: each can offer individual financial advice, structured to minimize conflict of interest. But, even within those companies, you’ll still need to identify a competent advisor. It’s not guaranteed.
How do you determine competence? Start with their years of experience. Have they managed money through at least one (preferably several) major downturns? How did they do? Seek testimonials from satisfied clients. Though that may be difficult, since financial regulations prohibit their use in many cases.
A look at an advisor’s certifications may be helpful. The Certified Financial Planner (CFP) is the "gold standard" in personal finance certification. I’m familiar with the CFP curriculum, having taken the first course, and can vouch that anybody who passes the CFP exam, is very bright and can crunch financial numbers. On the other hand, the CFP curriculum was never very strong in retirement planning and cannot possibly keep up with the latest in retirement withdrawal research. So be advised, just because you are dealing with a CFP, doesn’t make them an expert on your particular needs.
More important than technical competence is a measure of wisdom about building wealth. You want somebody advising you who has demonstrated deep prudence about money and living. Have they built much personal wealth? Do they use it wisely?
Most important of all, have they helped their clients build wealth? Don’t forget the title of the investing classic: Where Are the Customers’ Yachts? Does an advisor seem to genuinely care about your long-term financial success? Remember that many financial decisions can take years to play out, and ask yourself whether your advisor seems to be in it for the long haul with you….
Rick Ferri suggests asking a potential advisor “Did you go to church last Sunday?” The answer doesn’t matter — the mere question can scare somebody into being more truthful. Religion and politics aside, if you can establish a deeper personal connection with somebody, in any domain — you are more likely to get honest and beneficial service.
Before you commit to working with an advisor, get a taste of their approach and ask yourself: are their recommendations simple and easy to understand? Do the solutions seem to be "best of breed," or are they built around a product or products where the advisor has a financial interest? Beware adopting an insurance agent or stock broker as your advisor. Usually these folks are in sales. Optimized, impartial advice is really not their job.
Finally, can your advisor articulate a coherent retirement accumulation and distribution strategy? The latter is one of the most difficult problems in personal finance today and relatively few advisors have much training or experience with it. If you are approaching retirement, one of the most critical financial stages of your life, deal with somebody who has been there before.
Costs and Results
Though it’s rarely obvious, financial services, of any kind, are usually expensive! The current economy, along with secular changes in the industry, are pressuring advising fees down, but they are still high in many cases.
The Wall Street Journal reports that the average advisor’s fee was about 1.3% in 2010, but the most expensive quartile of advisors charged nearly 2.1%. These may sound like small differences, but compound those percentages over time with large sums of retirement savings and you’re easily looking at tens of thousands of dollars in extra costs.
It’s all too easy to underestimate the importance of fees, especially if they are hidden behind performance numbers, or withdrawn quarterly and compounded over time. And remember that, in addition to an advisor’s costs, there are likely costs associated with the underlying funds being recommended.
You need to know what an advisor is costing you, and then you need to assess whether they are worth that to you. Both questions can be difficult to answer.
Roughly speaking, there are three ways that advisors get compensated:
- Sales commissions
- Hourly fees
- Fees based on a percent of assets under management (AUM)
An advisor might be very nice, friendly, and honest — most are — but if they receive lucrative commissions by selling specific financial products, they simply cannot be impartial when recommending options to you. For any advice you receive from an advisor, it’s essential to understand what’s in it for them. Ask about what they are receiving by recommending a certain investment. (If the stakes are high, get that answer in writing.)
I strongly recommended finding an advisor offering one of the latter two, fee-based, options: hourly or AUM.
Of those fee-based options, hourly works best for well-defined tasks such as preparing a financial plan, choosing an asset allocation, deciding when to take Social Security, or evaluating annuity purchase options.
In general, you don’t want to pay continually (AUM) for tasks that are performed only initially or only occasionally. In today’s world of easily available, passively-indexed, low-cost ETFs, it is truly wasteful to be paying high fees, quarter after quarter, for nothing more than an annual meeting plus rebalancing your portfolio!
So is an advisor worth it?
In my opinion, there is overwhelming evidence that a disciplined, DIY investing approach using ETFs will beat an advisor in the majority of cases. Especially an advisor who actively trades. Even an advisor who makes use of those same passive index ETFs will underperform them, due to fees. Few advisors can hope to outperform the market, and none can guaranteed it.
Speaking for myself, as we live off our investment portfolio in retirement, I simply can’t afford advisor fees — they would consume a sizable chunk of the annual income my wife and I need to live!
So the main justification for an advisor is if you need discipline or coaching. And in that case you should ask yourself: Do I need that service indefinitely?
Leaving an Advisor
Some readers with advisors have told me they are concerned about the quality or expense of the advice they’re getting. Or they might feel the current adviser has been a good mentor, but they are now ready to go it alone. So, for whatever reason, they’re inclined to leave their advisor, but need help making the transition.
How do you wean yourself from an advisor, if you’re so inclined? What do you do if you’d like to try DIY investing, but have doubts about your abilities?
First, be forewarned that most advisors are primed for this scenario and will offer up a host of logical reasons to argue against it: (a) You don’t have the time or experience, (b) Even professional athletes need coaching, (c) The market is dangerous, etc. Remember, by taking your assets elsewhere you are threatening their self-esteem, and more importantly their livelihood. So don’t expect a warm reception to the idea. You can also expect some paperwork and logistical hassles in transferring your money.
But remember those last words: it’s your money, not theirs! Do whatever you consider prudent, and ignore their objections. If you want to get started in a small and careful way, here’s one approach: move 10% of your assets to one of the four companies I recommended above, and manage it yourself for a year or two. (Take pains to transfer those assets without tax consequences if at all possible. Consult a tax professional first, if necessary.) That’s enough money to matter, and demand your attention, but probably not enough to materially threaten your future if you make some mistakes.
After a year or two, you can compare your performance and costs against your advisor’s, and decide on your next move. You might keep the status quo, move to a 50% split, or be ready to manage the whole enchilada yourself.
So those are my thoughts on getting financial advice. There is no one right answer. You must start by knowing your own personality, strengths, and weaknesses.
My first choice is to manage your money yourself, using one of the trustworthy firms outlined above. If you need more guidance or coaching, consider an individual advisor, but make that choice very carefully, paying special attention to costs. And, when you’re ready, take steps to wean yourself from any advisor.
The most important thing is to start early, ensuring there is a plan for your money. Don’t leave your wealth unattended for years, when it could be hard at work for you.
The U.S. has created a patchwork retirement system supplemented by the financial services industry. Most of us are stuck with constructing our own retirement plans or pensions using a few essential services from that industry, while sifting through mounds of dubious, conflicting, and sometimes expensive, advice. That’s the process I’m engaged in here, and write about regularly for you!