Overview: Once you’ve spent more than a few weeks learning about investing, you will be knowledgeable enough to not need the expensive services of a financial advisor. They usually charge too much for the same tasks you could do on your own. They also sell products you definitely don’t need or want. Complicated tax or estate planning should be left to a CPA or attorney. You can be your own advisor and save many thousands of dollars in fees!
Fred Schwed wrote a book asking, “Where are the customers’ yachts?” It begins with this:
“Where are the customers’ yachts?” asked the naïve visitor.
Indeed. I want to be as diplomatic as possible, lest I offend some who may be in the financial “advisory” industry. However, I do want to point out to everyone else that the fees this industry takes in are enormous. Remember: “In investing, you get what you don’t pay for” so limiting fees are crucial to success. Be mindful of tactics like investment churning — the opposite of buy and hold — where funds are sold and new funds purchased on a regular basis. This will increase your fees dramatically.
Where are the customers’ yachts?
A typical “advisor” will have lots of alphabet soup listed after his or her name. This impresses many, but most of those credentials mean very little, or only took a few weeks of study to attain. No one watches over your own money better than you do. “Advisors” probably start out honestly wanting to help others with finances, but they have to feed their own kids too. The draw to extra fees is hard to turn down. Folks with managed funds almost always end up with high expense ratio funds, 5-6% loaded funds, funds that overlap each other, and insurance policies they don’t need. That type of scenario is common, but doesn’t help the investor gain wealth.
Where are the customers’ yachts?
Many “advisors” commit the cardinal sin of mixing investments with insurance; something an investor should never do. If you have someone depending on you, have a simple term life policy and consider disability policies. However, please tune out the sales pitch on all types of whole life insurance. It comes in many forms, whole, universal, variable, indexed, and others. These policies are expensive, complicated, and yield low returns. These types of policies are sold, not bought; i.e. they aren’t appealing without a grand sales pitch. Often times, the first year or two of premiums go right to the salesman of the policy, not your investments.
Where are the customer’s yachts?
“Advisors” do play one important role: They can talk you off the ledge when the markets are imploding If you are a nervous investor. When they convince you not to sell low, they’ve earned all their fees and more. If this might be you, consider a fee-only styled manager that charges a flat fee for advice. This means they are less motivated to sell you high-fee funds and expensive whole-life policies. Advice Only styled advisors are also a good avenue to pursue when you need help initially, but feel like once you’re on the right path you can do it yourself. Another good thing about “advisors” is some have access to sell DFA funds, which are great index funds like Vanguard, but aren’t sold directly to the unwashed masses.
Where are the customer’s yachts?
Remember: Investing is simple but not easy. However, by the time you’ve spent enough weeks reading up on how to invest and what to look for in a good “advisor”, you already know enough about the subject to not require the services of one.