Disillusioned with Financial Advisers

by Vered DeLeeuw · 19 comments

Do you use a financial adviser to help you manage your finances? I don’t. I’m a self-educated investor. I’ve been managing my family’s financial portfolio for over a decade now, and I’ve been doing a good job – I periodically compare my portfolio’s performance to the performance of major financial benchmarks, and so far, I’m pleased with the results.

You CAN Manage Your Own Portfolio

I believe that most of us can learn the basics of investing and manage our own portfolios. I believe that investing is not rocket science, and that the basic principles are easy to understand. If you tend to be a buy-and-hold investor, viewing the stock market not as a playground but as one of the best ways to grow your money long term and fund your retirement, then you can absolutely do it on your own.

I also believe that once you know the basics, you will do a much better job than any financial adviser, simply because you care more than they do about your own portfolio. For an adviser, your portfolio is one of many. For you, it’s your future – your nest egg. In addition, by not using a financial adviser you will save a lot of money – many advisers will charge you 1-2 percent per year of your entire portfolio (although you should always negotiate). That’s a steep price to pay, and it can only be justified if the adviser will do much better than you in terms of how the portfolio performs. In my opinion, this is highly unlikely.

My Personal Experience with Financial Advisers

I’ve never used a financial adviser to manage my portfolio. But during the boom years here in the Silicon Valley, several advisers have approached my husband and I and offered their services. We’ve met with each of them, and were thoroughly unimpressed.

We gave each adviser a list of our assets and have asked them to prepare a portfolio for us. Without exception, each and every one of them had used general asset allocation models and forced them on our portfolio, without really bothering to tailor the portfolio to our specific needs and requests (we tend to be very conservative and allocate more to bonds than we’re “supposed to.”)

In addition, each adviser we talked to had included in their suggested portfolio load funds, high-cost funds (with annual expenses of 1.50% or more) and under-performing funds (compared with peers and with the applicable benchmark).

The final encounter, with an adviser from a large financial firm, put me off ever using a financial adviser to manage my portfolio.  When I compared the portfolio he had sent me to a cheap S&P 500 index fund, I realized that the portfolio he had put together had seriously under-performed the index fund over 3, 5 and 10 years.

Why Are Some Advisers Doing Such a Bad Job?

1. They care less about your portfolio than you do.

2. A broker who is paid on commissions can make money only if you buy or sell products on which he earns a commission. These advisers have a strong incentive to recommend front-end load funds, and the higher the load, the better. They also have an incentive to recommend a specific family of funds.

3. If they earn a commission for every transaction in your portfolio, they have a strong incentive to get you to buy and sell often, even if the best strategy for you is buy-and-hold.

4. When the fee they charge is not tied to the portfolio’s performance, they don’t have any incentive whatsoever to build a successful portfolio.

The best scenario is probably a scenario in which the adviser earns a percentage of the profit your portfolio makes each year. This compensation structure aligns your interests, although you should still make sure they don’t push you to take on too much risk in order to make more profit.

Should You Never Hire A Financial Adviser?

It depends. For me, the answer is “yes,” because I feel confident that I can do a good job on my own. But if your portfolio is very complex, or if you simply don’t have the time to educate yourself and to manage your own portfolio, outsourcing the management of your finances is a legitimate decision.

While my personal experience with financial advisers has been very frustrating, I should note that I never actively looked for an adviser or asked my friends to recommended advisers – the advisers I spoke with have found me. One could argue that the best advisers are not chasing after clients, so the ones I dealt with were likely not the best.

If you do decide to hire a financial adviser, remember that conflict of interest is very common in an investor-financial planner relationship, and it’s important to be aware of that prior to entering such a relationship and to minimize it as much as possible. The recession is actually a good opportunity to negotiate a financial planning agreement that would be favorable to you.

Are you an investor? Do you manage your own portfolio, or are you using a financial adviser?

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{ 19 comments… read them below or add one }

kt- lifedividend July 15, 2010 at 7:13 am

i read the intelligent investor some time back and they more or less held the same stance when it came to your investing; be weary of most of the advice being dished out all over the place. I also do not ask for advice, i prefer researching and teaching myself stuff. The problem is that i do not have the stomach for risk and thus more inclined to index funds and very well managed mutual funds with very good track records. To find out a mutual fund only requires a few hours of research and very little advice from people. People whose advice i would take is someone that is insanely successful and had nothing to gain from giving me any pointers

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vered July 15, 2010 at 8:20 am

“very well managed mutual funds with very good track records” – that’s an excellent strategy, especially those who also have a reasonable expense ratio and a low turnover.

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Split Cents July 15, 2010 at 9:57 am

Best case scenario: financial adviser tells you to buy a few mutual funds, exchange traded funds, etc… Of course, probably the smartest thing to do, but I’ll just buy my own ETFs via TradeKing and save on the % fee or outrageous commission, thanks very much.

Worst case scenario: financial adviser pulls grandma in on a synthetic long option strategy, and she ends up losing her retirement.

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Marc July 15, 2010 at 10:25 am

I’m sorry to hear you’ve had such bad experience with advisors, but I’m not surprised. The fact is, the majority of so-called “advisors” out there are just stock and/or mutual fund salespeople who know nothing about real financial planning, or about the realities of the market. They’re either steeped in “company” and Wall Street rhetoric, or have a boss that tells them what to sell.

I’m a planner and a financial fiduciary, and I can’t tell you how many devastated lives many of these “advisors” have left in their wake; lives that I’ve had to get back on track.

And you’d be shocked at some of the portfolios I’ve seen… because I was shocked. How they could sell people the “junk” they sell just leaves you scratching your head. And the cavalier attitude of some of these guys is appalling. They lose half of a family’s life savings and then have the gall to say, “It’s not my fault… every body lost money.” What a crock.

It’s sad.

It’s no wonder Wall Street has such a bad name… they bring it on themselves.

Marc

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Cd Phi July 15, 2010 at 2:56 pm

In terms of hiring my own financial advisor, no I have not and don’t plan to anytime soon. However, I like to rely on a few very trustworthy people who are quite experience in finances. Those friends of mine are often called on for money advice whenever necessary. Otherwise, I’ll just stick to these personal finance blogs.

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TexasEx January 22, 2013 at 9:26 am

Friends are great, and it’s always nice to get a second opinion.
That said, being trustworthy does not imply expertise. Are these same people giving you all of your medical advice or answering your tax questions? A rethorical question, but I hope it makes the point.
I took 7 college classes and passed a total of 24 hrs of rigorous testing to get my CFP designation. Only 1 class was in investing, although like many advisors I have also passed several FINRA securities exams and hold appropriate insurance licenses.
A financial advisor does a lot more than manage money, in fact many do not manage money at all. Professional training in federal taxation, retirement planning, insurance, asset protection, financial concepts along with product knowledge are esential for a complete financial plan.
If you bought an array of cheap, no load index funds in 2000, you have actually lost money considering inflation. Maybe not a great knowledge base to advise others.

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Jenna July 15, 2010 at 3:04 pm

Seems like if you have enough money that it is worth a financial adviser to pay attention too then it is worth it to have a financial adviser. If not, seems like you are on your own… which is kind of a bummer…

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Greg McFarlane July 15, 2010 at 8:27 pm

It’s not that hard to find an advisor who works on salary, if that makes you feel better.
Still, entrusting your decisions to a financial advisor (even someone without, say, a CFA designation) seems capricious. The advisor/investor relationship is far different than the doctor/patient relationship: in the latter, the professional only dispenses advice after spending countless hours in the field. Often, there’s little practical difference between the knowledge held by a savvy investor and that held by an opportunistic financial advisor looking to earn a commission.

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basicmoneytips.com July 16, 2010 at 4:29 am

If you are not going to do the leg work it might be best to use a financial advisor. However, personally I do not recommend it. There is a lot of good information out there and if you do the research you can easily match their wit. If the market is going down, as in most of the years from 2001 to 2010 – it is going to be hard to make money period. Most advisors just want to put you in mutual funds anyway.

Where it might help is if you have a large portfolio. Some advisors will help large clients by looking at things outside the box that are great investments. Some preferred stock, municiple bonds, etc. When is the last time your broker called you and suggested something like this?

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Cd Phi July 16, 2010 at 8:19 am

I totally agree with you. Taking the time out to learn about your own finances is a very important thing to do in my opinion. It’s a great way to track your own progress and see how you’re growing your finances. Like Basicmoneytips said, there’s a ton of info out there available for us to use. Now we just have to use it.

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Belmont Thornton July 17, 2010 at 3:52 am

Hey, I feel it is good to know your own finances, but you should always seek the advice of a financial advisor. This way you can avoid some un-necessary risk.

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Steve at MakingAMillionDollars July 26, 2010 at 8:10 am

No, I have never used a broker or financial planner. I have always educated myself on trading stocks, options and even the Forex for awhile. I have my TDAmeritrade account and do all my own trades and make my own decisions. I have been completely in cash over the last few months, but am now going to slowly start building a new portfolio. I am listing my stock picks and what I am doing on my blog.

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David Haycock July 5, 2011 at 7:15 am

Absolutely agree with Steve, personally I have never used a personal or financial planner.

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lifeisdynamic February 10, 2012 at 7:20 am

Can anyone offer me advice about where to search to learn about trading, stocks, shares, options and the like? The terminology alone is boggling and I need to get a grip at this level first. Baby-step help!

Of course, free information would be most helpful. Those websites which teach without a bias and hardsell would be best for an overall education, if you know of any, please.

I admire those of you who have taught yourselves, but I feel like a ‘babe alone in the dark woods’, and would love the same self-confidence in managing/improving my own financial situation.

Truely grateful for any help to find my way out of the dark and into the sun.

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Bryon January 17, 2013 at 6:22 pm

I use google finance. You can create several different portfolios to test out and watch. I then read lots of articles related to the stocks (about 5-10 a day).

In terms of terminology and general knowledge, Ivestopedia.com is great for describing things. I was also taking an actuarial test and this helped me learn all of the combination of options strategies.

If you are not confident with these things, I would suggest mutual funds. You should look up which categories you want in your portfolio and the allocations. For example, one might get 4 mutual fund categories: 25% in large value fund, 25% in medium blend fund, 25% in small growth fund, and 25% in an international fund. Morningstar.com is great for researching which mutual funds you want for the categories you choose.

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Lifeisdynamic January 17, 2013 at 8:35 pm

Thank you, Byron.
Immediately after I made the post, I invested in two fantastic Aussie books which has all the information I could want to understand and get started, along with a number of other free resources listed among the pages.
I feel so much more empowered than I did – but it always helps to have more resources and I will be following through with your recommendations.

Thank you again,

Judy

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chris April 13, 2012 at 2:24 pm

hello,
Can you tell me the best resources (books,on-line etc) to educate myself on doing my own investing starting from the very basics? Also when I begin don’t I still have to go through some type of broker to buy Stocks,Bonds ETF etc? Your feedback would be greatly appreciated

thank you

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Lifeisdynamic January 17, 2013 at 8:56 pm

Hello Chris,

Not sure which country you are from, however, I found ‘Investing for Dummies’, ‘Shares for Dummies’ and the like are written in different languages and for different country’s stock markets. Flipping through one US book for Dummies, I see it is peculiar to the US and written in plain language, easy to read, easy to understand.
Try Google for different types of investment (beware the inundation of people wanting to sell to you or get you to subscribe).
In addition I found a number of free websites which offer education. Once you know what to begin to look for, the information is there for the plucking – so I find now. Also see above comment from Byron.
Goodluck, Judy

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Leanna Rahll January 21, 2013 at 1:52 pm

I am a financial advisor. The truth is good financial habits build and sustain wealth… not a certain stock or mutual fund. Expecting the investment to do the heavy lifting is the equivalent of winning the financial lottery.

Investing is only one aspect of personal financial planning. Since most advisors are compensated via commission or fees on those investments, that is where the focus lies. I strongly believe the value a planner provides is in eliminating debt, reducing fees, indentifying low cost investments that align risk with your investment time horizon (the industry has turn key solutions for this), implementing an appropriate risk protection plan (insurance) and minimizing taxes.

It is important to distinguish between product pushers and qualified financial professionals. Not everyone needs a personal trainer to become fit. But that does not mean that personal trainers don’t add value. The same is true of financial advisors.

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