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?