Almost every personal finance blog out there (even the best of the best on my blogroll) hates financial planners, financial advisors, investment advisors, etc., but I don’t understand all the expressed hatred. A financial advisor could be very useful for those that need help, despite all the negative information out there.
Before even starting, I will concede that there are bad apples out there that don’t care nor understand the basic tenants of financial planning. However, that being said, I spent an entire semester in law school taking ethics and learning about lawyers that didn’t act appropriately (and the New York Law Journal goes over Attorneys on a daily basis that gets disbarred). Fine…fine…maybe those aren’t great examples, but what about Doctors acting unethically, teachers who cheat, secretaries who commit fraud, and who the hell hasn’t felt completely ripped off when an auto mechanic tells you that your flux capacitor is dead. Oh yeah…can anyone say Enron, WorldCom, and Arthur Andersen.
For the purposes of this post I am going to focus on financial planners/advisors, and less on investment advisors who actively trade on the part of the client. The reason I am making this distinction is that I don’t work closely with investment advisors that are trading for clients on a daily basis.
First Complaint About Financial Planners: I can do What Financial Planners Do
I think those that talk about money on a daily basis (PF Bloggers and money journalists) take for granted what it means to have both, basic and advanced ‘money skills.’ Right or Wrong this is the case.
I’ll never forget when I was a wee young lad and asked my Uncle what he did for a living. He responded that he invested people’s money (he is one of those active traders for people, and from what I understand a very good one). Well being the pain in the ass child I was, I responded why does anyone need him for that? Can’t People just invest themselves? His response stuck with me, his response was,
Why does anyone pay to have their oil changed by a mechanic? Did I think that his occupation was less technical than someone paying to have their oil drained and filled up?
and thank you, reader, for giving me the opportunity to use the statement ‘wee young lad.’
Basic Money Management
I do not deal with this world in my office, because quite frankly I am a person that believes most people should be able to handle this including both planners and their clients. That being said, there are a ton of planners/advisors out there that budget and work with clients because if everyone had this skill (and yes I think it is a skill) then America would be in much better shape. Should someone get paid for this skill? OF COURSE. Organizing anything for anyone is a trade that should be compensated for. Does anyone remember the Seinfeld episode where Jerry was going to hire the virgin closet organizer? Oh come on…it is the episode where they had the bet to see who was “master of their domain.”
Advanced Asset Allocation and Investment Management
Why do people assume that everyone should understand even the basics of asset allocation? portfolio analysis? correlated and uncorrelated asset classes? Even with badass free tools like Morningstar Portfolio X-Ray, it is not as simple as let’s say…changing a light fixture (which trust me took a long time for me to master, and that was recently and I am not a master).
I am all for index, and passive investing, and I am not saying that most people can’t understand it, I am just asking why people assume that this is the portion of their life that they are going to undo,
ἓν οἶδα ὅτι οὐδὲν οἶδα hen oída hoti oudén oída
The above Greek statement is what Socrates allegedly said in response to the Inquisition that he believed himself to be smarter than everyone else. It is loosely translated as, “The only real wisdom is knowing you know nothing.” So if someone is going to help you with investments…doesn’t that lead us to payment.
Second Complaint about Financial Advisors and Planners: How Planners Get Paid
The industry gets SLAMMED for its payment methods. There are those planners who get paid by product. For instance, a planner/advisor may help you out with your money management skills, and asset allocation just to make an insurance sale. Concurrently, there are planners/advisors who will handle your investment management for no fee but will get a commission on the sale of a mutual fund. Then there are fee-based planners who will just work for an hourly fee, much like an attorney, but may then get additional compensation for products sold.
The combinations are endless and the commissions/fees paid can be confusing (A Shares, B Shares & C Shares). I bet that most people if given an option for an upfront fee or taking it off the backend of an investment would choose the latter, but for whatever reason it is an easy subject to attack.
I blame the bad apples insofar as they probably didn’t explain how they got paid, or the differences between A, B, and C shares, or the insurance product, or even that it was $150 an hour and there is no cap as to how many hours the planner will spend on your case.
What other Complaints are out there? Education, no standardized acronym? What do you think of these counter-arguments? Am I full of it?