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Financial Advisors; Need em? A short confusing discussion with one! May 13, 2009

Posted by shaferfinancial in Finance.
Tags: , , ,

One day recently this blog got much traffic from another blog.  I was familiar with this blog and was a little surprised because it was written by an inside-the-box, do-it-yourself, be frugal, index fund investor; hardly the type to link to an outside-the-box investor like myself, so I checked the link and found that one of my readers [thanks Joshua!] had linked to me.  What caught my eye was that the blogger was contemplating hiring a financial planner to help him create a financial plan.  I thought this was a little strange for a do-it-yourselfer, but this blogger had accumulated around $100K and apparently thought that meant he might be in line to work with a financial planner.

Many of the responses [this blog has a much higher level of readership than mine] also surprised me as they were suggesting hiring a fee-only adviser.  Now this blog had gone mainstream with a thumbs up from Money Magazine and a Motley Fool writing a weekly column, but I wondered why the DIYs weren’t all over this?

So I posted what I thought is the most important question to ask when contemplating adding another middle man[women] between you and your investments, “Will the financial planner obtain a greater NET rate of return for me than what I can get doing it myself?”  Now to me this question is so basic as to warrant little argument.  I mean why else would someone who has been investing for themselves want to change what they are doing, unless to get better results.  Boy was I wrong, as several financial planners posted.  So here is a synopsis of the discussion with my additional comments in brackets:

“You make some valid points but your argument is self-defeating.” [I’m not sure how asking that question is self defeating, but he is going to tell me why I am wrong!]

“I say: Financial planning, done right, has very little to do with getting higher returns on money, but has more to do with getting higher returns on quality of life.” [Now he has got me totally confused, is he a financial planner or a life coach?  Do you hire a financial planner to improve your financial outcomes or to improve your life?  And what exactly does a financial planner do to “improve one’s quality of life” if it isn’t improve their financial outcomes?]

Then he tells me: “Hiring an adviser is a form of prudent “outsourcing,” which is a means of freeing more time for the individual to focus on their personal strengths and/or to focus on those things in life that matter more to them than money.” [Ok, he is simply doing a job for folks that they don’t want to do themselves like hiring a lawn service or a housekeeper!  Hmmmm, well how much does this service cost the customer?]

Now we get to the crust of the issue again.  I suggested that the evidence is that financial planners actually lower the rate of return received by the investor.  I even down played the amount by saying it only reduced returns [slightly]!  Here is his reply: “I say: Once again, where’s your evidence? I’ll remain charitable and assume you are correct that a planner will lower returns.” [He’s being charitable to me???????  No, he is being disingenuous because everyone in the field has heard of and seen the studies.  Wrong guy to ask for the evidence.  The evidence is summarized here.]

Then another financial planner posts with this:

“Seriously? Because I am in the industry too, and almost everyone I know discloses their performance…Its the first thing that comes up at almost every meeting, even before the financial planning topics–or what you call the financial psychoanalysis… :)”  [Really, and what do you tell them?  Because very few put up their returns on their websites or display them publicly where they can be challenged!]

And then from the original financial planner:

“The greater point with investing is that a financial planner, specializing in investment management, can in fact use indexing and provide added value for their clients. This value is obtained through asset allocation.” [see results of study for proof that this isn’t true]

“A Certified Financial Planner (CFP), can go beyond investments and asset allocation and save clients thousands of dollars on tax strategies alone. Even further, as Ralph Waldo Emerson said, “The cost of money is often too high.” How much is your time worth?” [If the financial planner is also a CPA, yes then they might be able to do this, but most, as far as I know still suggests investing inside IRAs and 401Ks which we know is a tax loser!]

“I believe a financial adviser’s greatest value is in the ability to view their clients’ money logically, and largely without emotion.” [again found to be untrue]

“The greatest risk to an investor is not market risk but the risk in submitting to self-defeating behaviors (greed, fear, complacency, inertia, lack of motivation).”  [evidence suggests financial advisers suffer from the same]

My last post, which hasn’t been responded to yet:

The definitive study is the BCT study done by Harvard/Morningstar researchers [2006]: synopsis at this link: http://www.people.hbs.edu/dbergstresser/dbjchpt_morningstar.pdf

You will note that the investors without advisers outperformed those with advisers 6.6% to 2.9% in the period studied. Do advisers outperform index funds? No. Do advisers provide superior asset allocation? No. Do advisers help investors correct bad behavior like chasing performance? No, they actually contribute to that behavior!

I will let the readers decide what to do with this information!

So what is the cost of this service [financial planning]?  Apparently, over half the returns  [6.6% to 2.9%]!

No wonder this financial planner thought that “Financial planning, done right, has very little to do with getting higher returns on money….”

I rest my case!



1. BawldGuy - May 13, 2009

Thanks for providing my laugh of the day. My 25 year old daughter, with no financial training whatsoever, would laugh at most of what this guy says. Sometimes dealing with that much ignorance and misinformation just ain’t worth the time. Thanks again.

2. investmentblogger - May 20, 2009

Interesting discussion that was posted. I wonder, aren’t the worlds’ most successful investors (super-investors) are all DIY too?

shaferfinancial - May 20, 2009

Of course they are! I am a big proponent of learning to be an active investor and founded the Shafer Wealth Academy to help folks become an active investor.
I have come to believe [by looking at the results] that passive investing and the stock market should not be put together.

3. Joshua - May 22, 2009

You’re welcome for the link. 😉 I thought you’d like it and I linked to your site because I knew the blogger was “misleading” even if it wasn’t done intentionally.

I’ve been following you for awhile now and trust your advice. Hopefully you will get some converts from the traffic. 😉

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