Financial Advisors – Are They Good For Building Wealth?

If you are like 99% of the population, you manage your own money. In fact, according to this CNBC poll, only 1% of the people surveyed use a financial advisor.

Ever wonder why so few of the people use a financial advisor?

For starters, there is more information readily available than ever before. 30 years ago, if you wanted to invest in the market, you had to go through a stockbroker or financial advisor to do so. Not anymore.

Today, there are literally dozens of websites that offer investing platforms from Robinhood and Betterment to TD Ameritrade and Fidelity. You can buy and sell stocks, bonds, mutual funds, ETF’s, derivatives, etc. at the touch of a button.

Want to do investing analysis? Use Yahoo Finance or M1 Finance. You don’t need a financial advisor to do so.

Money Burnt Up by Financial Advisors

Also, companies are giving their employees free financial services to manage their 401K’s. My company uses Edelman Financial Engines for a basic analysis of my 401K including risk analysis and investment recommendations based on my personal profile and preferences. They even offer, for an additional fee, active portfolio analysis with a live person. I don’t do this and will explain why later in the article. 

Another reason why people do not hire financial advisors is the cost. Financial advisors earn money in a variety of ways from earning commissions on the financial products they sell, to charging you either a percentage of the assets under management fee or a flat fee, and referrals fees for using certain accountants, lawyers, insurance agents, real estate agents, etc.

Ever wonder why your financial advisor has such a nice office and drives a new car every time you see them? Well now you know. 😊

Lastly, it’s also about perception. A lot of people think that financial advisors are only for the wealthy and well off. Not so anymore. More and more people think that they do not have enough assets to be considered “worthy” of a financial advisor’s time. Compound that with the fact that people, particularly millennials, also have a huge amount of debt coming out of college and do not have a lot of money to invest with. It’s no wonder people think the way they do.

What Financial Advisors Should Be and My Experiences

Money Managers, financial planners, financial advisors….. whatever you want to call them, you might be asking, what’s my opinion of them? Do you use a financial advisor?

My answer, to put as succinctly as I can…… oh hell no!

To me, money managers are supposed to have a holistic view of the market and my financial needs. They should be certified experts with a fiduciary responsibility in understanding my goals, what I want to achieve, and use every possible financial tool to achieve those goals.

They should have a plethora of resources to use to achieve my financial goals. They should know of or have access to people who understand all the financial tools available. They should know about or have colleagues who understand the stock market and its derivatives. Their team should know how to use and understand the benefits of insurance policies, pensions, annuities, real estate, tax minimization, and know how to find good businesses to invest in.

Finally, they should be financial experts trained in finding ways to consistently outperform the S&P 500. Otherwise, why work with them? If I wanted to match the performance of the S&P 500, I would just invest in a low-cost index fund and leave it alone. If I hire an “expert”, I want exemplary results, period.

I have yet to meet a person who claims to be a financial expert that even comes remotely close to this.

To be honest, my experience has been quite the opposite.

My experience with financial advisors is that they are simply nothing more than high priced salesman who make money off the average person’s fears about the market and lack of financial literacy.

The financial advisors I have worked with have no knowledge about whole life policies, universal life policies, annuities, buying / selling real estate, real estate syndication, or how to find good businesses to invest in as a silent partner.

Want to know why that is? It’s because they do not make money off it. Their focus is only on the products or services offered by the financial institution (i.e. Goldman Sachs, Charles Schwab, Morgan Stanley, etc.)  where they get either get a fee or commission from. That’s it.

Here Are Some Examples

I was interviewing a financial advisor who claimed to have knowledge in a “broad spectrum of products and services”. When I quizzed him on his knowledge base, he simply responded that the financial institution he works with offers a plethora of financial products that can help me. Namely, stocks, bonds, mutual funds, ETF’s, and index funds. Things I can freely purchase on the open market.

I inquired further on their knowledge of annuities, real estate investing, and insurance policies that offer cash value and other benefits. The person paused on the phone for almost 5 full seconds and then said, “We do not sell those products or services”.

Translation: “I cannot make money off of those financial products.”

This is just 1 example. Here’s another one for you.

I was fresh out of college, barely a year, when I received a call out of the blue. A person called claiming I reached out to them, and they were following up on my inquiry for financial advising. I did not remember any conversation like this. Normally, I would have hung up the phone. Instead, I inquired further. I was looking for someone to help me with my finances and decided, “what the heck”, and scheduled an appointment.

I went to his office and saw this older man, probably in his 60’s sitting in a cushy leather chair behind this HUGE mahogany desk. He wore a suit worth at least a week of my pay and had a pinkie diamond ring. The rest of his office was no less elegant and luxurious. The room was a mixture of cherry and mahogany judge’s paneling with 8-foot-tall shelves filled with books. He thought he was rich, and he definitely wanted to flaunt it.

He sat me down to discuss what he can do to help me on my financial journey. He also mentioned that he has helped dozens of people at my company achieve their financial goals. Nothing of substance was discussed just a lot of hand waving and fluff.

After about 15 minutes of this, I asked him a few questions. For starters, I wanted to know the historical average rate of return of his clients, what and when were his best and worst years, how did he do in 2000 when the stock market tanked, how much he had in assets under management, and how many years has his average client been with him.

He shrugs off my questions, pompously waves his hand around the room, and says, “Look around this room to see how good I’m doing.” I mentioned that this just shows he knows how to spend his client’s money and really doesn’t give me any confidence in his ability. I told him that I prefer to see data on his performance because if I want average performance, I’ll just invest in low-cost index funds.

He just continued on and on about how well he is doing financially and that I just need “to trust him”. At about this time, I had enough of his pompous, arrogant ass and was done listening to his garbage. I thanked him for his time and never looked back. If a person cannot back up their claims with data then that is all they are, claims.

IMO, financial advisors should have a much higher-than-average level of financial acumen. In reality, the vast majority are just high-priced salesman trained to speak from a script. Think most financial advisors have an MBA from a Top 10 business school or are former Wall Street finance experts? Want further proof that this is bunk? Here’s another story for you.

I was a member of a fraternity back in college. About 10 years after I left, I came back to celebrate our Homecoming. I met one of the active members who was a few weeks from graduation. Good guy. We hung out for a couple of hours and had a few beers and some laughs.

After awhile, I asked him if he started looking for a job. He said he was and already had an offer to be a financial advisor. I asked him what led him to make this choice. Did he have a degree in finance? A passion for personal finance? He said, “Nope.”

Now I’m confused. I asked him what made him think he had the knowledge and experience to handle people’s retirement and financial goals especially with just being out of school himself. He said, “I don’t know anything about this stuff. I was just told to follow the script they give me and to sell as many products as possible to maximize my commissions.” ….. huh?

Well that really threw me for a loop. It just goes to show that the expectations made and what you purchase are 2 vastly different things. If that is their attitude, then you are WAY better off managing your own finances.

Why I Don’t Use Financial Advisors

Want more reasons why I don’t use a financial advisor, here goes………….

Fees are Too High

Financial advisors charge fees 2 different ways. Either a flat annual fee or a percentage of assets under management (AUM). A flat fee charge can be anywhere from $2,000 to over $7,000 per year. If a percentage of assets is charged, it can easily range from 0.25% to 1%. In some cases, it can be as high as 2%.

What’s the big deal? They must make money, right? Yes and no.

While I totally understand that people must make a living, the charges can be exorbitant. Let me explain.

For starters, let’s assume that your financial advisor charges a flat fee of $5,000 annually. You’re a few years out of college and have a 401K balance of about $70,000. Your portfolio has a great year and goes up 15%! A year later, your portfolio is now $80,500….. or is it?

Don’t forget to deduct the $5,000 you paid your financial advisor for their great advice. Your portfolio really netted out to be $75,500. A nice return (net return of 7%) but those advisor fees really ate into your earnings.

If you have a down year and your portfolio loses 15%, the advisor fees compound this to an even greater loss.

What about advisors that charge a percentage of assets under management (AUM)? For starters, the amount of money they make grows as your portfolio grows.

Here is an example. Assume you have $70,000 portfolio and the advisor charges 1% of your portfolio. At the end of the year, the advisor deducts $700 from your portfolio for his fees. Not bad huh?

Not look at it 30 years later. Your portfolio has grown to $2M. That same advisor now charges $20,000 to manage your portfolio (1% * $2M). Same services, same amount of effort with similar results yet they make WAY more money off you. Nice huh?

But wait, I know they charge high fees, but actively managed portfolios make way more money over your lifetime, right? Wrong.

This leads to another reason why I do not use financial advisors…….

Active Portfolio Management Does Not Improve Results

The end goal of hiring a financial advisor is to beat market performance and deliver superior returns. The question is, “do they really outperform the market”? Historically speaking, actively managed funds perform much worse than passively managed funds (i.e. think index funds).

From this article, it shows that the vast majority of index funds significantly outperform actively managed funds.

The study from Vanguard shows that, over a 10-year period, 90% of Vanguard index funds outperform their actively managed fund counterparts.

If the big funds cannot outperform index funds, what chances does a financial advisor have? Not very much.

But financial advisors have the entire industry of financial products to use to boost your portfolio, right? Not really, which leads to my last point.

Limited Offerings

Most financial advisors are affiliated with a financial services firm. Think Prudential, Goldman Sachs, Fischer Investments, John Hancock, etc.

As a result, they can only offer the products provided by those companies because that is how they get paid by them. They receive commissions for pushing their products onto you on top of the fees they charge you. In other words, they double-dip from both the financial services company they represent as well as from what they charge you. They receive all the benefits, not you.

 If they were to offer a competitor’s product, not only would their affiliate company literally disown them, but they also wouldn’t make any money in commissions for selling the competitors’ products.

What To Do Now?

My advice is to educate yourself and be your own advisor. Educating yourself seems daunting and complex. It seems like they are smarter than you and that this is WAY over your head. I assure you it is not.

If you can balance a checkbook, you can learn to read a financial statement. If you can add and subtract numbers, you can learn how to analyze a business. I’ll admit I am no expert yet and am constantly working on it. However, if I can be self-taught and learn how to do this so can you.

Financial Planning on your own

The question you may be asking yourself is, “Where do I start?”

There is a wealth of knowledge out there. I recommend watching YouTube videos on how to analyze a financial statement. Then pick a company you really like (i.e., Amazon, Google, Tesla, etc.) and download their financial statements off their investor relations site.  Take these statements and practice analyzing the statements yourself.

Take your time doing it because there is a lot of information. The more you do it, the more comfortable you will become and the faster & easier it will get.

If you’re still struggling, watch Phil Town from Rule1 Investing. He has a plethora of knowledge and has tools you can use to back test and practice investing until you feel comfortable enough in your analysis skills to try it in the real world.

So, there you have it, my opinion on financial advisors and what you should do. What do you think? Leave your comments here.

Until next time……..

Live the Life You Love, Want, and Deserve……… 😊