Broker: Should You Hire A Financial Advisor?
- Mar 20, 2013
- Written by Warren Brofett
(Editor's Note: We are continuing our Bro Council Finance series, creatively titled "Broker", with an article about financial advisors. Yes, we have a lot of humor and sports on the site, but we want to help men be better at being...men. One of the things most men could work on is becoming better with their finances. In this months article we ask the question "Do you need a financial advisor" - read on to find out.)
If you’re reading this article, you may be interested in finance, but just don’t know where to begin. You may be interested in investments, or you might just be lured in by my sweet by-line.
Let’s assume you are interested in investments. You’ve been working, you’ve saved some money, and you want to grow that capital and put that money to work. You want to invest, and aren’t sure where to start – whether that’s managing your own investments, or relying on someone else to do it. If the latter sounds more like you, then likely you’ve heard of the concept of financial advisors, who all are vying for the assets of individual people wanting to transfer their money management. Financial advisors typically work for companies that offer a buffet of financial services – including insurance planning, retirement planning, estate planning, and investment planning/management.
What the average person considering this approach needs to know is this: unless the financial advisor you hire is specifically adding value to you beyond simply “managing your relationship” with their company, you are with the wrong advisor.
To understand my argument, you need to understand the structure of many of these investment advisory companies. Broadly, the companies typically have a group of folks who serve as “Financial Planners”, who take the information that you provide them, and help generate a financial roadmap for you to achieve your goals. There are also “Investment Personnel”, which would consist of people serving on the Investment Committee, the Chief Investment Officer, and the Analysts. These are the people who are actually determining how to allocate the funds of the firm’s clients. Lastly, you have the “Financial Advisors”. As a client, this is your main point of contact. They are the person who calls to talk with you, and who you directly meet with periodically.
If you take nothing else from this article, then take away this: if that financial advisor does not help with one of the other roles (i.e. actively contributing to the investment process), then why are you paying them?
If you do decide to go the route of using a financial advisor, you need to realize that you will be paying fees for them to do so. Typically, companies will charge you each year a percentage of the assets that you have invested with them. Remember, these companies are running a business, and they are selling you their services. Not all fees are bad. But not all fees are created equally either.
Let’s first consider that basic yearly asset fee. Make sure you understand how that is divvied up. If a financial advisor isn’t willing to disclose where the money you pay them is going, then that is not likely a person you want to be in business with. Some of that money should be going to help the company run the investment management operations, which is good. But you need to be aware of how much of that fee is going to the advisor if they are merely meeting and talking with you, while the lion’s share of the true investment management work is being done by others.
Unfortunately, with the vast number of financial advisors in the United States that there are, there are likely many existing relationship structures that enrich the advisor without actually being a valuable asset to their client. Most of the time, financial advisors make a good living because of their share in the receipt of the asset management fee we just discussed. As an example, say a financial advisor makes 0.50% per year of the assets under management for his/her clients, and their total book of business is $100 million. Each year, as long as that book of business does not shrink, the advisor makes $500,000. That’s a lot of money. The benefit of capitalism is that those providing truly highly valued services can fetch high wages on the open market. But as noted above, a key question is whether or not they are actually providing that valuable service: helping your money grow.
Another factor to consider is this: if you are going to an advisor offering a full suite of service, how much time are they actively giving to manage each portion of your financial picture? Yes, the investments piece is just one part of the total picture for an individual. But it is a super important part that merits a VAST amount of attention and focus. Are you getting that from your advisor?
If the advisor is telling you that his/her investment committee is recommending the stock of company X, or mutual fund Y, that same advisor should be able to tell you WHY they are recommending that. Is it because they think the economy is improving, and this particular company has the factors in place in its business model to benefit more than other companies in an economic rebound? Is it because they think that the investment style of the mutual fund is ripe to outperform other styles? After all, if the advisor can’t answer these questions, then how can you view them as qualified to manage the investment piece of your financial picture?
If you find yourself in one of these situations, then don’t despair. There is hope, and there are other alternatives. Cutting out the “middleman type” of financial advisor will allow you to give money to a firm that specifically manages the assets, and does nothing else. There are vehicles like this out there.
Additionally, you could also begin to manage more of a portion of your assets yourself. Unless the advisor you are using currently provides you with specific stock selection insight, then there doesn’t seem to be as much point to having them on your financial payroll. If you are simply being put into a portfolio that buys a group of mutual funds, can’t you do that yourself? Yes, in fact, you can, and it will be cheaper. (Now, a caveat: managing your own assets requires attention to detail, research, and a willingness to learn. Successful investing is NOT rocket science – it’s a skill gleaned through practice and study.)
Finally, let me note that the other financial services offered by financial advisors are valuable. Considering insurance planning, tax planning, retirement savings, and other factors are extremely important services that anyone must consider in examining their full financial picture.
This article is not meant to downplay the value of financial advisors who truly service their clients as they are meant to do. If you believe this is the best way for your money to be managed, then focus on finding an advisor who is actively contributing to the investment process, keeps a low fee that is somewhat tied to how they actually perform in managing your money, as well as provides individual security selection. These advisors are worth their weight.