What are some of the top reasons to not have a personal financial advisor?
Making investment decisions for retirement or opening a brokerage account to put your money to work can seem complicated. Getting advice from a professional financial advisor can be advantageous in the right setting, but it isn’t something everyone needs. The truth is that for most people the reasons to not have one will outweigh the thought of considering it.
1. Money
Everyone can invest and should whenever possible. However, like many things in life the more money you have the better service and attention you will receive. This is no different in the financial world. There are more opportunities for better rates of return and lower sales charges for people of means. Advisors will also tend to cater more to wealthy clients giving them much better service. This is something many of them will say it is not so, but it is undeniable.
Advisors earn a living in several different ways. Sales charges, a percentage of assets under management and many different structures that can be set up. Working with wealthy clients is the bread and butter of their business. Many advisors will not even work with someone unless they have a certain amount of money to invest. Many will also even still earn the same amount regardless of how your account performs.
2. Finding a truly qualified advisor with the right experience for your situation can be challenging.
What many brokerage firms do not mention is that it does not take years of formal education to become licensed in securities and insurance. You study for an exam, take the test, and you receive a securities or insurance license. As long as a person has passed these exams and works for a brokerage firm, they can be considered a financial advisor.
Because there are newly licensed advisors each day, many do not have much experience. Opening a modest account at a broker will often result in having an inexperienced advisor. This is due to the first reason, which is money. More experienced advisors are given larger accounts. New advisors often work with much smaller ones typically.
Although there is some training and licensing required to be a financial advisor, this does not always mean they know investing inside and out. There are always changes in laws and new investment products. These can be complicated. The fact is that an advisor does not even need to have a lot of experience or knowledge to have a large number of clients. I have seen this first hand with advisors that have no knowledge of a number of regulations even though they should. Being a financial advisor is not first about investing, but it is about relationships. Just because an advisor has a large client base does not mean they are a good advisor.
Not all financial advisors are bad. There are some really good ones. But, finding an experienced advisor that will provide the service an individual needs will depend on the size of the account and the relationship with the advisor. Trusting the right person with your money can be a deterrent to having an advisor.
3. Performance
Getting a financial advisor does not guarantee that the products or techniques they use will outperform the market. Just like you and me, a financial advisor will rarely outperform the market. If they do, by the time you add in the fees and expenses it will often match or do just as good as you could have done on your own.
While there are many so-called experts that claim they can beat the market, this is just simply not the case for the majority of advisors and individuals. Again, the industry is set up for people with large sums of money. These people have the connections to get the advisors with the inside knowledge to do better than most.
Insider trading is indeed illegal, but don’t think it does not happen regularly. People with wealth typically have power and these people know people who run large publicly traded companies. Having the right network and being surrounded by the right people ensure a better success rate to beat the market averages. This is just not something the average person has access to.
4. Fees and Costs
Having a financial advisor can be costly in addition to whatever investments they sell you. These fees are typically disclosed. However, there are often many fees that people do not realize exist. These are buried deep in their investments. Investments often have many people with their hands in the cookie jar. Don’t get me wrong, I understand the need for people to get paid for their work. But the fees often do not justify the work involved. I was once told by an advisor to quote him “This is the best part-time job for full-time pay”.
The fees and expenses can diminish returns over time. Quite often these are not justified in the work performed.
5. You can learn to be your own advisor.
There is a lot of books, classes and additional information for people that want to learn how to invest on their own. You don’t have to be a professional to have a good sound investing knowledge and success. Choosing low-cost index mutual funds will often do just as good or outperform many advisors in a number of investing situations for retirement and saving. Learning how to diversify investments and good general knowledge of investments will go a long way. The best person to trust with your own money is most often yourself.
Every person’s knowledge, financial situation and comfort factor investing on their own is different. If you are more comfortable having a financial advisor manage your money there is nothing wrong with this. Just be aware that they do get paid for their advice. The importance of doing a thorough background check to get a qualified and experienced advisor is the most important first step. Using Finra’s Broker Check can be a good first step. If you do not have a sizeable amount of money to invest, be aware that you may not receive the attention you believe you deserve.
