If someone can’t count to 10 or still possesses a negative net worth after 20 years of work experience, it’s probably not the best idea to listen to them for financial advice. It’s not useful to read home buying tips from someone who has never bought a property. Nor is receiving child raising tips from someone who’s never been a parent helpful either. Common sense wins again!
But what happens if you went to Yale and are rocking a $20 million dollar net worth with decades of investing experience. You’ve got a portfolio of properties around the world and worked as an accountant, investment banker, and entrepreneur for 30 years. All you want to do is kick back, relax, and not worry about your money. What can a 35 year old, sub $500,000 net worth financial adviser who majored in religion from Podunk U possibly teach or help you about managing money? Perhaps you should be giving him advice instead!
Most rational people look up to older people for advice on work, money, and love presumably because they have more experience and have made plenty of mistakes. The easiest way to counteract, “I wish I knew then what I know now” is to listen to people who’ve been there. It’s only the stubborn individual who thinks their way is always the right way. Meet any of those types before?
In an ideal situation, we’re much better off going with a financial adviser who is smarter, more experienced, and wealthier than us to manage our money. The problem with the ideal situation is that star financial advisers probably only spend time with their wealthiest clients, leaving their lackeys to advise the rest of us! Always strive to understand the background of the financial adviser before taking them on please.
In this post I’d like to explore how we should think about using a less wealthy and less experienced financial adviser, if at all. I’ll also suggest ways for financial advisers who lack the pedigree relative to their clients to better serve us.
A GOOD FINANCIAL ADVISOR IS MORE THAN JUST SMARTS
Financial advisers are not investment gurus who’ve consistently beaten the markets for years. This misperception is probably what gets financial advisers and clients in trouble the most. Clients with such thoughts immediately expect their financial advisers to start making them Warren Buffet type of money from the get go. This can’t be farther from the truth.
Instead of being considered investing gurus, financial advisers should be considered professionals in financial planning to meet your financial goals. They should be able to understand all the tools and strategies available to you and recommend them accordingly. They will introduce you to experts in the fields of fixed income, equities, real estate, annuities, and estate planning to help address additional inquiries. Think of a financial planner as a general contractor who knows a little about everything and will get the most qualified people as possible to build your dream home.
You should also treat your financial adviser as your personal financial butler. You are paying ~1% of managed assets as an annual fee to make sure s/he gives you some recommendations, listens to your ideas, properly allocates your assets for retirement and takes orders. The more responsive the financial adviser, the better. The last thing you want is your financial adviser to pawn you off to his secretary while he’s playing golf!
A good financial adviser will sit down with you or have a conference call at least once a quarter to review your objectives and prior three month performance. You don’t need a degree from Yale to care about your customers. What you need is a financial planner who methodically cares for your every financial need and watches your asset allocation carefully so that your risks parameters are in line with your desired targets.
THREE RED FLAGS ABOUT FINANCIAL ADVISERS
I’ve interviewed four financial planners from four different firms for this post and all but one was impressive. The biggest red flag that comes up is when a financial adviser starts confidently making predictions about the stock market. If they were such experts in investing, they probably wouldn’t be sitting there talking to you. When a financial adviser is overconfident, they put your assets more at risk. The financial adviser should demonstrate humility and highlight his or her strengths and weaknesses. An important item to review is their track record.
The second major red flag is when the financial adviser can only discuss his or her firm’s product offerings instead of the best product offerings on the market. This conduct shows that they are too lazy or too ignorant to spend the time finding what’s best for you. A well versed financial adviser should understand a wide variety of products from various competing companies.
The final red flag is if your financial adviser is so busy trying to market himself as some guru that he’s not spending enough time on you. It’s understandable that in order to get clients you’ve got to market yourself. But if all the financial adviser is doing is spending all his time trying to craft an image online, I’d stay away. The most successful financial advisers are the ones who don’t have to market themselves at all. Their performance speaks for itself and they get endless referrals. This concept is similar to the inverse relationship between those who like to reveal their income and their insecurity. People who have money don’t need to tell everybody they have money.
As a personal finance blogger who worked in finance, I’m naturally very critical of financial advisers. If there’s one hint of bullshit or a financial concept I don’t think they fully understand, I walk away. But everybody’s expectations are different. You’ve got to also ask yourself the brutally honest question of what caliber of people go into which financial sub sector. For example, the average hedge fund analyst makes over $300,000. The average financial advisor makes under $100,000.
SERVICE CAN TRUMP BRAINS IN FINANCIAL PLANNING
We automatically screen those who take care of our most precious assets. Whenever I go to a doctor I instinctly look to see where s/he went to school and whether the doctor is in good physical health. There’s usually a diploma proudly hung in the patient waiting area, so I don’t have to look for long. The hope is there’s a positive correlation between academic institution, the doctor’s physical fitness, and the treatment and analysis received. The same type of screening goes for financial advisers who could literally make or break your retirement future.
It’s also important to understand that financial advisers are also salespeople whose optimal goal is to make as much money from you as possible while enriching you in the process. The better the clients do, the more the financial adviser should earn over time due to rising management fees and increased referrals. You should probably look for an adviser who charges per visit or per assets managed with zero add on fees.
If you just can’t find that superstar financial adviser who is smarter and wealthier than you, then insist on finding the most service oriented financial adviser possible. And if you can’t afford or find the most service oriented financial adviser possible, follow financial blogs whose authors have the experience and intellectual curiosity to guide you towards a better financial future. There’s no point hiring someone if you don’t think they have the professionalism and the financial acumen to help you achieve your financial goals.
If you are a financial planner with a low net worth and mediocre educational achievement, the only way for you to make up for your deficiencies is to HUSTLE. Be the most responsive, forward thinking, thoughtful financial planner you can be.
Recommendation: I suggest people manage their finances themselves first. Personal Capital is a free online wealth management tool which allows anybody to easily keep track of their net worth, screen their retirement portfolios for unnecessary fees and risk, while managing their budget. Be your own financial advisor! I’ve been using them for three years now and particularly like their 401k fee analyzer and weekly e-mail updates about my net worth. If you manage to amass a lot of money and want professional help, you can use one of their financial advisors as well for a fee of 0.8% of assets under management a year. Take control of your own finances and leverage free technology.