Recently, Rob Carrick discussed choosing an investment advisor. The conclusion is that a good advisor has the following 4 attributes:
1. Is comfortable speaking about fees and commissions.
2. Communicates clearly in everyday language.
3. Asks detailed question about clients’ situations.
4. Makes time for clients.
These make sense, but they aren’t enough to avoid being taken in by a good salesman. The article acknowledges this saying that people “have to be at least a little involved in the running of their portfolios.”
The problem I have at this point is that if you are knowledgeable enough to be involved in the running of your portfolio, then you probably know enough to pick a few ETFs yourself and forget the advisor. For the more complex financial planning activities (that many advisors don’t really do), investors can pay a fee-based advisor by the hour periodically.
In my limited experience of listening to people talk about their financial advisors, they tend to pick them based on rapport. Of course, rapport is important, but should you really hand over all your money to someone just because he or she knows how to act friendly?
Given the various low-cost index ETFs that exist today, mapping out your own financial plan isn’t very difficult. People who can’t handle this on their own are forced to take the risky path of trying to find a trustworthy financial advisor. I fear that the list of four desirable attributes of a financial advisor won’t be enough help.
Personal finance needs to be included in school curriculums, something so important to people's lives is currently left to people to figure out on a trial and error basis - and unfortunately the realization of an error may not be discovered soon enough.
ReplyDeleteCouple this with commission based compensation and low hurdle qualifications for advisors, and the management of personal finance in Canada (and most other countries) is a completely broken system.
(And there are too many people making too much money with too much lobbying power to protect the current state of affairs.)
Thanks for the link Michael. I agree with you wholeheartedly that most people are better off investing on their own and paying for advice in specialized areas like estate planning, taxes etc.
ReplyDeletePreet: I agree strongly about teaching personal finance in schools. Such a class exists at my younger son's high school. Unfortunately, for the investing portion, they teach a lot of nonsense about mutual funds without discussing the importance of MER. In general, I'm not sure how you would keep the financial industry away from meddling in any course material taught in schools.
ReplyDeleteThicken My Wallet: Unfortunately, there isn't much evidence that financial advisors serve as a stupidity brake. In fact, follow the link below to see evidence to the contrary:
ReplyDeletehttp://michaeljamesmoney.blogspot.com/2008/01/do-financial-advisors-provide-steady.html
The comment above is a reply to Thicken My Wallet's comment:
DeleteI have always thought of an advisor as not an advisor per se but a stupidity brake. In other words, they make sure they keep you from doing stupid things. If you can find an advisor who can do that, and not try to peddle you product night and day, then I believe you are one step ahead of the game. If it costs you a few hundred dollars in commission a year to save thousand of dollars then it is money well spent.