Financial Advisors
This is a Sunday feature looking back at selected articles from the early days of this blog before readership had ramped up. Enjoy.
Many people have investments in the form of retirement savings. For Americans, this might be a 401(K) or IRA, and for Canadians, an RRSP. Often these investments have been set up by a financial advisor. I have dealt with many financial advisors over the years and have learned a few things.
1. Competence. Most financial advisors seem to be well-meaning people who don’t know as much as you might hope about investing. I’m sure that there are exceptions to both the well-meaning part and the competence part.
2. Main focus of the job. Their job is more of a mutual fund salesperson than what most people would think of as a financial advisor.
3. Individual Customer Attention. The comprehensive personal financial assessment that they perform with each client seems mostly geared toward figuring out how much they can get you to invest in mutual funds.
4. Conflict of Interest. The amount that financial advisors get paid varies from one mutual fund to the next. The funds they choose should be based on what is best for you, but some advisors choose the funds that pay them the most.
These comments do not apply to fee-based financial advisors who are paid for their time and do not receive commissions from selling mutual funds.
Are Financial Advisors Helping or Hurting People?
The short answer is some of each. Suppose that your financial advisor, Fiona, convinced you to set aside money for mutual funds each month. If you would have spent the money on shoes and over-priced coffee, then Fiona is helping you even though you may be paying high fees on your investments. However, in most cases, you could be invested in essentially the same investments for much lower fees. In this sense, Fiona is hurting you financially.
If you have managed to find a financial advisor who is knowledgeable about investing and serves your interests well, then you are fortunate because this is not the norm.
Many people have investments in the form of retirement savings. For Americans, this might be a 401(K) or IRA, and for Canadians, an RRSP. Often these investments have been set up by a financial advisor. I have dealt with many financial advisors over the years and have learned a few things.
1. Competence. Most financial advisors seem to be well-meaning people who don’t know as much as you might hope about investing. I’m sure that there are exceptions to both the well-meaning part and the competence part.
2. Main focus of the job. Their job is more of a mutual fund salesperson than what most people would think of as a financial advisor.
3. Individual Customer Attention. The comprehensive personal financial assessment that they perform with each client seems mostly geared toward figuring out how much they can get you to invest in mutual funds.
4. Conflict of Interest. The amount that financial advisors get paid varies from one mutual fund to the next. The funds they choose should be based on what is best for you, but some advisors choose the funds that pay them the most.
These comments do not apply to fee-based financial advisors who are paid for their time and do not receive commissions from selling mutual funds.
Are Financial Advisors Helping or Hurting People?
The short answer is some of each. Suppose that your financial advisor, Fiona, convinced you to set aside money for mutual funds each month. If you would have spent the money on shoes and over-priced coffee, then Fiona is helping you even though you may be paying high fees on your investments. However, in most cases, you could be invested in essentially the same investments for much lower fees. In this sense, Fiona is hurting you financially.
If you have managed to find a financial advisor who is knowledgeable about investing and serves your interests well, then you are fortunate because this is not the norm.
I agree with you the best thing about a "financial advisor" is they can introduce you to investing. Hopefully you can then do some independent research, and eventually graduate to lower expense funds or equities. They can light the spark, and blogs advising lower MERs can then move the investor in the right direction to higher returns through lower costs.
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