Are Financial Advisors the Solution or the Problem for Older Investors?
As investors age, two things become increasingly apparent: they need more help with their finances and investments, and they’re more vulnerable to financial exploitation. Depending on who you listen to, financial advisors are either the solution to these problems, or they are part of the problem.
On one hand, financial advisors and their firms like to sow self-doubt in the minds of do-it-yourself investors. “Will you know when you’re no longer competent to manage your investments? What will happen to your less financially savvy spouse if you pass away first? You’d better hire a financial advisor while you’re still able to make good decisions.” This paints a picture of competent and honest financial advisors stepping in to save their clients from themselves as they age.
On the other hand, we have Ken Kivenko’s Financial Self-Defense Guide for Seniors. Ken is a tireless advocate for Canadian Investors, and his guide is largely designed to help seniors protect themselves against unscrupulous financial advisors.
So which is it? Are financial advisors the solution or the problem for older investors? The truth is that they are both. Honest and competent advisors are part of the solution for aging seniors, and dishonest or incompetent advisors are part of the problem.
However, it’s not as simple as determining if an advisor is honest and competent. There are many shades of grey. For example, many financial advisors aren’t very knowledgeable, and they rely on their firms to guide their behaviour. These firms are driven by a profit motive to steer clients to higher-fee financial products. Most firms will avoid outright illegal activity (if they think they might get caught), and they avoid bad press. This limits how far they’ll go to extract fees, but the profit motive pushes them toward the line between ethical and unethical.
So, are financial advisors mostly honest and competent or not? The answer to this question depends entirely on where you draw the line. How many advisors always place their clients in the lowest cost version of an investment, never advise client behaviour that preserves assets under management over the client’s life enjoyment, never choose investments that serve their firm more than they serve their clients, and never take extra advantage of seniors who are unlikely to notice and complain? This is a high bar, and the fraction of financial advisors who meet all elements of it is low.
Another line we could draw is whether an advisor’s behaviour is bad enough to get caught and either fined or prosecuted. This is a very low bar, and the vast majority of financial advisors are on the correct side of this line.
In the end, some financial advisors are the solution for aging seniors, some are part of the problem, and the proportion of advisors in each camp depends on where you draw the ethical lines.
Thanks for all you do, Michael; I owe a debt. I am a long time reader and first time poster.
ReplyDeleteAt 62 and retired, my temporal horizon has long since flipped. My wife (still working for likely another few years) is 10 years younger, but despite a great degree of mathematical sophistication has only moderate interest in investment and retirement planning. My approach has been to make retirement planning and investing as simple as possible with (in no small part) asset allocation funds - perhaps at the expense of tax and MER efficiency.
In the event of my early demise, my wife would find our retirement plan manageable.
I suppose this is all an attempt to avoid the pitfalls of self-interested financial advisors. I know too many people who by my calculus have made less than optimal decisions on the recommendations of an advisor all while suffering substantial fees. I would like to think that my 12 year-old daughter will acquire the necessary sensibilities early into adulthood to help her parents out if necessary, but that is an open question.
If you'd be willing to share, I'd be interested in your approach to the problem of money management as age becomes an inevitable factor.
Hi Alan, I'm glad you enjoy the blog.
DeleteI could see switching to asset allocation ETFs at some point. My sons are older than your daughter, and they already use asset allocation ETFs. So, if I were to simplify our investments, I'm confident my sons could help manage them if the need arose.
As more tontine-type products come to market, I could see using one of them some day for at least part of our portfolio. An ideal product would cover longevity risk, have some inflation protection, and have expected returns closer to stocks than bonds. We'll see what the market brings forth.