People often believe that once they reach a certain level of wealth, they need a financial advisor. While having one can be beneficial, many individuals engage financial advisors for the wrong reasons, resulting in significant financial losses over time.
Consider this: if you had $1 million earning a conservative 5% annually, and your financial advisor charges just 1%, you would have paid nearly $1 million in fees. Shockingly, if your returns were even higher at 10%, their fees would take over $3.6 million from your pocket! These figures only account for advisors charging 1%, and many charge even more.
Unbelievably, I have a client that previously was paying a staggering 5% annually.
Know What You Are Getting Into … Financial Advisors Are Expensive
Before deciding that you need a financial planner, it’s crucial to weigh the costs against the benefits. Consider how much harder you’ll have to work during your retirement years to make up for that missing $3.6 million.
This blog post will delve into the expenses associated with financial advisors and shed light on why it’s essential to carefully evaluate their value before making a decision.
Hiring A Financial Advisor For The Wrong Reasons
The worst is when I talk with people that have a Planner strictly for the wrong reason. We have many Hollywood celebrities as clients and they are notorious for having a Planner strictly because it is the same planner that Steven Spielberg uses! Think about how ludicrous that is … would you hire the same gardener or computer guy or doctor as a famous person just because of the status you feel??
What Is A Financial Advisor?
So, what is a Financial Planner? A DECENT planner is well versed on financial options for their clients. They generally ask a whole slew of questions to find out information about you that helps to organize your financial world appropriately.
Particular items of importance are:
- your risk tolerance (how much risk are you willing to take to grow your money)
- where you are financially at this moment in time
- your age
- family circumstances (wife with three kids, etc)
- current and future bills you have (college expenses for your children, retirement plans, etc)
It’s All About You! Or At Least It Should Be …
The process should be very focused around YOU and your particular situation. And this is the main difference between good and not good … poor planners will try to fit you into a ‘canned’ solution, whereas a good planner will create the plan around your needs.
And to go to the other extreme, Planners at the top of the game help with estate planning, tax situations, business planning, insurance needs, liability protection, even paying your bills … the list is endless, and generally the more the need the higher the cost.
Most planners also handle investments, which is where problems can arise. Most planners are terrible stock pickers and do not manage your investments properly. They have little understanding of how financial markets work and tend to encourage a Buy and Hold approach, which isn’t necessarily bad … BUT you should not be paying a Planner 1 – 2% a year to buy and ‘hope’.
Sadly Under Performance Is Standard Practice
Study after study shows that 99% of Planners under perform the market year after year for their clients. In fact, not only do many of them under perform even before fees are taken into account, but when fees are deducted, the returns are often disappointingly minimal.
I had a client whose previous advisor’s statements revealed an alarming disparity: while the market generated a 9% return, the client only earned 5% before fees. With the advisor’s hefty 2% annual fee, the client was left with a mere 1% gain after fees were deducted. Huh??? This is more typical thank you think …
This is an important point … most people assume that since the Planner “does this for a living”, they will handle your investments better than you could yourself. That at least before their fees they’ll outperform the general market, but 9 times out of 10 … the Planner has literally under performed before fees.
When interviewing a new Planner, it’s a good idea to ask for historical returns AFTER fees are factored in. Then you compare them to a buy and hold approach (which I will show you how to do later). Most planners that handle investments will try to avoid showing these numbers, in fact … I have yet to find one that does!!
Financial Planners Are Not Licensed
VERY IMPORTANT TO NOTE … Financial Planners are NOT licensed or regulated by any government agency! In fact, my 14 year old can decide today that he wants to be a Financial Planner and hang a sign over the door and be giving people financial advise today, it’s actually kind of scary. This why most planners are dishing out bad advice and costing more money than they are worth.
My first experience with a Financial Planner in my mid 20’s resulted in the person taking my investments and moving them to loaded mutual funds that paid the Planner 6% in fees the day the account was opened. So, on day one I lost 6% of my net worth! Check out my story in the video below …
What’s worse … when I spent a little time AFTER the fact researching the investments he put me in, they were mediocre at best! This should be criminal in my opinion … and the sad thing is that most Planners do similar things … not thinking of their clients’ best interest, but rather their own pocket book.
Do Advisors Need Certifications?
Now with this said, there are “certification” programs that people can take to have a higher financial planner distinction. CFP stands for “certified financial planner” and although again, there is no governmental agency regulating the industry, they have at least passed a few hardy exams that require a fair amount of studying. But it is important to note, this is NOT like a physician where it takes years of schooling in order to achieve the three letter distinction.
There are CPA’s that also call themselves Planners. And although they are much closer to a planner, since they have an incredible financial background, they too may not truly be qualified. The same can be said for lawyers.
Many top notch planners will be Registered Investment Advisors (regulated by the State Securities Commission). These are the only planners that are truly regulated and audited on a regular basis. Registered Investment Advisors have a legal fiduciary responsibility to their clients.
The important thing to note here is that just because someone calls himself a Financial Planner doesn’t mean that they will put you in prudent financial products for your particular situation.
More important than designations is history and comfort level. Trust referrals over the person’s Bio and trust your instincts when interviewing them for the first time. And of course, try before you buy as much as possible. Which in this case means, start with a small portion and let them prove themselves to you first before you trust them with your whole nest egg.
With all the above stated, I want to say there are some amazing Planners out there that earn every penny that charge. I work with hundreds of them every day. But … there are an equal (if not more) number of boneheads that quite simply should not be doing this for a living.
Most aren’t bad people and specifically are not trying to be bad. But, they just are putting in a minimal effort and it shows. These advisor are doing their clients and the entire industry a disservice. I am hopeful through education we can change the status quo and force these ‘bad apples’ to step up and perform for their clients.
Fee Structures: Aligning Incentives with Your Goals
Understand the fee structures offered by financial advisors. Fiduciary financial advisors, including RIAs, often charge a fee based on a percentage of assets under management (AUM) or a flat fee for their services.
Very few charge a performance fee which aligns your interest with the advisor even further. This transparent fee structure aligns the advisor’s incentives with your long-term financial goals. Check out our video and blog on fees and the differences between them.
Coming Up …
In my next post, I will talk about why most people hire a planner and whether you actually need one or can you do it yourself?
And whether you need a Financial Advisor, or not … I will share with you an amazing way to have the best of both worlds. Imagine getting the expertise of a planner without paying $3.6 Million I mention above??
We will also discuss the best ways to “interview” a potential Financial Planner. The goal should be to make certain you are getting what you are paying for.
Want to Learn More?
Check out our comprehensive guide, How to Trust Your Financial Advisor: Fiduciary & Prioritizing Your Interests
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