— “Beware those free dinners”—
May 9, 2018 — One of several recent Member article suggestions was this one: “Is it better to hire a financial advisor or handle that financial planning yourself? And if you hire one, how should you go about it?” Thank you Lewis, that is a topic we know a lot of retired people struggle with.
We should preface this article by saying that we are not financial experts. This piece summarizes recent interviews with four baby boomers who have wrestled with this topic themselves, plus some of our own experiences with financial advisors. At the end you will find links to some other great resources about how to/whether to hire a financial professional to manage your money, vs. doing it yourself. We welcome suggestions on what you have learned on this topic.
Is financial planning Important?
Yes! The worst thing that can happen to you as a retiree is to run out of money. That can happen easily, if you don’t have much to start with, make poor investment decisions or spend your assets too quickly. Another bad outcome is the opposite – being too conservative and shorting your lifestyle unnecessarily. A third result from bad planning is to be untidy about what happens after your death. Will your surviving spouse be able to manage, particularly if you were the person in charge of the finances? Are your affairs arranged so you leave assets to your children without creating unnecessary problems?
A plethora of acronyms and certifications
There are a variety of levels for financial planners. Perhaps the most vigorous of those is the Certified Financial Planners (CFP) certification. In addition to taking strenuous classes, CFPs must also pass board exams and take refresher training. At the bottom of the rung, almost anyone can claim to be a financial/investor advisor or the like, without any particular qualifications. Investment advisors registered with the SEC or a state securities regulator are fiduciaries, subject to the duty of loyalty and due care with their clients. There have been attempts to soften rules for fiduciaries recently. Whatever the outcome of that effort, in our opinion you are better off with a fiduciary, because they are obligated to keep your interests above theirs.
Beware the free dinners!
One of the first comments we got in our conversations was this one from Lew: “Beware those free dinners”. What he meant was to be cautious about invitations to dinners or events from financial companies. On the plus side, these offers might be appealing, and you can usually learn a lot. But you might later regret opening up your financial life to them, along with the subsequent high pressure you might get down the road. Rather than having advisors find you, you might be better off doing your own research to find prospective advisors yourself.
On doing it yourself – don’t (some opinions)
Joseph, another interviewee, summed up the do-it-yourself option this way: “Most people shouldn’t manage their own money – they don’t have the discipline to do it properly”. If that seems like a harsh judgement, it does have some logic. He explained that the way many people invest is to hear about some great idea and buy without doing the due diligence. After they invest they tend to go on auto pilot. Even if they had an initial allocation plan, shifts in the market over time knock their portfolio off kilter, and they don’t adjust.
Big shocks in the market rattle people’s confidence and judgment – they tend to panic. Making emotional decisions can have drastic consequences. For example, we know a couple who reacted to the crash of 2008 by selling everything, losing half the value of their portfolio in the process. If they had been patient, they wouldn’t have lost anything.
He also made the point that most folks do not have the tools to manage their own money properly. They just do not have the financial literacy or experience. You can compare it to what happens if you design your own home: you might have a few good ideas but you lack the background to avoid big mistakes.
Finally, Joseph stressed that as we age everyone needs a backstop. We aren’t thinking as clearly as we did in our younger days. Someone whose judgement we trust should help keep watch over our financial assets.
Everyone in the panel agreed that no one should build a portfolio that consists mostly of individual stocks. That is far too risky, they say, and recommend buying index funds to spread out the risk from a drop in any one or group of stocks.
Doug, another of our panelists, has struggled to find an advisor he feels comfortable with. He once used a colleague who had started an advisory business, but his investment strategy seemed to get flakier and flakier. He is currently using the advisory services of Fidelity, which is helpful but somewhat generic. So for the moment, he is directing most of the assets himself, but feeling that might not be the best move.
What makes a good advisor, or a bad one
The easy answer is that a good advisor is the one who beats the market and makes you lots of money. But as famous investor Warren Buffett posits, it’s not that easy. In 2007 he put up a $1 million bet that a hedge fund couldn’t beat a low cast S & P 500 index fund. The index fund Buffett picked won, and the money went to charity. Buffett’s advice: “Consistently buy an S&P 500 low-cost index fund”.
Here are some qualities to look for in an advisor, according to our panel:
– Willing to take time to ask about your needs and preferences
– Explains their investment approach and strategies in detail, including past performance over different time spans
– Is recommended by sources you respect
– The investment strategies do not seem clear and focused, or they can’t explain them
– Reliance on picking stocks rather than indexes. Some advisors seem to have scattershot strategies. Beware of the increased risk and volatility from too much emphasis on individual stocks and investments classes like precious metals.
– Advisor is unwilling to explain their approach or past results
– Wants to immediately liquidate your assets and put them into products/funds either related to their company or that have loads. Such a plan could expose you to hefty capital gains and might be lining their own pockets.
– Fees that seem exorbitant, or that are not explained to your satisfaction.
How to find a good advisor
This might be the most difficult challenge. How do you find someone who is effective and trustworthy, out of the blue? Here were some suggestions from the panel:
– Be wary of a recommendation from a friend or relative. Be even more leery of hiring someone who is a friend or relative. Hiring someone close to you takes away objectivity and narrows your search field
– Lindsay suggested relying on recommendations from someone you trust and respect. Better yet, if you have seen the person or firm in action professionally, you have valuable insight into how they will perform for you.
– Ask your accountant for a recommendation. They will usually have better experience in evaluating an advisor than you.
– Get a clear explanation of the fees involved. There is a range of how fees are charge – fees or percentage of assets are typical. If it is a percentage of assets, the larger your portfolio the smaller the fee should be. Some people panic when they realize how much they might have to pay – for example 1.5% of $1 million is $15,000 annually. That might be worth it if they do a better job than you could, but not if the advisor does worse than the market.
– Probe about customer service. You are paying for a service and you should be able to get it fast and competently.
Where to start looking for possible advisors
One place many people start is with one of the big mutual fund companies. All of our panelists had extensive and very positive experiences with two of the biggest: Fidelity and Vanguard. They and stock brokers like Charles Schwab as well as insurance companies have great tools that can help you allocate and manage your portfolio. They also have advisors who will help you build your portfolio and rebalance it. The advice is fairly basic and cookie-cutter, but it is generally sound. Ultimately, if you use one of the big outfits, a lot of the responsibility falls to you to use the tools and keep on top of your portfolio.
Edward Jones was mentioned as another reputable outfit by Lindsay. The firm has branch offices all over the country but, according to Lindsay, has a centralized investment approach that avoids the scattershot approach offered by some smaller outfits.
Organizations for various certifications have services to help you find one of their members. Certified Financial Planners has one of those.
It is a personal decision whether to manage your own retirement assets or hire a professional advisor. There are advantages and drawbacks to both. The main point we want to stress is that you need to make that decision consciously. If you decide to manage your own money, make sure you have the experience, temperament, and discipline to stick with it month after month, year after year. If you hire a professional, make the hiring decision using a process, rather than signing up the first person that comes along. Even then, apply common sense to make sure that your advisor is doing an effective, disciplined job of protecting this important key to a happy retirement – having enough money to enjoy life.
Comments? What have you decided to do about managing your retirement assets? How did you find your advisor, if you have one? What have you learned that you might do over again? Please share your thoughts in the Comments section below.