If you’ve been reading ESI Money for more than 15 seconds you know that I am not a big fan of financial advisors.
This stems from a couple issues.
First, I’m a big believer in DIY finances. The concepts that will make you rich are not that hard to learn, so anyone can do it.
And there really aren’t that many things you need to master to become wealthy, so it doesn’t take a lot of time. In fact, if you just read five books and apply what they say you’ll be ahead of at least 90% of the population.
In other words, there’s no reason you can’t be your own money manager and be quite good at it.
Second, many (most?) financial advisors aren’t really money experts, they are SALES experts.
They know less about money than most people reading this post but they are awesome at selling — and turning your money into their money (or at least they get a portion of it).
If you want more thoughts on financial advisors you can check out my Not Experts category. In particular, these posts cover my main points:
- Not Experts: Financial Advisors
- More Evidence that Financial Advisors and TV Personalities are Not Experts
Consider this post an addition to these two.
A Financial Advisor is Born
I was at the gym a month ago in the locker room before a workout.
I was getting dressed amid the hustle and bustle of everyone having to rush to work (#LoveBeingRetired) when I heard two guys chatting in the set of lockers next to mine.
It was all pretty innocuous stuff (kids, family, etc.) and I wasn’t paying much attention to them until one guy said, “Hey, how’s the work situation going?”
The other guy responded, “Oh, I forgot to tell you. I quit. It was just too stressful. I’ve actually entered an entirely new field. I’m a financial advisor.”
I was immediately very interested in this conversation.
Lucky for me, the first guy bit on the information and said, “Really? I didn’t know you had a background in finance.”
I could have almost predicted the response. The second guy said, “I don’t. You don’t really need to know much about money going in. The company teaches you all you need to know.”
Uh huh. I bet they teach you “all you need to know.”
But then it got better. He said, “It’s really a sales job more than anything.”
Really? You don’t say…
He then added, “Really selling insurance is what I’m doing. They call me a financial advisor because it sounds better but I’m really mostly an insurance salesman. I don’t think I’ll stick with it long but for now it’s better than the last job.”
After that the conversation went into another direction and I walked upstairs to work out. I guess I shouldn’t be surprised at stuff like this after all these years but it’s still almost impossible to believe every time I hear it.
By the way, the conversation above is paraphrased. I did not whip out my phone and begin recording them. But the words are close and the meanings are what was communicated.
The Highlight Reel
Let’s break down the highlights of this short conversation which show just how bad some “financial advisors” are these days:
- “I didn’t know you had a background in finance.”…”I don’t.” — One of the major points I make here regularly. Many financial advisors know very little about actually managing money. So what are they actually advising on? More on that in a minute.
- “The company teaches you all you need to know.” — Of course they do. I’d love to know how much time they devote to teaching about money and how much time they devote to teaching sales techniques. My bet is that the latter gets way more time.
- “It’s really a sales job more than anything.” — Truer words were never spoken. Of course, if they are offering value then why not pay them a fee? But the data seems to suggest that for people with even basic money knowledge and self-control, financial advisors are not worth the fees they charge.
- “Really selling insurance is what I’m doing.” — Uh! Selling insurance! This is one notch up from selling used cars IMO. Yes, there are good insurance agents out there, of course. But many are the “Slick Willy” sort that make most of us want to lose our lunch.
- “They call me a financial advisor because it sounds better.” — Marketing is at the heart of the financial services industry. I was a marketing executive for 28 years and I can see what they are doing. It’s smart marketing. Who would you be more likely to buy from, a “financial advisor” or an “insurance salesman”?
- “I don’t think I’ll stick with it long.” — Two things you want when you do buy financial products or services is 1) a person who both has lots of knowledge and experience and 2) someone who will also be around for a while (in case you need the insurance, in this case.) But this guy was going to pop in, sell people some insurance, and be long gone if and when they needed him. Sure, the company would take over administering the policy, but I think most people would want to talk to their agent it they needed help.
All I can say is “Ugh”.
It’s Another Brick in the Wall
Not sure we can learn much new from this conversation but it does reinforce a lot of what we already know including:
- Many financial advisors know little about managing money. In fact, if you’re a regular reader of this blog, you probably know more than they do.
- Many financial advisors are really just salesmen. They want to sell you financial products and services. That’s it. If you’re better off as a result, I’m sure they’re happy with that. But if you’re not better off, they can probably live with that too.
- Many financial advisors are in and out of the profession. Their last job wasn’t going well (like the guy in Not Experts: Financial Advisors https://esimoney.com/not-experts-financial-advisors/) so they decided to get into “financial planning”, not because they were knowledgeable at it, not because they loved the topic, not because they wanted to help people, but because they needed a job. That’s it. And when the job stops being better than other options they are off to the next thing.
Anyway, I just had to share this with you — it was too good to let pass by.
Any thoughts on what I overheard or financial advisors in general?
I once had a Mortgage Adviser come around when I was moving home and rather than advise he ended up having to be educated on the Mortgage that I wanted. He had never heard of a ‘Smart’ Mortgage before. They are pretty common now but back in 1999 they weren’t.
They are pretty common? I have had dozens of mortgages over the past 10 years. I have never heard of a smart mortgage either. If I google it all I can find is a company called smartmortgage.com, but I don’t think you are talking about a specific mortgage company.
So please share with us what a ‘Smart’ Mortgage is. Apparently mine are all dumb. 馃檪
I remember meeting with a “financial advisor” when I first started working. He was only a few years older than me and I was skeptical of his “advisor” ability. The pitch boiled down to “invest in our funds, with absurd expense ratios, and buy our insurance.”
There are good planners and advisors out there. I don’t know if the DIY route is for everyone but do not go with one of those “advisors.”
I’d be willing to manage your massive fortune with only a slightly absurd expense ratio. 馃槈
Ironic timing. I just posted The 10 Commandments Of Early Retirement this morning. Commandment VII – Manage Your Own Money.
Amazing minds, my friend. Thanks for the validation!
All your words are true. Most are not experts and you can do it yourself. My concern is that once you get older you start to lose your ability to make great financial decisions. This has been shown to be true in studies. It would be advantageous to get advice from a true professional as you advance in age to protect yourself from yourself if you can find one. I am in my fifties and do it all myself. But I have seen multiple people make catastrophic mistakes in their seventies after working and saving their whole life.
I’m in the same situation – fifties and DIY. The sad thing is that many elderly people don’t realize their judgement is impaired.
My plan is to use my sons – both are financially savvy – to help me as Mrs. Freaky Frugal and I as we age.
I will say there was a time when I wanted to do a side hustle as a financial advisor. I wanted to help people and unlike the two you overheard I at least have the training to do so. Ultimately I decided my job took up too much time to do so (this was a decade ago), but I’d imagine there are plenty of financial advisors out there who are doing it to help people as well. In every profession there are bad apples. If you require an advisor, and there are some that do, make sure you do your diligence on them. Heaven forbid if I go senile in my 80s I might even require their services myself some day.
Ouch…well at least the guy was honest with his friend. I think you have one of the most complete lists of real world examples of why financial experts are not experts!
Piling on: I used to work retail and a regular customer was an assembly line worker at a rubber company. It was a terrible job and he hated it. One evening he came in dressed in a suit (I hardly recognized him.) and told me he’d just come from a seminar on how to be a financial advisor. He was all excited about his new career and informed me that “I would put you in mutual funds.”
I asked how he could make that call when he knew absolutely nothing about me or my financial situation.
He wasn’t fazed. He had a spiel and was sticking to it.
Don’t trust these people.
P.S. He was still working at the rubber company when I left that job.
One big ‘red flag’ in that conversation is “…I forgot to tell you. I quit. It was just too stressful.”
This is a guy who is working out at the gym in the daytime, instead of working his job. He is a guy who quits a job without having another job to go to. And stress makes him quit. I wonder how he will react the first time there is a market correction? My guess is that he will fold like a Chinese laundry!
It is good to see financial advisors face new levels of transparency (Canadian reality). To a lesser degree they will get away with their MER robbery, where little to no value is provided. In the end, most lack a fiduciary responsibility; of course educated self management solves this!
I have heard this conversation before. My friend’s son graduated from college a few years ago and asked me what I thought about becoming a financial advisor for New York Life. I asked him if he wanted to be a salesman. He said no. I said consider a different job. He ended up using his Economics degree to become a business analyst.
In any field there will be “many” people in the field that are not great at what they do. But there are plenty of people that are very good at their jobs. I would say this holds true for financial advisors. I have done it myself for many years and still do but I know a lot of financial advisors that do right by their clients and don’t just sell or try to make a buck. They are very knowledgeable about the market and don’t sell products that are not in the best interest of the client. I enjoy speaking with them and picking their brains on topics. Just thought I would add a comment for the good ones.
I think that’s a valid point. There are good financial advisors out there.
That said, there are a few problems this profession does have in that regard:
1. The good ones seem hard to find. The tried-and-true method of finding one by asking a friend who he recommends doesn’t work as your friend is just as likely to hire a bozo as not and may not even know it.
2. The good to bad ratio seems low. I don’t know how many good ones and bad ones there are, but it seems the bad ones are all over the place and the good ones seem to be in hiding.
3. Many of the people in this profession know very little about managing money (like the guy in this story). And yet they advise people on what to do with their money. I’d put these people in the “bad” camp.
4. Many of the people in this profession are simply sales people. As sales people, they are paid to sell, not really advise on money issues. I’d put these people in the bad camp too.
So yes, there are good financial advisors out there but the odds seem stacked against them. And they are stacked against anyone who is trying to find one.
My best suggestion is to learn about money management yourself. That way you are knowledgeable on the subject and thus much more likely to find a good planner (who you’d interview in advance, of course) than end up with a bozo.
I don’t talk to anyone that hasn’t been around since before 1999. Anyone in the last 8 years hasn’t gone through a bear market. There is a guy at Northwestern Mutual that really really wants me to buy an annuity. I keep saying no thanks.
That’s a good point. Many advisors are in their early 30’s or younger and have a lot to learn IMO. Time and experience is a great teacher.
My wife can have a 403b which has to be through and financial adviser. It was mostly money that she was not using for benefits when our kids were young and she was on my health insurance. Not knowing what she had set up I just let it go. When the amount was getting large I decided to educate myself on the 403b and could not believe the fees associated to them. We stopped our $50 a pay contribution and started maxing out her Roth instead. I can’t roll over the money until she retires where I will consolidate it to her Vanguard account. I need to be nice in that the financial adviser was a parent of hers and I don’t trust him one bit as he reminds me of a used car salesman. Funny thing is that many a teachers trust a financial adviser because they don’t want to deal with this money stuff.
I love the blog (despite being a financial advisor)… and I agree completely – about 90% of financial advisors aren’t advisors at all – they’re sales people paid a commission to sell a product… one that they typically don’t understand at all. They don’t understand money or finances, their own financial houses are in total disarray, and they are the last people who should be giving financial advice. However, there are about 10% of us that know what we’re doing (or flat out tell clients when it’s a subject or area of finance that we don’t know) and get paid for advice, not sales. I actually hate telling people that I’m a financial advisor because they immediately say something along the lines of “oh, you’re like my Northwestern guy” or “so you’re like Joe over at Morgan Stanley or Merrill Lynch”… no, no, no.
I do believe true financial advisors can provide real value, but you have to do your due diligence and ask your advisor a lot of questions… 1) do they serve as a fiduciary? 2) are they paid commissions or receive compensation for recommending specific products, 3) do they invest their own money in said product/service, 4) what specific background or knowledge makes them qualified to manage your money or provide you financial advice… don’t be shy to ask the hard questions. The advisor’s responses will immediately tell you what type they are – a true advisor or an “advisor” who sells. Or just look at their website – if they have FINRA or Broker Check on there, they’re a salesperson and legally do not have to put your interests first.
Keep up the great work ESI!
The fact that we can’t pass a law (see DOL again-delayed fiduciary rule) that would require advisors working with retirement assets to serve as a fiduciary and do what’s in the best interest of their clients, just shows you where all the lobbying dollars are coming from (insurance companies and broker/dealers). They talk out of one side of their mouths while spending millions of dollars to lobby against what their verbally supporting.
And if you ever want a guest post or interview with an advisor (an inside look so to speak), let me know. It really is ridiculous how our financial services industry is structured.
I stay miles way from anyone I can even sniff to be a financial “advisor”. They all should come with a warning label pinned to their suits, similar to the cigarette warning. I can suggest the text for the warning label, if the government wishes to consider this idea!
I changed careers (14 years) from the insurance business/financial services business to becoming a self employed Realtor over 20 years ago. I was burned out from the constant pressure to sell life insurance.
Ask your advisor these questions:
1. How long have you been in the business?
2. How much ADVANCED training/education do you have, and how much of it is industry accredited (CFP, ChFC, CLU, etc.).
3. Would you be willing to share your net worth and personal investment history with me.
More likely than not, the advisor will never call you again.
BTW, the real estate business is the same. Heavy on sales training, light on property knowledge, unless you go for advanced and accredited training (GRI, CRS). The office that I first worked with was filled with stay at home parents and semi-retirees working part time. People were allowed to stay that only sold a couple of houses a year (which does not give you enough on the job experience that you need to advise clients). I left after 6 months and joined a firm with a terrific mentoring program.
“Would you be willing to share your net worth and personal investment history with me?”
LOVE this question!!!
It’s one I’ve recommended as well and you’re right, it certainly separates out the pretenders.
FAs can provide advice/guidence for a fee. They don’t have to manage your portfolio. I would rather pay someone for the investment strategy than to pay 1% for them to do basically the same thing I can do. I get that many don’t want to be bothered with the details, but many of like it. Doctors and lawyers are the worst about managing their own money. I worked at a law firm in Treasury and we had a NY lawyer always wanting an advance. I think I heard his apartment in NY was about $10K a month and his draw without bonus or end of year draw was like $30K a month. WTF are you doing with the other $20K? Those lawyers made some insane amount of money, but I think most worked 80-100 hours a week. At least I like to think so. They did suck at collecting the money owed to the firm.
Back in 2009 my wife and I went to see a lawyer for estate planning. This is her specialty and I can tell that she knows what she’s talking about. The fee was about $900. We decided on an estate plan as our kids were very young back then and we were doing quite a few traveling. Anyway, long story short, she referred us to a financial advisor in which we found out during our meeting that he’s also a Fund Manager. He talked to us about fees and how he will handle our account. The minimum amount that he will accept to manage was $300k at that time. During the meeting, we told him that we will definitely consider investing and that we will go over our finances and let him know. Called him up two days later and left a message to his admin about our intention to invest and to set up another meeting. They never called us back and we never heard from him again. Being an investor with accounting knowledge I decided to take charge and manage that part of our finances. That decision was well worth it. If you are willing to learn and if your spouse can help, I’d say keep the fees to yourselves.
Here is another example that proves they are sales people – I just moved my sister away from her “financial advisor” as I couldn’t, in good faith, have her stay with this advisor. Her advisor basically had her in all, not some, SEI mutual fund investments exclusively; a variable annuity; and they charged a 1.4% annual fee for assets under management. I don’t know how any so called “advisor” can charge a 1.4% fee for the pleasure of investing in only one fund company who’s funds, based on my assessment, are mostly mediocre, at best, and include high expense ratios. The “advisor” also had all of my sister’s investments peanut butter spread across a traditional IRA, Roth IRA and taxable account. No management of putting the most tax inefficient assets in the IRAs and most tax efficient in the taxable account – they just mostly bought the same funds in 3 different accounts. My sister’s assets totaled approx. $200K and were spread across 30 different line items (sometimes the same SEI fund was in her IRA and taxable account, for example). IMO – this is ridiculous as no one should have 30 different line items for a portfolio of $200K. It is as if the “advisors” want to make it look more complicated by having so many line items of fund investments. I also think they don’t want to show favorites to any specific mutual fund so they put their client’s assets into as many funds as possible.
Wow. That is brutal.
I’ve worked with over 10 financial advisors and interviewed 30+ over the course of my career (many I met during all the account transfers and consolidations from the dot com burst and financial crisis). I’ve never gotten the best advice from a single one, and have met ones who had no financial knowledge while employed at the big-name investment banks. Even knowing that it is almost impossible to find a good advisor, I still found and used one from 2014 – 2017, mainly because I wanted someone who could ease the transition for my family if I kicked the bucket. I just fired him early this year because he was useless.
He had 25+ years of experience and catered mostly to Silicon Valley HNWIs. I handed over about 10% of my assets to manage as a trial.
He was conservative, kept 20+% in cash for the 2 1/2 years I had money with him, waiting for the right conditions to put the money to work, yet collected fees on the full account value. Those conditions never materialized. FAULT: This is just market timing. And collecting fees on cash sucks, but I think all advisors and managers do.
He invested in about 10-15 mutual funds and ETFs. FAULT: The mutual fund fees had about 0.5%-1.0% expense ratio, on top of his flat fee. A few of the funds were so complicated I didn’t even know what the fund’s goal was. Those were also the ones with the highest fees.
He picked a few individual stocks in casino gaming and energy while they were falling. FAULT: The picks worked out great, although they fell another 50% before tripling, but I know he knows nothing about individual stock-picking.
He tried to advise me on a concentrated position in my portfolio, saying he attended a workshop that analyzed this particular stock for a full day, and that he knew people in upper management of the company. He said the company product line was a “one-trick pony”, and the stock would shortly collapse after running up 2x+ in a few short months. He was sure due to the technical analysis he had seen and all the other fundamentals information he had at his disposal. He wanted to set up collared protection on the position at first (would have missed out on most of the gains), and then pushed me hard many times to diversify out of the position as it was running up (to gain more assets to manage?), etc. Well the stock ran up 12x from its original price in less than 2 years.
FAULT: He knew nothing about technology but was trying to offer advice on a technology company. Technical analysis means nothing if the company is breaking out into new, huge markets and winning big business. The insiders he knew must have been clueless. The fundamentals he had were based on historical data while technology is all about the future. Throughout our discussions over the 2 years, he was so sure his bearishness was right when he was staring right at what would turn out to be a 12-bagger.
Most advisors are sales people, nothing more.
When I fired him the account was up 2% while the S&P 500 was up 20-30% in the same time frame? But this fact is kind of meaningless to me since I didn’t invest with him through an entire market cycle. He would have done a lot better if we had a bear market in those 2+ yrs.
I could write a whole book about all the advisors I and other family members have met or used over the years. The fact that I’m still going it alone is the conclusion of that story. Maybe the advisors get better at the $200 million dollar account level? 馃槈
I know exactly how you feel…
I was visiting the local branch of my bank the other day, and I asked them for their fees on investing through their platform. I told them what type of investments I was considering, but that I would do it myself rather than them doing it and charging me for it. When I got home, I found that the representative had charged me roughly $40 for financial advice. A rather intense phone call later, the fee was luckily cancelled, but wow, I was disappointed..
They really are just salesmen.
Holy cow! That is unbelievable!
Love the commentary and analysis . . . I’ve been skimming through their trade rags (Financial Planning, Financial Advisor, Investment Advisor) for years, and have enjoyed less than a fraction of the content, which is, unsurprisingly, intensely self-referential and morally numb, despite selling and talking up a good game, so they can . . . enthusiastically screw others as the markets evolve! They make their own news, basically, and it sucks. Great disappointment; I’ve been hoping to become one, yes, but between their rabid enthusiasm for ETF fees, teaching the controversy in regard to the DOL/SEC fiduciary bid, or its language, plus the CFP scandal; generally all, far more deplorable than advertised. And yet, they still look pretty good in suits! Recently they’ve adopted a more congenial, women-friendly, identity considerate approach, which I take for territorial expansion, just new suits for the wolf pack. Nevertheless, casting all aspersions aside, I still hope to enter the industry, a growth industry (thanks boomers!), maybe Eventually, I hope to take an alternate route through The American College . . . fee-only, 100% fiduciary whether they like it or not. Teach a man, woman, or person to fish . . . tons of Americans still need credible help and feel helpless and weak, very short on confidence regarding these issues, forever fascinating to me. And I’ve been through the fire i.e. several recessions, including the mother of most. The trick for me would be becoming a better listener than storyteller, and actually helpful, no matter the situation. Lot of work to do there, then a credible business plan and LLC setup perhaps, though I’m not really sure I could honestly market enough business to survive the first two years of ‘coverage’, flying solo. Not so jazzed on Schwab anymore, or any other firm. Long story short, better keep my day job! Good luck out there.
Absolutely hate the pay-to-play, CFP or bust approach . . . to hell with them. Corrupt gatekeepers at best, but they are pretty strong i.e. talk a better game than they play. Makes me sick. Till then, if ever, this is my homework: every article at ESI. Every article at MMM. A dozen or more books. Also, keep skimming the trade rags; basically know your enemy, keep an eye on the industry as it stands. The degree is for, yes, the veneer of credibility. We all need it. The proof is still in the pudding; the ambition, be part of that 10%, if not one in a million. Authenticity still sells; I’ll be working on that (lol).