Saturday, February 16, 2013

Do you need a Financial Advisor / Financial Planner?

People assume that at a certain wealth level they need a financial planner, and although having one can be quite a benefit, many people have them for the wrong reason which ultimately costs them hundreds of thousands + over years of time.  In fact … if you had $1 million invested earning just 5% a year, managed by a Financial Planner charging you just 1%, you would have paid him/her almost $1 million in fees … if you earned 10% a year … his fees would have taken over $3.6 million out of your pocket!  Most planners charge more than 1%, so the numbers would obviously be proportionately higher … I even have a client that pays 5% a year … say whattttt??

Is your Planner worth $3.6 million of your hard earned money???  He might be … but before you decide you need a planner … weigh the costs to the benefits.  Think how much harder you will have to work into your retirement years to make up that missing $3.6 million.  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 pool cleaner or computer guy as a famous person just because of the status you feel??

As you probably figured … let me state that that I am not a Financial Advisor / Financial Planner, I am a Money Manager.  The difference between these two career types is substantial, which I will define a little later.

So … what is a Financial Planner … a DECENT planner is someone that is well versed on financial options for their clients, they generally ask a whole bunch of questions to find out information about you that helps them 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), current and future bills you have (college expenses for your children, retirement plans, etc). 

The process is supposed to 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 I have a big issue with.  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 hold.  

Study after study shows that 99% of Planners underperform the market year after year after year for their clients.  In fact, many of them underperform even before fees are removed, then removing fees and you are generally making very little.  I have a client that when we looked at his previous Advisor’s statements over the past two years, we realized that while the market made 9% … he earned 5% before fees and 1% (2% a year) after fees were removed.  Huh???  This is typical …

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’d outperform the general market, but 9 times out of 10 … the Planner has literally underperformed before fees.  This is why when interviewing a new Planner that handles investments, I encourage you to ask for historical returns AFTER fees are factored in, and 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!!

I always say … you can be really good at one thing in life, not two … and a Planner that also handles Investments is stretching himself too thin in my opinion.  That is where Money Managers come into the picture … good financial planners know that there isn’t enough time in the day to be great at both, and so they hire Money Managers to actually “manage” the investments, while the Planner focuses on the Client needs.  This is really the best arrangement (most profitable for the client), hire the planner for his “planning” expertise, and then hire a Money Manager to implement the ‘plan’.  By hiring a money manager that understands the inner workings of the market, your returns are almost always market beating … since that is their focus.  We work with many Financial Planners that realize their limitations and have us handle their client’s day to day investment process.  The two work well together, but having one person do both almost always results in a costly unimpressive return that over years dramatically impacts your bottom line.

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 … which is also 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!  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.

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. 

Some CPA’s 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).

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 … if you are going to have them manage your day to day investments … give them 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) of boneheads that quite simply should not be doing this for a living.  Most aren’t bad people and specifically trying to be bad, they just are putting in a minimal effort and it shows.  They are doing their clients and the entire industry a disservice … and I hope through education we can change the status quo and force these ‘bad apples’ to step up and perform for their clients. 

In my next post, I will talk about why most people hire a planner and do you actually need one or can you do it yourself?

And whether you do, or don’t need one … I want to tell 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??
I will also share ways to “interview” a potential Financial Planner to make certain you are getting what you are paying for.

I would LOVE to hear from you on this topic ... feel free to add a comment or question below ...

Similar questions this post answers:
what is a financial advisor?
what is a financial adviser?
what is a financial advisor in Denver, CO?
Difference between a financial advisor and investment advisor?
Difference between a financial adviser and investment adviser in Highlands Ranch, Denver CO?
Do I need a Financial Planner?
Do I need an investment Advisor?
Do I need a Financial Advisor?
What is a CFP?
What's the difference between a Certified Financial Planner (CFP) and a Financial Planner?


  1. Great post. For starters like me, i am 22 who do you recommend CFP or investment advisor and why.

    1. Hi Rishi. thank you for your kind words. The issue is less about their certifications, but rather performing a proper due diligence that identifies how closely they 'manage' your account. What you want to avoid is paying someone to just "buy and hold" for you ... to put your money into a number of mutual funds or ETFs and not manage them.

      Sadly, most investment advisors/financial planners these days do just that ... and it is a disservice to their clients because they are not protecting your investment when the market declines (as it will). Corrections happen 2-3 times every single year and active management will protect your portfolio from large unnecessary losses. Imagine how much better off your portfolio would be if you avoided the next 20% decline!

      If you would like, shoot me an email and I will give you some suggestions that are specific to your circumstance.