A financial adviser should help manage your money properly and make you richer over time. The question I wonder is: Should your financial adviser be smarter and wealthier than you?
If someone can't count to 10 or still possesses a negative net worth after 20 years of work experience, it's probably not the best idea to listen to them for financial advice.
It's not useful to read home buying tips from someone who has never bought a property. Nor is receiving child raising tips from someone who's never been a parent helpful either.
Common sense wins again!
Should A Financial Adviser Be Smarter Than You?
But what if you went to Yale and are rocking a $20 million dollar net worth with decades of investing experience. Generational wealth is amazing!
You've got a portfolio of rental properties around the world and worked as an accountant, investment banker, and entrepreneur for 30 years. All you want to do is kick back, relax, and not worry about your money.
What can a 31-year-old, sub-$250,000 net worth financial adviser who majored in religion from Podunk U possibly teach or help you about managing money? Perhaps you should be giving him advice instead!
Most rational people look up to older people for advice on work, money, and love presumably because they have more experience and have made plenty of mistakes.
Getting Financial Advice From People With Experience Is Important
The easiest way to counteract, “I wish I knew then what I know now” is to listen to people who've been there. It's only the stubborn individual who thinks their way is always the right way. Meet any of those types before?
In an ideal situation, we're much better off going with a financial adviser who is smarter, more experienced, and wealthier than us to manage our money.
The problem with the ideal situation is that star financial advisers probably only spend time with their wealthiest clients, leaving their lackeys to advise the rest of us!
Always strive to understand the background of the financial adviser before taking them on please.
In this post I'd like to explore how we should think about using a less wealthy and less experienced financial adviser, if at all. I'll also suggest ways for financial advisers who lack the pedigree relative to their clients to better serve us.
A Great Financial Adviser Is More Than Just Smarts
Financial advisers are not investment gurus who've consistently beaten the markets for years. This misperception is probably what gets financial advisers and clients in trouble the most.
Clients with such thoughts immediately expect their financial advisers to start making them Warren Buffet type of money from the get go. This can't be farther from the truth.
Instead of being considered investing gurus, financial advisers should be considered professionals in financial planning to meet your financial goals. They should be able to understand all the tools and strategies available to you and recommend them accordingly. They will introduce you to experts in the fields of fixed income, equities, real estate, annuities, and estate planning to help address additional inquiries.
Think of a financial planner as a general contractor who knows a little about everything and will get the most qualified people as possible to build your dream home.
Your Personal Financial Butler
You should also treat your financial adviser as your personal financial butler. You are paying ~0.5% 1.5% of managed assets as an annual fee to make sure s/he gives you some recommendations, listens to your ideas, properly allocates your assets for retirement and takes orders.
The more responsive the financial adviser, the better. The last thing you want is your financial adviser to pawn you off to his secretary while he's playing golf!
A good financial adviser will sit down with you or have a conference call at least once a quarter to review your objectives and prior three month performance. You don't need a degree from Yale to care about your customers.
What you need is a financial planner who methodically cares for your every financial need and watches your asset allocation carefully so that your risks parameters are in line with your desired targets.
Three Red Flags About Financial Advisers
I've interviewed four financial advisers from four different firms for this post and all but one was impressive. The biggest red flag that comes up is when a financial adviser starts confidently making predictions about the stock market. If they were such experts in investing, they probably wouldn't be sitting there talking to you.
When a financial adviser is overconfident, they put your assets more at risk. The financial adviser should demonstrate humility and highlight his or her strengths and weaknesses. An important item to review is their track record.
The second major red flag is when the financial adviser can only discuss his or her firm's product offerings instead of the best product offerings on the market. This conduct shows that they are too lazy or too ignorant to spend the time finding what's best for you. A well versed financial adviser should understand a wide variety of products from various competing companies.
The final red flag is if your financial adviser is so busy trying to market himself as some guru that he's not spending enough time on you. It's understandable that in order to get clients you've got to market yourself. But if all the financial adviser is doing is spending all his time trying to craft an image online, I'd stay away.
Attributes Of The Best Financial Advisers
The most successful financial advisers are the ones who don't have to market themselves at all. Their performance speaks for itself and they get endless referrals. This concept is similar to the inverse relationship between those who like to reveal their income and their insecurity. People who have money don't need to tell everybody they have money.
As a personal finance blogger who worked in finance, I'm naturally very critical of financial advisers. If there's one hint of bullshit or a financial concept I don't think they fully understand, I walk away. But everybody's expectations are different.
You've got to also ask yourself the brutally honest question of what caliber of people go into which financial sub sector. For example, the average hedge fund analyst makes over $300,000. The average financial advisor makes under $100,000.
Service Trumps Brains When It Comes To Financial Planning
We automatically screen those who take care of our most precious assets. Whenever I go to a doctor I look to see where s/he went to school and whether the doctor is in good physical health. There's usually a diploma proudly hung in the patient waiting area, so I don't have to look for long.
The hope is there's a positive correlation between academic institution, the doctor's physical fitness, and the treatment and analysis received. The same type of screening goes for financial advisers who could literally make or break your retirement future.
It's also important to understand that financial advisers are also salespeople whose optimal goal is to make as much money from you as possible while enriching you in the process. The better the clients do, the more the financial adviser should earn over time due to rising management fees and increased referrals.
Fee-Only Financial Advisors
You should probably look for an adviser who charges per visit or per assets managed with zero add on fees.
If you just can't find that superstar financial adviser who is smarter and wealthier than you, then insist on finding the most service oriented financial adviser possible. And if you can't afford or find the most service oriented financial adviser possible, follow financial blogs whose authors have the experience and intellectual curiosity to guide you towards a better financial future.
There's no point hiring someone if you don't think they have the professionalism and the financial acumen to help you achieve your financial goals.
If you are a financial adviser with a low net worth and mediocre educational achievement, the only way for you to make up for your deficiencies is to HUSTLE. Be the most responsive, forward thinking, thoughtful financial planner you can be.
Related Posts:
Questions To Ask And Think About Before Hiring A Financial Adviser
Should I Use A Wealth Management Company?
Manage Your Wealth Prudently
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Should Your Financial Adviser Be Smarter And Richer Than You is a FS original post.
I don’t know if my comment will be read 4 years later but anyway, met a guy through a very trusted friend. Said he can have a 15% return for my 500k. His job isn’t financial advisement at all but, here’s the kicker, he’s connected if you read between the lines hence how he can pull off 15%. As someone with your wealth knowing the business, what’s your thought.
Thanks a lot!
Sorry, I’m not able to read between the lines. How can anyone promise a 15% return? Sounds shady.
Insider trading. It does sound shady but the entire conversation was also about how I should challenge my current wealth manager to make me more money. And, tbh, my friend wouldn’t put me in a situation where I would get robbed. That’s the thing that messes up with my head.
[…] who advise on various investments, but who can’t invest in the same investments themselves? Should your financial advisor be wealthier and smarter than you? I think so, but that’s oftentimes not the case. Is the SEC saying that the financial advisor […]
Sam,
One of the best write ups on Financial Advisors I have ever seen! I am happy that the firm I work for doesn’t raise any of your red flags!
This is a tough call. If the advisor is older than me, then yes, he better be wealthier than me. When I worked for a financial planning firm that catered to high net worth investors, it was refreshing to see the advisors driving Honda’s and Subaru’s. They weren’t caught up in appearances.
If the advisor is my age or younger, then they get a pass, but like you said, they have to be able to show me that they are capable of the job with their hustle and thinking outside the box.
So perhaps older and poorer is not a good combo!
Research has shown that individuals aren’t all that great at making rational decisions with their money. Plus the investment world is a pretty complicated and intimidating place. That’s why we need to be able to rely on trustworthy financial advisers. But as economists Sendhil Mullainathan , Markus Noeth , and Antoinette Schoar show in a working paper released this month by the National Bureau of Economic Research, financial advisers are often more likely to give advice that will lead to higher fees for them than higher returns for their customers. These economists sent hundreds of fake clients to financial advisery firms, banks, and brokerages around the Boston area and found that in many cases those advisers actually steered their clients away from more productive investments to less productive ones that produced more fees.
Good advice! I have that problem of not having a high enough net worth for some financial planners to be bothered with me.
Sam, what’s your opinion on financial planners/advisors that work for companies such as Fidelity?
I think they are fine. My IRA is w/ Fidelity and I trade e-mails with her a couple times a year. But I view her as a conduit to get me financial information for me to analyze. She’ll also provide access to experts to talk to or let me know about the latest investment seminars. It’s a service business at the end of the day.
always viewed financial planners as sales people! Perhaps more educated, but still a sales person. I rather do my own research because I can only blame myself for the mistakes. Over the years, I have do fairly well, but I will ever know if I could have done better or not.
Great post Sam. I think the main reason so many financial advisers are successful even though they are not really qualified as far as experience goes is because people don’t understand their finances and are happy to place it in the hands of someone else. If something goes wrong at least you have someone to blame right?
I prefer to be my own financial adviser. With the amazing amount of information on the Net you can learn what you need to know and plan accordingly (and save a good amount of money in the process).
Smarter, yes. At the least they should offer some specific experience that will provide you with guidance you can’t provide to yourself. Wealthier? In an ideal world perhaps, but I don’t think that’s quite necessary.
I’m going it alone at this point, but we’ll see if that changes in the future. The few that I’ve talked to have been very sales-oriented, and that’s not appealing.
Interesting post…I’ve been guy shy about hiring a financial advisor for much of the reason you list here. But now that I have ample assets and a nice chunk of cash to work with, I’m trying to figure out the best direction to take.
You only have to compare the financial advisor/asset manager stocks to their funds to see who really wins. T Rowe Price, Eaton Vance, and Ameriprise would have been better investments than their funds/recommended funds.
Financial planners make way more sense when you get into estate planning, IMO. Before that, Google-Fu gets you further.
I’m just your Average Jill, and to be honest, describing myself as “average” is likely an exaggeration if I were to compare myself to FS’s other readers. I’ve disclosed to Sam via email that I retired two years ago at the age of 45. Although I consider myself very lucky to have left the workforce, I’m still in the throes of trying to adjust to retirement life. It’s been tough thus far. (Is that a violin I hear?)
Unlike most “young” retirees–I am forced to use quotations because I am ancient compared to Sam–I have very little education. I have a high school diploma, some college units under my belt, and a decent amount of education relating to my past profession. I am, however, a finance nerd, and always have been. I love everything about the subject, but in the 24 years that I have been actively saving/investing, I have never sought the assistance of an advisor. I guess I’d be classified as a Financial DIYer. I’m now at a place where I believe an advisor could really help me sort out what assets I already have and hopefully make a plan for continued success. Internally though, I struggle with the thought of meeting with an expert. I am not educated in finance, so all of the fancy terms an advisor could potentially use will definitely go in one ear and out the other. (Even financial blogs are often way out of my league, but I keep reading them and trying my best to expand my knowledge.) Also, an advisor could easily impress me, and I’m not embarrassed to admit that, because I will be the one walking in the door already feeling inferior in the world of finance. I don’t like the word “ignorant” as used in other comments, but maybe I am. I’ll have to think about that one a bit more over a glass of wine, or three. ; )
Given my financial situation, which is anything but average, combined with my insecurity, I would want an advisor who understands me and who will take the time to use terms that I will comprehend. I would also want someone who “walks the walk.” Do they have to be rich? No. But should they care about their personal finances and have a plan in place for themselves? Absolutely. As a quick example, my tennis instructor is a great tennis player. Your personal fitness trainer should be in great shape. And I could go on and on. Formal education is important, but on-the-job knowledge/experience will be what really impresses me. Am I asking for too much? Are my expectations unreasonable?
45 isn’t old at all! The irony is, you’re going to a financial adviser as an early retiree, while the financial adviser still has to work.
Having someone map out a plan for you to rest easier for the next decade or five is a good feeling. I think you’ll get a lot out of it as an early retiree.
In planning for retirement, I think that an Advisor can be useful for ideas and suggestions, paying him/her a one time hourly fee. In fact, talking with two or three could be helpful for their input. But…I like making my own final decisions selecting my own funds and outcomes. Even The Target Funds by Vanguard, which are balanced each year, provide a good investment program over 30 years. The stock market is just one source of a necessary diversification program. As a retired college teacher, most of my colleagues who made big money did it by buying one house at a time, in addition to their own residence.
Can’t argue with the steady eddyness of real estate over the long term. Much easier to stomach than putting huge money in the stock market at least for me.
Sam, as to your question regarding should they be wealthier than you? I’d have to say not necessarily. If they have a decent net worth, then absolutely they should.
But if you think about it, that’s what you do. Suggest people save a very large portion of their after-tax monies, along with fully funding a 401k. That is perhaps the largest problem for most is not understanding why they should save when they want to spend now … Present company included until I finally started turning that leaf several years back.
Great list of red flags. We don’t have a financial advisor. I just don’t trust them. I guess I really need to come up with a list of interview question and do a thorough search.
For standard financial planning, I feel like I’ve got it covered. They’d have to add a lot of value for me to pay 1% on top.
My thought on why, in this day and age of available free-and-current PF information, there are still a great many people willfully ignorant who turn over their portfolios to “Financial Advisors”, is that these people are seeking to avoid responsibility. I say that as one who actively avoided this responsibility, eventually took it on, and then got my @$$ handed to me!:-)
Same reason so many look to ‘the government’ or ‘the legal system’ or ‘the church’ or ‘the SEC’, etc. Readership of FS, and other Yakezie blogs are self-selecting and understand more than 99% of the rest of the world regarding personal finance. But the concepts do not come naturally for most, and they would rather switch on ‘The Voice’, crack a beer, or wring their hands instead of taking that responsibility.
Here’s an old showbiz joke, to illustrate…
A white horse and black horse had a double act, grew a following over the years, through radio, TV, and arena performances, and as happens with comedy teams, split up. The white horse had to start over, open mics, opening act spots, secondary markets, years of repeating the brutal journey. Finally, he was headlining a Saturday night show at Madison Square Garden, and felt a satisfaction and redemption. Before the show, the white horse took a stroll around NYC, and came across a carriage cab in Central Park. It looked like his old partner, the black horse, was pulling it, but the black horse was swaybacked, cracked teeth, appeared 30 years older. The white horse greeted the black horse, and they had a short cordial chat before the black horse had to get back to work. The white horse couldn’t help himself, and asked “after being the top act in the country with you, all the money and fame and fillies, I never thought I would see you reduced to pulling a carriage! How did it happen?!?!!” The black horse shook has mane regretfully, and replied, “Man…my f****n’ agent…”
So long as the agent is getting rich, at least 1 or 2 out of the 3 or OK! :)
Funny you should mention financial planners. I have an appointment with mine tomorrow. My planner came well recommended by a family friend. I have been with him for about two and a half years. He works for a three letter firm. When I first met with him, he asked all the right questions about my goals, age, situation, etc. On a return visit, he had nice pie charts and answers to my questions with regard to college savings and a host of other things. Nice.
Long story short. He sold me on a WRAP account with a 1.25% annual fee on the balance of the portfolio. Im not happy with the product, thus my appointment tomorrow. The fund returned an average of around 6% since inception. I look at my gain and look at the amount in fees and I wish I had just gone with a no-load, low fee product from one of the mutual fund companies. For instance if I had put the money in VG wellington I would have fared far better than this “actively managed” fund.
What is your opinion of the flat fee only, WRAP accounts. Does anyone else have experience with this type of product and were you happy with it?
It doesn’t make sense to pay a 1.25% fee when there are no fee ETFs, low fee index funds at 0.2%, and a new normal of low rates.
A 6% return is horrible of it is within the last 3 years in equities. What type of fund is it and when was inception?
I agree. The fee sucks. Don’t get what your asking about “what type of fund is it?” It’s a mix of some mutual funds, individual stocks, etc. allocation is 59% equity, 32% fixed, Rest is cash. Inception was 2/11.
Steve
Las Vegas
That’s a pretty bad annual return since 2011. Ask him what happened and see how he explains things.
I wouldn’t want an advisor straight out of school, perhaps a few years. I talked to one once and they were espousing the virtues of whole life insurance and the tax benefits and some universal insurance program. At that point the conversation ended.
If I had an advisor I would want to know what they’re invested in so I can decide. Put your money where you mouth is. Just like real estate agents who sell houses but rents, believe in your product.
I agree with you that the advisor doesn’t need to be rich and an interest in your goals is much more important. They might have gotten that way by making some risky moves that paid off but that doesn’t mean all clients are looking for the same thing. Some could simply want a safe return and be looking to maintain the assets that they’ve built.
Good point about looking at the financial planning profession in the eyes of a college student. I don’t know many people who majored in finance who wanted to be a financial planner. The most hardcore students with the best grades all wanted to get on Wall St. Financial planning just doesn’t have the allure probably due to the salary. Although you can be a wealth manager at a big Wall St. firm and make very good money.
I remember a friend applying for a job as an AMEX Financial Advisor back in 2004 or so. The starting pay was $28,000 vs a $65,000 starting pay for first year Wall St analysts then. That spread is huge. If the AMEX advisor didn’t get at least $25 million in new client money within 3 years she was gone.
She ultimately passed on the job and I don’t think AMEX is in the advisory business anymore.
I once had received a “free financial planning consultation” from a local AMEX gropu. It was apparent within minutes that they could have cared less about me because at the time, my fiance (now my wife) and I were just getting to the point where we would have tangible assets.
I walked out within a few minutes and asked why they called it “financial planning consultation”, since they didn’t want to help doing any of that.
I have been taking the DIY approach (as I do with most things) and have not yet looked into hiring a financial adviser. I’ll echo Matt and your comments about not assuming the purpose of an adviser is to beat market performance. If I hear someone trumpeting that sort of performance, I turn and run the other direction.
I’d be happy to hire a financial advisor…if they could actually offer something I couldn’t learn from a few good books or blogs. The only subject I sometimes find confusing is tax efficiency and I’ve already got a CPA for that.
I’ve had a couple intro meetings with financial advisors I quickly walked away from. There’s a huge range of skill, knowledge, and experience out there and it can take several tries before finding someone who will work well for your needs.
It REALLY bums me out when the meeting just becomes a sales pitch. I encourage financial advisers reading this NOT to sell, but to express your planning skills and demonstrate your critical reasoning in different market and life situations.
My sister-in-law just took her 7 and 66. I pray that she doesn’t ask us to become her client. This could really cause contention in my marriage.
The Law of The World says she will. When financial advisers first start out, who else can they turn to, to build their book of business but friends and family!
Why the consternation? It’s all about hustle baby!
Get ready, cause she’ll be asking! I interviewed at a number of financial planning firms right out of college and the #1 thing they were all looking for is someone with a large network they could call on. Friends, Family etc… they want you to turn them all into customers.
I know. I’ll probably cave. Perhaps the ROI is more than just financial in this case.
Just think how much nicer your spouse will treat you.
Just give the sis $100,000 to play with and of she crushes the S&P500 or achieves all your first year goals, send her some more!
I wish I had $100K to goof around with.
So my best friend from college started in public accounting and has since transitioned over to financial advising, embodies the final point in your post. Hustle. But not from a sales perspective, but from a customer service perspective as you’ve mentioned. He isn’t out there seeking bigger fish, but instead focusing intensely on the ones he currently has. As a result, tremendous amount of success. It goes without saying, fee only planner.
And as you’ve alluded to, the biggest challenge for advisors under the age of 35 or so is developing “long-term legitimacy” with potential clients, yet both my friend, and some other planners he has networked with, are all under the age of 30, with many having significant books of business. Why? Hustle. The wealth and years of experience folks look for will come, but nothing can compete with those willing to provide exceptional service.
As for why people listen to those who aren’t as smart, wealthy, or experienced, many people are lazy. They don’t care enough, or have bought into some line about how great someone is or how product ‘X’ can make them rich. Folks believe what they want to believe, especially when blinded by money.
I want to explore your last paragraph answering my question more. If we spend so much time researching a TV or a smartphone, why don’t we spend even more time researching our finances and industry sources? Perhaps it’s because so much information is free, so who really cares.
IMHO many people don’t spend a lot of time researching such things. For a host of people their buddy or girlfriend has a new item, they want one like it or better and that’s what they go for. There is no serious comparison shopping involved.
Even if you do research, often for hard products you can go to various web and print magazines, etc. for reviews by “experts”. When you are looking for personal services, that’s harder to both rate and find out about. For example my current primary doctor used to also be my wife’s. After a few visits she switched to another doctor, she didn’t like my doctor. I get along fine with him and have never had a problem and would recommend him, she wouldn’t. It is hard to please and meet everyones expectations even when you are competent and you shouldn’t expect to, but the simpler something is the easier it generally is to agree how to rate it and mushy, personal areas, are pretty complex and hard to rate objectively.
Also we forget that there are hordes of people out there who cringe at the thought of math and numbers. They often aren’t stupid and aren’t lazy, more misguided and ignorant IMHO. For example, I find it insane that some women I’ve met will tell me they stink at math, but will then turn and tell my wife exactly how much they’ll save stacking a 25% coupon with a two for one offer and an additional 10% super saver card without popping out a calculator. Yet when you mention budget, savings, or show them a spreadsheet their eyes roll back into their heads and index fingers drift up to plug their ears as they start chanting “la la la la…” For guys I’ve met some who can give me all the stats for their fantasy football league players and project out their odds for the season based on a number of prossible trades and stats for those players. Yet these same animated guys will suddenly zone out staring at a spot on the wall with a trickle of drool sliding out the side of their slack jawed mouths when asked about finances. These people walk into a financial planners office ignorant and often scared because they know something is wrong but are unsure how to make it better. Then here is someone telling them not only what to do to help themselves but offering wonderful solutions, and they seem to really know what they are talking about when you come at them from a positon of ignorance or fear. I’ll also add that more often than not the only reason many of these folks even got up the courage or sought a financial planner is because the planner is family, friend, or fellow members in some group (church, club, neighbor, etc.) so there is already an element of trust implied. Right or wrong, to these folks it is a relief that someone else can even help them.