The financial markets are incredibly complex. Financial products like stocks, mutual funds and ETFs grow in number and complexity every day. Financial complexity drives investors to financial advisors, but professional help isn’t always what it seems. In fact, given the right set of tools, most people can overcome the complexity of the financial markets and manage their portfolios as well or better than a professional.
To help uncover why you might outperform a professional, it is helpful to put professional asset management services in perspective.
When investing for the first time, investors face the Herculean task of deciding what to invest in. This can include individual securities, ETFs or Mutual Funds. With an overwhelming number of choices available, it’s no wonder that many investors turn to financial advisors to manage their portfolios.
However, the reality is that account managers cannot constantly monitor 70,000 mutual funds, countless ETFs and individual securities either. They have no crystal ball to determine what will outperform over time.
Data indicates that the vast majority of advisors underperform the markets, year after year. While their choices may remove the burden of decision from you, it isn’t without a cost.
Furthermore, brokers are not required to purchase securities that are in the best interest of their clients. Hopefully, the laws will change soon, but currently brokers do not have fiduciary responsibility. As a result, brokers can sell you products that increase their profits over yours.
Ultimately, their incentive (along with doing a good job) is to earn higher commissions. This can be done by putting clients into high fee products that underperform benchmarks year after years. The higher expense ratios that you pay for these underperforming funds are on top of account management fees which can be between 1-2% of your assets, each year.
Financial advisors read a screen to you
Eric Nissan, one of the founders here at DIY.FUND often recounts a story about his personal frustration with his advisor. He wanted to know some basic information about his accounts, but the information wasn’t available online.
Eric called his advisor, who quoted him the info and “ran some reports,” but Eric felt the information was pointlessly difficult to access. Why was that? Eric believed that his financial advisor used the access to the information to keep Eric dependent upon his services. At that point, Eric realized that his advisor had no special powers, or extra market intuition; he just had access to more information.
Eric realized if you have the right tools, choosing securities, rebalancing and maintaining a healthy portfolio, it is not hard. Ever since that experience Eric has asked, “Is it worth giving 1-2% of your net worth away each year, to have someone read a screen to you?”
Financial Advising is a sales job first
Asset managers provide valuable services for anyone looking to invest, but the majority of their time is not spent working on your portfolio. It is spent finding new clients, sales, and marketing.
Think about that. They probably know more about finding and marketing to clients like you, than they do about investing. Plus they know how sticky their services are, most people, once they transfer their assets, do not change often. Once financial advisors have your business, they move their attention to their next new client.
Becoming a financial advisor
Do you think to become a financial advisor, you have to prove some ability to properly invest in the market? Do they have to have a track record that shows they are worth the fees they are charging?
No. Becoming a financial advisor merely requires that you pass a few tests. Once you pass, you can get a job at a firm and start marketing your services.
As with any profession, there are skilled and experienced advisors, but with almost 300,000 to choose from, it can be as difficult to pick a good advisor as it is to pick your first securities.
Who is the most interested in your wealth?
Nobody cares more about your assets than you do, and with the right tools, most people can manage their assets as well as a professional. It’s not hard especially if you consider, that most financial advisors underperform the market. You don’t need a professional to manage your assets.
But if you feel you need professional help, or don’t want to manage your investments, make sure you have the same tools they have so you can keep them in check with your goals, and properly hold them accountable.