Financial Advice

A week ago I met with a financial advisor.  A mutual business associate facilitated the meeting, so I accepted the invitation.  He made a soft pitch for my business; primarily positioning his firm as the proposed manager of my self-directed investment account.

He’d been doing this for over twenty years. The firm he represents is ranked # 1 by popular business TV channel CNBC, and Barron’s.  He showed me a demo of his employer’s website, walking me through their portfolio of services.  That was boring, because I had already looked at their website.

Their fees are based on a sliding/tiered rate scale, starting at 1.2% (of assets under management) for investment account balances of up to $500,000.  The fee for investments greater than that is 1% (i.e., for the next tier).

He explained that no clients have the same investment portfolio allocations, because every client’s requirements, investment goals, age, financial situations, etc. are different. Accounting (e.g. tax-filing), legal (e.g. wills) and trust advisory services are offered as a complement to their investment advisory services.

Seems like a bargain at the price quoted.  Who could possibly operate on a 1% margin? 

Probably people who manage other people’s money, that’s who.  Remember the Dire Straits song “Money for nothin’ and chicks for free”? As I’ve explained in older blog posts before, the Dow has returned - on average - almost 7% per year, for more than 100 years!  And this is an example of a low risk = low return investment strategy!

This means that you could literally just deposit money into an investment account, buy a diversified basket (or index) of Dow stocks, hold it for a few years… and earn a compounded, high, single-digit return over the holding period (higher with reinvested dividends).

When I left the meeting mentioned above, I immediately started questioning everything we had discussed. This character trait - questioning everything - is a by-product of having experienced people in positions of power like politicians, church ministers, teachers, etc., spreading so many untruths during the few decades of my existence, to date.

Warren Buffett famously once said that "Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who ride the subway."  Have you ever paused to ask out loud (or at least just wondered to yourself if you're too shy to ask) whether the person dishing out financial investment advice has been more successful, similar in standing, or spectacularly worse off in terms of generating consistently good returns on their own investments, than you?

So, I replayed the conversation with the professional financial advisor a few times in my imagination.  He said I should provide personal information about everything; life insurance, wills, business interests, investment accounts, car insurance, property info, etc. 

I joked about not wanting to be featured on American Greed, the popular TV show where investment advisors make off with all their clients’ possessions and wealth. 

We all chuckled a little, uncomfortably so.

He said that his team would prepare a binder, with all the relevant information (above) in one place.  That would be good for my family when I die, for example.  They’d be able to review the contents of my binder, where all my important information would be available in one place.  Now this is actually a really good concept.

But, I still felt decidedly uncomfortable.  Maybe it was the concept of a physical binder?  Maybe it was two decades of Old Wall Street experience talking? 

Maybe it was the suggestion of putting my hard-earned cash into ETFs, and then threatening to charge me a management fee on top of the low-cost ETF fees?  I’m too cheap to pay fees for index investing, when I’m able to build my own indices, at no cost.

Do you use a financial advisor? If you do, you may also still use a realtor to help you hunt for a new home, pay a travel agent to book your next holiday, and write checks when you need to pay people?

Maybe it’s just me?

Maybe I simply don’t need a binder… after all; I have the Internet, WIFI, electronic documents that can be viewed on computers or laptops, and a Google Drive for storing and sharing information, including electronic folders and documents.

So, did I derive any benefit from meeting with a professional financial advisor? 

Yes.

A tinge of guilt.  Being reminded to electronically scan, organize and save any all-important paper documents online. And then to make sure my family will know how to retrieve these in my absence, should they need to do so. 

As for the professional investment management choices… show me stellar outperformance vs. my own returns on investment achieved, and I may be willing to buy your binder, and listen some more!