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Who Should You Trust With Your Money?
Maybe nobody.
For several years I worked for an financial planning firm that I would have been comfortable recommending to anyone and using as a model for the type of firm to look for. The firm was fee-only, the culture had a true focus on financial planning and believed strongly in acting as a fiduciary. Employees were well-trained and asked to maintain and expand that training. Everything you would think to look for in a financial planning firm was in place.
Unfortunately, despite all the right signals being there, clients and employees of the firm were ultimately harmed in very dramatic ways. Former clients no longer have a concept about the amount of wealth they have, are unsure how they will pay next month's bills, and have had their financial well-being forever harmed. Former employees most important asset, their earning power, has been hurt immeasurably. They have been stained by association with the firm despite no knowledge of alleged wrongdoings. It is an all-around bad story.
The question I have often asked myself about the experience is "who can I recommend people use as a financial planner when the indicators here were positive but ultimately resulted in such harm?" The more I have considered this question, the more I have begun to believe that I cannot recommend people who handle your money and act as investment advisors and financial planners. There is simply no need to trust somebody to handle your money.
I am not saying financial advice is unimportant. In fact I believe the need for good, objective financial advice is extremely high. What I think is unneeded is someone to physically handle your money, whether that be managing an investment portfolio for you, being able to make distributions of money out of your accounts, etc... Yes, someone providing these services can deliver a lot of convenience and take work off your shoulders, but there is great risk involved as well. Despite controls that are in place, you just cannot be quite sure what is happening with your money. Is that risk worth the convenience?
I think it makes more sense to seek out a financial planner that would provide advice without touching your money. You will end up having to do some of the work yourself, but you eliminate one risk on your financial well-being. And it should make the cost of advice much less expensive and much more accessible to you if investment advice is not provided.
So, who should you trust with your money? I am beginning to think you should only trust yourself with your money. Seek someone out to provide financial advice and financial planning service, but don't let them touch your money. Why assume that risk?
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4 comments:
For many (not all), the best person to trust with your money is yourself.
However, there are also many people who would benefit from the advice and counsel of a trusted, objective advisor. This isn't because they can't trust themselves, but rather because they need someone to assist in detaching emotions from the financial decision making process.
Trust is a BIG part of it, but it ultimately boils down to behavior
Oh Mr. Gehring...
Your method sounds like visiting a doctor who advises you to have surgery, but then hands you the scalpel and tells you where to cut. A few people may grab the scalpel, most won't. Unfortunately, most that won't will end up with some schmucky "planner" who will sell them an annuity and tell them "don't worry."
IMO there is ample room to provide fee-based investment management to those that seek it, and there are plenty of advisors that do this ethically and in the client's best interest. Unfortunately, you worked at a firm that went the other way, through no fault of your own. I can imagine how that's soured you.
Believe it or not, there's even room (Gasp gasp gasp) for some commission based accounts in today's day and age...think the young couple just starting out. It's much more effective, in my opinion, to pay an A share mutual fund load for the $50 a month they are contributing to their Roth IRAs. This is how I started out with an advisor...$50 a month. I paid $30 a year (5% of $50 X 12) and received an hour of "advice" from a CFP each year. That in my opinion was well worth the 5%.
But Chad, that is precisely what most doctors do. You visit a doctor, they examine you and maybe run some test if something seems wrong. Then they give you some "advice" about how to live healthier and how to fix whatever ails you. They recommend you do some exercise, give you a prescription for medication, tell you to sit better on your chair... whatever it might be. What they do not do is show up at your house each day to remind you to exercise or take your pill at the appropriate time. They do not make your dinner to ensure you are eating healthier. They have given their advice, it is your responsibility to choose to follow that advice or not.
There is nothing (and I don't want to split hairs here,) NOTHING a comprehensive generalist financial planner does that is akin to surgery. We do not offer anything that an individual cannot do well on their own after being equipped with only good advice and education. Look at the investment landscape... discount brokers offer access to just about any investment product desired directly to individuals. If we give the advice, people can follow our advice to a T on their own. If we give them the tools and education, the can become self sufficient in the transactional part of investment management. And they can do that without the risk of being taken by an unscrupulous or misguided advisor.
Investment management on a transactional level offers convenience and only convenience. Financial planners can make the exact same recommendations and allow clients to do it on their own, but at a much lower cost and with much lower risk to the client.
Unfortunately the current regulatory environment does not allow for people to practice in this manner easily. Financial planners have to register as investment advisors simply by discussing investment theory and providing education while under a paid engagement regardless of whether they have custody of client assets or receive compensation for the sale of securities. The regulatory burden this places on them is so great that they are almost forced to take on the investment management work to justify very high fees.
Ideally, I would like to see financial planners able to register in front of some board as "financial planners" not as individuals selling securities. No different than an CPA offering some investment advice and education incidental to their primary function, financial planners could discuss investment markets and provide advice incidental to the full financial planning engagement. If a planner has no custody, no access to client account information and does not sell securities, why should they be treated the same as an investment advisor who does? Unfortunately, our government on a bipartisan basis does not have the chutzpah to take on real financial reform. Instead they feed us this reform package that does little to help individuals. But I do look to the reform occurring in other countries as promising...reform which has included the elimination of commissions in a couple countries. Maybe will get some real reform and lasting change in individual financial behavior after the next financial meltdown.
And, Chad, I do truly appreciate your participation and comments on my blogs even if I am only tilting at windmills. I think the debate is worthwhile.
With the exception of the first paragraph, I couldn't agree more.
Unfortunately, most people need a doctor to "babysit" them (and sadly, I'm in this majority). I can be told all I want but unless someone "sits on me" to monitor my progress and make sure I'm doing what I'm told, there's too many other more pleasing distractions. So goes investment management. People retain financial advisors because they see handling their finances as "confusing", "distasteful" etc and are willing to pay others to handle something that yes, they might well with some education be able to do on their own.
Take spark plugs, for example. I, with some measure of education, could change my own spark plugs. Heck, I've even got the tools in a toolbox to be able to do that. But, I don't change my sparkplugs. I pay someone else to do it. Why? Because my car requires 16 (yes, sixteen) plugs and it also requires half of the top of the motor to be taken off to get it. I DO have all the tools to do it, sadly I don't have the confidence (nor the desire) to do it myself.
So, we come back to the big question. If we are going to "babysit" and make sure people follow through, how do we get paid for that time? I can't do it for free...and people are loathe to write hard dollar checks unless they have to.
In the interest of full disclosure to those reading, I'm a CFP(R) practitioner and partner in a fee-based financial planning (and yes, Investment Advisory) practice.
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