Save on Investment Expenses and Losses: Fire Your Financial Planner
If you read a lot of the right things about investing, you will be regularly admonished to minimize your investment expenses. This includes choosing mutual funds with low expense ratios and finding ways to trade with little or no transaction costs. In markets where gains are hard to find (like today), controlling these costs is even more important.
Depending on how you interpet and react to survey data, it seems we should add “firing the financial advisor” to the list of investment cost cutting moves.
This is what the Consumer Reports survey (as reported in the February 2009 issue) revealed about the investment performance of those who used a planner compared to those who did not:
Unlike our 2007 survey, clients of financial planners said this year that they were no more satisfied with their retirement planning than those who’d educated themselves. Both groups said they lost money at about the same rate.
And this little nugget of a survey finding was particularly enlightening:
Our respondents who had planned were less conservative, in general, than those who hadn’t. Before the meltdown, that approach benefited them, according to our 2007 survey. But it proved punishing during the unusually severe market downturn of recent months. So pre-retirees who had done more planning reported worse losses, on average, than those who hadn’t planned.
So it seems that in the cruel world of investing and personal financial planning, sometimes it pays to be self-educated, clueless, or both!
Actually, I believe there is less to be learned from these survey findings than it appears. Addressing the first finding (those who used financial planners did no better in the market than those who did not), I think this speaks to the unique nature of the market in 2008. A significant portion of the market decline was caused by outright fear followed by investor capitulation. Consequently, many investors moved completely out of the market even though their advisors had different ideas. Depending on when they acted on their fear and bailed out, those investors either did worse than the market or better. (Recall that the Dow dropped to 7552 on 11/20. Not a good time to get out. ) Those outcomes had nothing to do with the advice they were given because panicked investors acted on emotion, not on the advice.
The second survey finding is more interesting. It appears that a common characteristic of investors who do not plan or think about what they are doing tend to be more conservative in their investment choices. These are the folks, for example, who keep most or all of their 401(k) money in a stable value fund. Their contributions and matching money goes into that fund by default and they never bother to change it. In a typical market environment, these non-planning investors struggle to earn a return of 4%, which will not provide the growth they need for retirement. On the other hand, when the market tanks like it did in 2008, they look like geniuses compared to those investors who either received asset allocation advice or carefully studied it on their own.
So what are the hard truth takeaways from the Consumer Reports survey? Mr. ToughMoneyLove suggests the following:
1. If you are not interested in personal finance or do not have time to learn anything about it, find a fee-only financial planner, get some professional advice, THEN FOLLOW IT!
2. If you have the time and interest to study personal finance and investing, and particularly including asset allocation, you will probably do as well as those who consulted a professional financial planner. You will need to create your own financial plan and goals, then devise strategies and tactics to implement your plan. At the same time, you will have saved yourself the extra expense of using a professional planner.
3. If you do no planning at all, you may accidentally do well in a severe market decline, but don’t count on that strategy paying off in the long term.