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.

Consumer Reports conducted a survey of its online subscribers in the 55-75 age group.  Presumably, those in this demographic are the folks (like Mr. ToughMoneyLove) who are really focused on planning and investing for a present or future retirement.  We have accumulated significant invested assets (compared to our younger years) and want them to properly grow so that they can provide us income in retirement.  Some (not me) consult financial planners and advisers to help us.  Others (me) are DIY investors and planners.

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.

What are your thoughts about the results of the Consumer Reports survey? Feed Mr. ToughMoneyLove

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7 Responses to “Save on Investment Expenses and Losses: Fire Your Financial Planner”
  1. Andrea says:

    Speaking as someone who works in this industry (though not as a planner, I don’t care for the sales portion of the business), I just want to say that if people go to a financial planner solely looking for the next great investment, then I agree, it’s a waste of money.

    A good financial planner is someone you should be able to turn to for holistic planning – that planner should know more about you than perhaps even most of your friends and family. He or she should have an ACCURATE picture of all of your assets and liabilities, your risk tolerance, your goals for retirement or college educations for your kids, your concerns (including any family histories of serious illness), your special loves for travel or collecting. That person should be a coach, not just a salesperson, and it should be someone that you truly connect with on a personal level.

    If you can find a planner like that, they’re well worth the money. If you choose a planner because your neighbor you don’t even like made a killing in oil last year, well … it might not go well, even if that planner is a perfect match for the neighbor.

    Make sense?

  2. Andrea – I agree with you 100%. You must trust your planner with all of your financial information, not just a piece of it. Only then can he/she provide the correct advice for you.

  3. MasterPo says:

    I’ve worked in the financial field. I was Series 7, 63 and 65 licensed for a time. I still have my CLU and ChFC designations.

    While there maybe some good planners out there it has been my sad experience that most barely know more than they read that morning in Money or Kipplingers. If you go to them needing sage advise you may as well go to Vegas.

    I would never go to an advisor.

  4. doctor S says:

    I work on theIT side at a large Financial Services company and they offer internally free financial planning workshops. I attended one and I sat w/ a financial advisor and it was pretty much pointless. It lacked personal attention, all the planner provided me with was a template of “This is how much you need to invest if you want to have X amount of dollars by Y age”. There are calculators online that can figure that out for me. They also reccomended every single fund that we offer, our funds are good, but I want some personalized advice, not generic advice given to every client!

    I have read enough through periodicals and blogs (Like this one) to have a good understanding of what I should invest. A small goal for 2009 is to develope a better understanding of investing, as it is still a weak point.

    I too would never go to an advisor.

  5. Andrea says:

    Master – I think comments that planners are no better than Vegas are harmful. Good planners are not idiots.

    Doc – For you, “this is how much you need to invest” may have been too basic. For some, it might be more than they’ve ever learned – and of course your internal seminars for employees are going to focus on your funds, you say it as if it’s some kind of scam.

  6. MasterPo says:

    Andrea – That may be so. But I have yet to meet one.

  7. My Journey says:

    I couldn’t agree with Andrea more…insightful comments and well thought out points.

    The problem with these blogs (including mine) and the comments relating thereto, are the fact that by reading the post already puts you 100x (made up stat) above most of the country in terms of LOOKING for education.

    So while I could change my oil, I don’t because I feel that a professional could do better…it is the same with financial professionals, they usually will know more than the AVERAGE person out there; and like all people, there may be some bad seeds.

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