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Do You Really Need a Financial Adviser?

by Louis J. Wasser

“I am more concerned with the return of my money than the return on my money.” — Mark Twain

Talk to people about their financial adviser, and the very first thing you’ll notice is their vanity. They love to enunciate the words “my financial adviser” in the same reverent tones they say “my BMW” or my “place at the beach.”  To have a financial adviser is a sign you’ve arrived. After all, if you’re low enough on the food chain, your de facto financial adviser is the US government.  And there’s no vanity to be indulged if you’re on the dole or if Uncle Sam is in charge of your finances.

The second thing you’ll quickly notice is how easily people cede control to their financial advisers. If the advisers have put them in stocks, they might have a vague sense of being in, say, energy or tech stocks, but they might not know how these particular stocks have performed over the past 52 weeks.  If they’re in mutual funds, there’s a good chance they’re not aware of how their funds rank as compared with others in the same class.

While giving up complete control of your money could be a prelude to fraud down the road, misappropriation of your funds is not your biggest worry.  The horror stories of celebrity clients to the contrary, most financial advisers are probably pretty honest.

You have more flexibility and opportunity for return on your money than the plain vanilla financial adviser would have you believe…

A short visit to about 5 or 6 financial advisers’ websites should persuade you that most of them are fairly risk averse and plain vanilla. Their website lingo invariably rings of same old same old:  capital preservation, unbiased advice, prudent planning, a plan tailored to your goals… that sort of thing.

There’s a good reason for this: fear of lawsuits.  You’ve got to feel for these guys. The responsibility of handling your money can be daunting. So their watchwords for doing so are most often “conservative” and “careful.”

What a financial adviser always tells you is “markets go up, markets go down, so you don’t want to lose what you’ve worked so hard to earn.”  What the financial adviser really fears when he pleas for you to be conservative is that he doesn’t want you to sue his pants off if the investment he recommended just happens to go against you.  So yes, by all means watch yourself when shopping for a financial adviser!  You want to steer clear of the occasional fee gouger and cowboy. And they’re out there!

But realize that your biggest concern when deciding to go with a particular financial adviser has more to do with opportunity cost.  It’s the investments she advises you to avoid that could wind up costing you.

There is no one secret to making money: stocks, bonds, real estate, collectibles, ETFs, options… they all have their place, depending on the economy. So when a financial adviser begins telling you that a particular investment sector is not in your best interest, or that her particular software proves such and such, remain skeptical.

Think about it:  if she successfully tamps down your financial expectations, she gets to collect an annual fee as you grow old, and you get to have warm milk and crackers every night without indulging in silly pipe dreams about any return above 5% per annum on your money.

Are we suggesting that you don’t have to be careful or conservative when you invest?  Not at all! What we are suggesting is that you have more flexibility and opportunity for return on your money than the plain vanilla financial adviser would have you believe. Here are a few suggestions to help you control your own nest egg:

  • Educate Yourself About Investing:  You don’t have to be a Warren Buffett or a George Soros to learn about particular stocks, commodities or markets that might give you a healthy return.  And it won’t take you as long as you think to learn what they are.  In the long run, even if you decide to have a financial adviser handle your money, you’ll be better able to ask him tough, probing questions.  What you ultimately want is a financial adviser, not an investment nanny.
  • Be honest with yourself about your risk profile:  Of course you don’t want to lose what you’ve built up.  But consider how you’ve lived your life, made your living, and built your career. A retired personal injury lawyer will have a different take on risk than a retired high school principal.
  • Test the investment waters on your own: Forget how a financial adviser warned you about a particular market sector. If you’ve done research on a particular company, and are impressed with its five-year growth history, try investing a small amount of money in it.  If you’ve retired with a net worth of $10 million, a $2,500 investment in a company you’ve carefully studied won’t bankrupt you.
  • Educate yourself: If you feel completely at sea when it comes to investments, take an online investment course.  Learning to consult a source like Investopedia regularly can prove a very productive habit for a rank novice. And staying abreast of the market through a source like The Wall Street Journal’s MarketWatch can help you stay very savvy.  Here’s a great article from that publication called “10 Things Financial Advisers Won’t Tell You.”
  • Put a prospective financial adviser through the pacesIf after taking all of the above steps, you’ve decided that you simply must put your portfolio in someone else’s hands, don’t cede control!  Interview several financial advisers.  Boil the lot down to two of them. Give each the same amount of money, and see what they do with it in one year’s time.  Should you let each one know he’s in a horse race for your total nest egg? Your call.  Personally, I wouldn’t.  I’d want to see what each would do with my money under sterile operating room conditions.

Make no mistake though. Just because your financial adviser made you money last year, doesn’t relieve him from the responsibility of letting you know what he’s going to do for you this coming year. And if he balks when you start asking him the hard questions, remind him that you signed up for a financial adviser — not an investment nanny.

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