Why Do People Hire Financial Advisors Again?

[oldtoyota]

In this article, there's nothing that the FA does that the customers themselves could not do. It's puzzling to me. If the client already has $500K, it seems strange they would not realize they could get the rest of the way on their own. Instead, they pay this guy $5K a year to put their money into "boring" investments, which is something anyone can do...

"Kendall Capital is small. He manages $110 million and has four employees, including himself. The average client is 58 years old and has $950,000 invested with him. Clients must have at least $500,000 to invest before Kendall will take them on.

Kendall charges a minimum annual fee of $5,000 to manage a client’s money, but the charges can vary depending on what the client’s investments are worth. He charges 1 percent on the first $2 million he manages for a client, but the rate drops for additional investments."

Bizarre:
http://www.washingtonpost.com/business/economy/financial-adviser-prefers-boring-middle-class-millionaires-for-clients/2013/10/13/5aa5e3a8-2f8c-11e3-bbed-a8a60c601153_story.html

[KMMK]

Some people are really good at saving, but know absolutely nothing about investing, and may not care to learn. I could see the benefit in that situation. Personally, I love managing my own money, but my husband could really use a financial advisor. I try to help him, but there's only so much I can do. At least because he's so good at working and saving I think he'll still be able to retire early without a problem.

[Nords]

In this article, there's nothing that the FA does that the customers themselves could not do. It's puzzling to me. If the client already has $500K, it seems strange they would not realize they could get the rest of the way on their own. Instead, they pay this guy $5K a year to put their money into "boring" investments, which is something anyone can do...

Seems perfectly normal to me, and that's what they charge.  It's possible that he's also making commissions and other sponsor fees on the side for recommending certain products.

Rick Ferri makes his living on a 0.25% fee, but he uses a highly-efficient time-saving strategy (passive index funds) that scales well to a larger number of clients.  It's so boring that nobody wants to talk to him about it, so he can take care of a lot of people.  Jason Hull will do a basic financial plan for about $1800-$2400 (at ~$150/hour) and you can find your own way along the path he lays out for you.  (Or you can buy his online course for about $400.)  Of course you actually have to have the initiative, motivation, and discipline to follow the plan that you crafted with him.  Both of these guys will make a good living at helping people, but neither of them will get rich at those fee schedules.  That's why Rick writes books and speaks at conferences, and that's why Jason is a rock-star blogger writing eBooks and online courses.  They also sleep very very well at night.

A stereotypical customer of a financial advisor is a high earner or business owner who's talented at making money, and not so good at saving it or investing it.  The advisors can help clients who have 90% of their net worth in their company stock, or have hundreds of thousands of dollars in options, or who sold their business and have no idea how to convert that eight-figure ATM deposit slip into a lifetime stream of income.  Successful lawyers and doctors should immediately offload all of their financial planning & management to an advisor so that they can get back to work earning $250-$500/hour for 80-hour weeks (while paying the advisor $150/hour or less).  An entrepreneur or business owner may have sold because they were offered a stupidly high amount of money, not because they truly wanted to sell, and they just want the advisor to take care of the stash while they find another project to turn into a pile of filthy lucre.

Other customers are desperately seeking someone to hold their hand and tell them everything's gonna be all right.  They've learned to become financially helpless (especially elderly widows) or they have no faith in the stock markets or they freak at volatility & CNBC.  One of Steve Vernon's most popular advice columns is titled "Just Tell Me What To Do!"

We have a local advisor who's one step short of a drill sergeant (or Jillian Michaels on "The Biggest Loser").  He'll point out how worthless & weak you are, sneer at your puny financial muscles, yell at your disgustingly unhealthy money habits, put you on a financial diet, and force you to build up your savings accounts.  Your paychecks are deposited to a wrap account that pays your bills, he has power of attorney over it, and you get a debit card with a tiny monthly limit.  You practically have to beg him to get your money back for buying a home or any other large purchase.  Guess what?  Clients pay him well for it, and (better yet) his clients really don't want to talk to him.  Of course you can get that from this forum for free, so don't tell any of his clients about this site.

A few clients want a whipping boy.  They want someone who can grow their wealth at 24%/year, just like their brother-in-law is always bragging about at family gatherings.  (They're particularly vulnerable to hedge-fund managers and Ponzi schemes.)  My brother-in-law the CPA also has a number of horror stories of clients (especially young adults with inherited wealth) who hold their financial advisor responsible for keeping them adequately fueled with cocaine, liquor, and strippers.  I guess it's hard to give up a client that pays you 1-2%/year on a $10M portfolio to let you watch them run into brick walls at 100 MPH.

[jly224]

I have no idea. My best guess is that they lack the confidence in themselves to learn how to invest. I think that is what it all boils down to. I guess it is just a luxury that some people decide that they can afford.

[LowER]

I've heard that they can be helpful to keep clients from panicking and selling low in a bad market.

[oldtoyota]

In other words, the people who might MOST benefit from having someone to tell them what to do financially, even at some cost, aren't people he wants as clients. The people he wants as clients are the ones disciplined and together enough to not need babysitting.

Yes. Thank you for articulating what I was really trying to get to with my post. This is it. Exactly. The FA is picking people who are already successful just to make some money for himself.

[dragoncar]

I'm constantly surprised by people who come onto this forum and say something like "I make 300k/year..." and then proceed to ask a question that is really easy to determine with Google -- e.g., how does the 4% rule work, how do I invest in an index fund, etc.  I guess it's the same kind of person.  That, and people with windfalls.

[Undecided]

We have a local advisor who's one step short of a drill sergeant (or Jillian Michaels on "The Biggest Loser").  He'll point out how worthless & weak you are, sneer at your puny financial muscles, yell at your disgustingly unhealthy money habits, put you on a financial diet, and force you to build up your savings accounts.  Your paychecks are deposited to a wrap account that pays your bills, he has power of attorney over it, and you get a debit card with a tiny monthly limit.  You practically have to beg him to get your money back for buying a home or any other large purchase.  Guess what?  Clients pay him well for it, and (better yet) his clients really don't want to talk to him. 

My new dream job!

[mariamarsala]

When people ask me why they should or shouldn't hire a financial advisor, I provide them with the following links.   

Description of an investment advisor:  http://www.bogleheads.org/wiki/Investment_adviser

Description of a financial planner:  http://www.bogleheads.org/wiki/Financial_planner#Do_I_need_a_financial_planner.3F 


IMO it never hurts to get a 2nd opinion of someone trustworthy and highly recommended.

[aj_yooper]

A financial adviser was helpful to my mother-in-law as she had no interest or experience in finances; it was a commission only account.  The adviser was recommended by her lawyer and son and, fortunately, it worked out. 

My wife is learning about finance and our accounts, but she would need help from our son to make it work.  Sometimes, I think about an adviser like Rick Ferri's firm (low fees, DFA products) as a possibility later on, but, hopefully, she will keep gaining in her finance and re-balancing skills.  There are good advisers.

[ShavinItForLater]

I've never used a financial advisor and have actively turned them down when I've been approached.  I've read a ton of personal finance books and generally have the philosophy of being my own financial advisor, and believing most others should do the same.  I wouldn't ever be interested in investing advice from an advisor, as I firmly believe I've got that figured out.

That said, I actually have been thinking of consulting one recently.  We have some stock we can sell near the end of the year or thereafter, which by itself could push us well over the FIRE point.  Tax considerations are my primary concern, although the CPA I used for taxes a couple of years ago indicated at the time that it should be relatively straightforward, just the 20% long term capital gain.  I've read that it can mess with other aspects of your taxes though, and my brother went through something similar recently and told me he had a huge tax hit, so I want to understand it before selling.  I will likely at least use my CPA's services to get advice about what the impact will be of selling in December vs. January vs. half and half, for example--particularly if I decided not to work next year, going from a high income to none.

Sure, I could run the scenarios myself in TurboTax or whatever, but when we used that CPA it was because TurboTax gave a weird result that would either mean I paid penalties or had to do a shit-ton of manual calculations to avoid them, so I essentially outsourced the problem to the CPA.  I would expect CPAs to be more useful for "weird" circumstances that software might not account for.

I've thought about getting a more complete financial plan done though.  Not because I can't comprehend the stuff--DW has actually suggested maybe I'd enjoy *being* a financial advisor (to which I've heartily answered no).  I'm thinking of this because our circumstances are what I consider out of the ordinary, and I'd like to have a conversation with someone knowledgeable about the topics that concern me.  Not just the windfall or being FIRE--we also have two kids to put through college, and although the windfall would likely pay for whatever they need, I'm interested in the FIRE scenario as it relates to that--would they be eligible for grants and other financial aid if I had zero earned income for example?  Do I need umbrella liability insurance to keep some loser from slipping and falling on my porch and taking me for everything?  Are any of these weird trust things something we should consider, or any fancy (legal) ways I can avoid some or all of the tax hit?  Do I have any blind spots?

I expect this isn't the typical financial advisor's customer profile.  I'd also just be wanting a one time plan or set of answers to my questions, I doubt I'd continue the relationship beyond that.  If I did go after it, I'd be looking to pay someone an hourly rate fixed fee, not a percentage of assets.

[prestojx]

I can tell you why I use Portfolio Solutions (Rick Ferri's Firm) to manage my investments even though I have the time, knowledge and experience to do it myself. First the fees are low at .25% and for this I get three important things:

1. The firm's knowledge and experience regarding the best vehicle for each asset class.
2. The rebalancing of my portfolio when required. This can be a bit of a hassle with multiple asset classes.
3. Access to DFA funds which are advisor only.

I could obviosly do the first two items myself and I am not overly convinced that DFA Funds are critical to my portfolio but I worked my ass off getting to Financial Independence and now I want to spend my time doing other things. I have a fairly substantial investment portfolio and it is now on absolute auto-pilot. I have used P.S. for about 9 years and have never had to worry about my portfolio for a single minute which has freed my mind and my time to travel the world as well as pursue other lucrative opportunities.

For me, .25% is a reasonable fee to remove the hassles of managing my portfolio but if their fees doubled, I would certainly re-consider.

[fmzip]

I can tell you why I use Portfolio Solutions (Rick Ferri's Firm) to manage my investments even though I have the time, knowledge and experience to do it myself. First the fees are low at .25% and for this I get three important things:

1. The firm's knowledge and experience regarding the best vehicle for each asset class.
2. The rebalancing of my portfolio when required. This can be a bit of a hassle with multiple asset classes.
3. Access to DFA funds which are advisor only.

I could obviosly do the first two items myself and I am not overly convinced that DFA Funds are critical to my portfolio but I worked my ass off getting to Financial Independence and now I want to spend my time doing other things. I have a fairly substantial investment portfolio and it is now on absolute auto-pilot. I have used P.S. for about 9 years and have never had to worry about my portfolio for a single minute which has freed my mind and my time to travel the world as well as pursue other lucrative opportunities.

For me, .25% is a reasonable fee to remove the hassles of managing my portfolio but if their fees doubled, I would certainly re-consider.

Interesting service. I was intrigued as I have someone handling my money but thy charge 1%.

However the footnote on their page reads "*A total relationship value below $1 million is subject to a $925 minimum quarterly fee in lieu of the 0.37% annual management fee. So if you only have $365K or so, you are still paying 1% even though they clearly state 1% is too high.

I don't see any reference to .25 on their page, only .37 and .20 over 3 million:

http://www.portfoliosolutions.com/benefits-to-you-2/the-low-fee-advantage/

[burly]

I work for one of the top 10 wealth management firms in the US and many of the reasons posted above are correct in that the client is a surgeon or business owner who's time is too involved to be bothered. We often say your specialty is XYZ, ours is managing wealth.

I'd say the majority of my clients are business owners, widows, and retirees. That being said, a proper wealth management team will not only consult on your portfolio but will look at everything holistically. On our team, we have a portfolio manager, private banking, trust advisors, and a on staff CPA/Attorney for estate planning and tax analysis. In addition to the advisors, we have a back office of hundreds of analysts looking at different sectors and vehicles rating and ensuring they are performing and keeping true to their style.

When you lump all of those services into a fixed percentage fee, it can be very beneficial for the client. Another thing not mentioned here is if you are managing your $1 million dollar portfolio, great! Now, let's look into $25 million dollar accounts with multiple trusts involved with different allocations because some accounts have specific purposes (charitable trusts, special needs trusts, etc). Once you get to a certain level, a wealth management team is essential.

As for a standard broker relationship... some people are not analytical or methodical in their decision. Keep in mind that this forum is very skewed to the tech-savvy engineer-minded person, and is no where near a proper population sample. I can't even begin to tell you how many people I've met that sold in 2008 due to their fear and not having a disciplined investment program..

Bottom line, they're around because there's a need for them.

[prestojx]

I don't see any reference to .25 on their page, only .37 and .20 over 3 million

You are correct. They recently changed their fee structure after many years of a flat .25% fee. I figure my total fees, including the expense ratios of my holdings, are still around .5%.

Because of the minimums you mentioned, my advice would be to DIY with a portfolio of less than $1mm. As I said above, my investment portfolio is fairly substantial and the PS fees are worth it to free up my time.

Paying 1% is way too expensive, however you slice it.

[marty998]

I'd say the majority of my clients are business owners, widows, and retirees. That being said, a proper wealth management team will not only consult on your portfolio but will look at everything holistically. On our team, we have a portfolio manager, private banking, trust advisors, and a on staff CPA/Attorney for estate planning and tax analysis. In addition to the advisors, we have a back office of hundreds of analysts looking at different sectors and vehicles rating and ensuring they are performing and keeping true to their style.

I never understood why the industry here fought so hard against the government introducing a law for Financial Planners to "act in the best interests of their clients".

Imagine the number of ways you can justify creaming fees if you do a proper job and involve a stockbroker, tax agent, bankers, lawyers, not to mention fees for all the trusts, wraps, funds, advice...

But if Planners are happy with their trail commissions for selling crap then thats their business.

[jamccain]

To simply answer the question...1. Marketing 2. Preceived value.

I think the better question is why do some feel morally superior enough to question other peoples personal decisions, while thinking they know what's best for everyone...even strangers. 

[luigi49]

To simply answer the question...1. Marketing 2. Preceived value.

I think the better question is why do some feel morally superior enough to question other peoples personal decisions, while thinking they know what's best for everyone...even strangers.

I don't believe people here are trying to be morally superior.  Some make statement and add to it to make an impact if you understand what I am trying to say.  It is not intended to be bad.