Financial Planners, Friend or Foe?

So, maybe you are new to investing and the idea of doing it on your own seems overwhelming. Or you could have just moved to a new job and have a 401k account to rollover for the first time. In either case, it’s understandable why the idea of going to a financial planner/advisor would seem like a good idea. Trust me, I’ve been there and done that before. I worked with 2 Edward Jones advisors in the past and have talked with various others from different companies as well. My first impression, even a company like Edward Jones which is supposed to be all about the small retail investor, doesn’t really want to go out of their way for you unless you are bringing a sizeable amount of money to the table. Again, this is just my experience, I am sure there are some great advisors working for Jones and other companies who would bend over backwards for someone starting to invest with their first $100. But in my experience, they are the exception, not the rule. While I was walked through the standard questionnaires to gauge my risk profile and length of time I intend to invest and assessing my goals, it all felt very formulaic. Not exactly one size fits all, but not extremely personal either.

At the end of the day I was put in a “diversified” group of mutual funds that went on to underperform the market, but as a novice made me feel good because I was investing. However, when you look at the fees associated with the actively managed funds and having an advisor, it was clear I was going no where fast with my watered down returns. For anyone still trying to learn the game, I will explain some details around the actively managed funds. In its simplest form, a mutual fund is a pool of money managed by a fund manager who in an active fund will be trading in and out of individual stocks in an attempt to outperform the broader stock market indices. So the fees you are paying in essence are for this expertise. But, what many of us have come to learn is that the vast majority of the actively managed mutual funds underperform the standard stock market indices such as the S&P 500 (which tracks 500 large US companies and is generally considered a good representation of the overall US stock market).  One study found that over 15 years ending in 2016, the S&P index outperformed over 92% of large cap mutual funds that were actively managed. So not only do the funds typically underperform but the average expense ratio you are paying for the right to own these funds is 4-5x that of a passive index fund (one that simply buys and holds stocks trying to match the index). Plus, you can’t forget all the tax implications of owning an actively managed fund with significant buying and selling when help outside of a tax advantaged account.

Again, this was my personal experience. I’m sure there are a lot of fantastic financial advisors out there who are great stock pickers themselves or recommend lower cost index alternatives where appropriate. My personal advice is to do it yourself, because with a little effort it doesn’t really have to be that hard. However, if you are determined to get some help because you just don’t have the time or inclination, I would highly recommend you search for a fiduciary advisor. This may sound crazy, but a non-fiduciary advisor, the majority of them, do not have to act within their clients best interest. A fiduciary advisor however must act within their clients best interest. Again, I’m not saying all non-fiduciaries would sell you the products most beneficial to them as a salesperson, but some will and they are within their rights to do it. If you go with a fiduciary, you won’t have that concern.

All the best in your investing future!

Gen Xer

Author: Gen Xer