In the Yale economics department, they teach that all financial advisers are crooks. If I am overstating that point, it is not by much. My finance class on Portfolio Theory was taught by David Swensen, who is famous for investing the multi-billion dollar Yale endowment and doing it fabulously well for, oh, about a couple of decades. Swensen is brilliant and charismatic, and has little use for the plethora of financial advisers that besiege the monied persons of this world. His book, Unconventional Success, lays out his case remarkably well. And he is far from the first to lay out the argument that investment advisers cannot be trusted. The hilarious book, Where Are The Customers’ Yachts? by Fred Schwed, describes Mr. Schwed’s experiences working on Wall Street in the 1920’s, and it reads like it could have been written yesterday with its tales of greed, conflicts of interest, and abused customer trust. And then there is A Random Walk Down Wall Street by Burton G. Malkiel. If this legendary book doesn’t convince you that no one knows what the stock market is going to do tomorrow (and thus inspire you to avoid the advice givers and just buy a broad array of stocks and bonds), nothing will.
I remember Professor Swensen saying something to the effect of, “Instead of listening to all the people who want to sell you the next great investment, and take a commission for themselves out of the money you would otherwise invest, consider just putting all your money into Vanguard’s S&P 500 index fund and forgetting about it.” If I had taken his advice back in 1988, my total rate of return through 2011 would have been over 11%. Not too shabby, professor. And that is especially impressive given that the period from 1988 through 2011 included some famously rocky investment territory.
So, that is the attitude that I had always held about investment advisers. I saw them as leeches attached to the accounts of poorly informed investors, slowly sucking out money.
But then in 2004, I opened my own law office. I moved into a building of office suites that share conference rooms, a break room, and a reception area, and I met several investment advisers there. I also began to meet investment advisers at professional networking events. And I got clients who had long time, positive relationships with their investment advisers.
I began to learn that there are many types of investment advisers. The best kind are the ones who: (i) are part of an independent office (i.e. not affiliated with a large bank) and are thus free to advise you to invest your money in low cost mutual funds and exchange traded funds like those from Vanguard, Fidelity, TIAA-CREF, and similar fund companies, (ii) take no hidden commissions or kickbacks from anyone else for encouraging you to invest in a particular product, (iii) charge you a clearly stated fee, (iv) contractually agree to take on a fiduciary duty which requires them to put your interests ahead of their own (rather than just selling you whatever they can get you to buy), (v) regularly provide written reports that make clear the investment performance they have achieved for you, and (vi) take only a limited power of attorney over your accounts so that they never have the ability to withdraw funds, and (vii) encourage you to invest in mutual funds or ETF’s that meet all of the following criteria: charge no front or back loads, can be sold quickly and easily if you need cash, have low management fees, are invested in a broadly diversified group of stocks and bonds, and follow an index rather than paying for active management from some supposed hot shot market soothsayer.
But even if a financial advisor does all of these things, why do you need them? Why have an unnecessary entity leeching money out of your account? Can’t you just put all your money in the Vanguard S&P 500 index fund and forget about it? Or if 100% stock ownership is too aggressive for you, then why not just put some of your money into a fund that invests in a broad index of U.S. treasuries? And maybe put some into a REIT fund, too? As long as you stay away from expensive places like Merrill Lynch and just stick with low fee, no load mutual fund companies like Vanguard, Fidelity, and TIAA-CREF, you’ll be fine, right?.
The answer is yes. You certainly can live without a financial adviser. But I came to realize that there are a lot of people out there who don’t want to deal with even very basic investment activity. They just don’t feel confident making any decision. They want someone they like and trust to advise them and handle that for them. In a bygone age, they would have called their estate planning attorney and their CPA and asked what they thought. But, these days, most attorneys and CPA’s charge too much per hour, and want a big retainer before they will even speak to you.
The other value that a good financial advisor brings to the table is what is often referred to as “the checklist.” They have a list of financial best practices (things like “Have a will” and “Have a budget” and “Make sure you have the right amount of insurance” and“Ask your CPA if he sees any simple ways you could reduce your taxes”) and they meet with you regularly to walk through the list and remind you to follow through on all those things. They are a like a personal trainer. You might be able to get in shape just by working out, without a personal trainer, all by yourself. But having a personal trainer makes it a lot easier because they give you pointers, hold you accountable, push you to do more, etc.
A good financial advisor can also raise red flags in certain situations because they meet with you more regularly than your estate planning attorney or CPA. For example, they may see that you are spending too much each month and are depleting your savings. Or they may see that you are considering a terrible investment, like a reverse mortgage. Or they may see that you are being taken advantage of by a caretaker. Or they may notice that money is going missing. Or they may see that you have early dementia and need to meet with your estate planning attorney and CPA to get your assets locked down. Or they might suggest that you make plans for additional care and assistance with paying your bills and managing your affairs.
So, there is a place for a good investment adviser, if you don’t want to deal with your own finances. But choose wisely. A bad financial adviser is often very expensive. And if your adviser ever suggests a whole or universal life insurance policy, run. And if they suggest putting all your money in an annuity, run faster and change your phone number.
Joe L. Fulwiler is a bankruptcy attorney in Austin, Texas. He holds a degree in Economics from Yale, a law degree from Columbia, and an MBA from Stanford, and he maintains a bankruptcy information site called www.BankruptcyStrategy.com. He is admitted to (and a frequent customer of) the bars of New York, New Jersey, and Texas. He is also a CPA, a Papist, a grand multipara (male version), and a jedi.