Debunking Financial Myths Part 7, The Utility of Financial Advisers
Today our series addresses common misconceptions about financial advisers.
#1: “Financial advisers are all the same. Pick one you like who has the lowest fee.”
Do all doctors have the same level of training and expertise? Of course not, and neither do advisers. Yes, you do need to like your adviser to interact with him, but the one with the lowest fee may, ironically, be the one who ends up costing you the most in the long-run (due to lack of training, bad advice, narrow product and service capabilities, etc.). A more prudent financial strategy would be to pick an adviser who will put your interests ahead of his own, and one who is knowledgeable and experienced.
#2: “Paying an adviser a fee, instead of a commission, assures impartiality.”
Hardly! A fiery debate has raged in investment circles for three decades about the best compensation method for financial advisers: fees versus commissions. While I have a personal preference toward receiving a fee for providing investment advice (my firm receives a fee that is based on a percentage of a client’s investment account), I think it’s a big leap to assert that receiving a commission for financial advice is fundamentally flawed or unfair. I am just as convinced that an adviser who receives a fee may not be completely impartial in the rendering of advice. For example, if you were to hire an adviser to manage $100,000 for a 1.5% annual fee, and then later you tell the adviser that you want to liquidate the account, would the adviser be impartial? Maybe or maybe not. That very compensation might cloud the adviser’s view of the liquidation.
#3: “Any adviser ‘worth his salt’ should be able to tell you when to get in and out of the stock market.”
Attempting to “time” the market has been shown to be an extraordinarily difficult and a potentially dangerous investment strategy. Investors who stayed with investments that tracked the S&P 500 index between 2001 and 2010 saw an annualized gain of 1.4% during those 2,500 topsy-turvy, trading days. However, investors who attempted to jump in and out of the market did far worse than that meager return if they missed out on some of the market’s rallies. Are financial advisers any better at this game? No. I’ve never heard of an adviser who has been able to consistently pick the best days to invest.
So, when you choose a financial adviser, choose carefully, and don’t be unduly influenced by the common myths that surround this profession.