I get asked a lot about hiring an investment manager. These companies are extremely common, often well respected and seem like a great deal. On the surface, they appear to be experts in their field who will manage your retirement accounts for a small fee or seemingly no fee at all. While I’m not 100% against using this kind of service, here is the caution I give all my friends.
There some upsides to this kind of investment planning. Most important: They help you get started! They help you get everything set up. They will encourage you to start investing. They will do some basic planning and run a few numbers. And the initial cost is low. That’s the pro column.
Now let’s talk about some of the potential downsides.
1. Commissioned Sales (but not obviously)
I worked in commissioned sales for years. Years. I have nothing against it. But it’s a certain kind of thing. When you walk onto a car lot, into a furniture store, or into your department at Nordstroms, a commissioned salesperson greets you. They can be extremely helpful, making suggestions and giving you information. But you know, at the end of the day, they want you to buy something. Because they earn money when you do. So you filter their suggestions knowing they have a financial motivation in your choices.
The trouble is, we don’t always know which professionals have financial motivations. We trust them in a different, less discerning way if we don’t understand why and how they are getting paid. Investors present information in a way that seems like they get paid the same no matter how we invest with them, but do we know WHY one investment is recommended over another. With a realtor, it is clear they make more money the more we spend.
But it’s actually tricker than that. Your realtor might be earning a flat 3%. And you know that. You know she makes more if you buy a $300,000 house rather than a $150,000 house. But…what if she earned 3% if you bought house A, 5% if you bought house B, 8% if you bought house C and 1% of you bought house D? Would she even show you house D? Do you trust her to show you house A, or strongly encourage you that way?
The term “Fiduciary” means they are required to act in your best interests (very few investment advisors are 100% fiduciary). But here is the rub with that….in any given housing market, how many houses are “appropriate” for you? Surely there isn’t just one perfect fit. There might be 6 or 12 you go look at. Your fiduciary advisor has hundreds if not thousands of options to offer you. Dozens might be “in your best interests” but all come with different financial gains for them.
2. It’s inherently biased
We all have information bias. When a new high-price-point item would come in a store I worked at, product reps would talk you up about how wonderful and awesome this item was. It’s great features and extra value. All commission salespeople want to sell high-price-point items, and this new item did seem much better.
It’s easy to drink the Koolaid. It’s hard to not get sold on the benefits of something that is extra profitable for the salesperson. And your advisor is a salesman. My sweet insurance salesmen once tried to explain the great upsides of whole life insurance to me. Ah….honey. That’s a horrible product, suitable for almost no one. But it’s so profitable, good, honest people will start to delude themselves.
Even if they aren’t earning a commission on your investment purchases, they might be earning a flat 1% each year. Of course, they will love the stock market. They will be inherently biased towards it. Are they really the best person to help you plan your overall financial life. What will they think of a 50% split between stocks and rentals? Well, that means they will earn 50% less. What might they think of stopping your contributions for a few years to grow a business?
No matter how much we try to separate our bias, it’s there. Mattress salesmen think you should sleep on a good bed, gym membership salesmen think you should exercise, car salesmen think you should drive a safe, newer car, and investment salesmen think you should have investments. They aren’t wrong, or evil, just biased.
Full Disclosure: I’m totally biased too! I think you should build a life with more financial freedom, more purpose, and more on target with what matters most to you. Intentionally carving out your best life possible. And everything I do is to that end. I’ll write posts, create courses, mentor, and coach to that end. And if that isn’t your goal, take what I have to say with a grain of salt.
3. It get’s expensive
It might start out as a good value. 1% of $1000 might be a great value. I absolutely think you should pay for advice, books, and professionals. Information IS valuable. It’s just with a 1% fee the value goes down over time. When you have $300,000 invested, you are paying $3000 a year, rain or shine. When you have $700,000 invested you are paying $7,000 a year.
I’m not even against paying $7,000 a year. But is your advisor actually providing $7,000 of value to you? Is there a fee-based advisor, CPA or coach who would give you more bang for your buck for $7,000 each and every year. Let’s be honest, most people don’t even talk to their advisors more than an hour a year. I’m hard-pressed to see the value of an hour yearly review being worth $7,000.
The problem is that because people aren’t writing a $7,000 check every year, they kind of forget that is actually what this service is costing them.
1% seems like a small fee. Except it is not 1% on what you earned. It’s 1% of your total assets, even if they lost money. In a good year with a 10% return, that’s still 10% of your earnings. Now, most investment advisors will say that they make up for that fee with better returns. Except after you account for the fee that’s almost never the case.
“A year-end study by S&P Dow Jones Indices found that “over the 10-year investment horizon, 82.14 percent of large-cap managers, 87.61 percent of mid-cap managers, and 88.42 percent of small-cap managers failed to outperform (their index benchmarks) on a relative basis.”Apr 14, 2016″
4. You shouldn’t opt out
I know a lot of people use these advisors so they “don’t have to fuss with it.” The problem is you SHOULD fuss with it. There are some things in life we need to be a little hands-on with. Our money is 100% one of those things. Hiring people is great, having professional help is great, but you can’t opt-out entirely!
You still need to know your numbers, where your money is, how much you need to save. Even if you hire help, you need to be involved.
There are some things in life we can pass off entirely to someone else and it will probably be fine. Let someone else buy your clothes or plan your meals, or decorate your vacation home.
I don’t care if you won the lottery, signed a huge football contract or just found your first job. You need to “show up” in your finances.
It’s like if you wanted to build a custom home. Sure, hire an architect, hire a general contractor, use subcontractors. But you need to be involved in the process. You can’t just say, “Build me a house, something nice, medium size.” Then show up 9 months later and actually like the result.
It’s great to pay for advice or have others do some of the heavy lifting, but don’t opt-out.
When in doubt….
ASK. How are you paid? How much do I pay you? How much do you earn on the investments I buy? Is that one time or every year? Is it the same amount no matter what product I buy?
Earning money for providing a service isn’t bad but we should always follow the money. No matter if it’s your realtor, car salesman, TV salesman, investment provider, mortgage broker or online course creator. (When you buy things I create or recommend, I generally earn money.) See, that’s easy, isn’t it? It should be easy for them too.
Do you hire someone to help you? What do you recommend for family and friends?
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