[Business] Why I Don't Trust Financial Advisors
and investment strategies I wish I had taken instead
The statement "I don't trust financial adivsors" is a generality and isn't totally accurate. What I really mean is that I don't trust salespeople. Most financial advisors are salespeople. They would argue with that, I am sure, but let's make this simple: if you make your money based on a commission from the products you sell, guess what: you are a sales person. If you are salesperson, your interests are in conflict with mine. For example, a certain financial advisor I recently spoke with, let's refer to her as "ML", will only advise me to put money into loaded mutual funds. Why? Well, because she makes her money off of the commission. Now, I understand that people are in business to make a buck, but right off that bat that means that a huge array of options (no/low load mutual funds) will not even be considered because she can not profit by them. I like to call that a "confilct of interest". Now, don't get me wrong; ML was honest about how she makes her money and fully disclosed the loads on the funds she recommended. Regardless, I'm always going to be left wondering what other options I might have had.
My skepticism comes from having already recieved very bad financial adivce. When I was a 23 year old 2nd Lieutenant in the Army, I met a financial advisor that sold me into the Fidelity Destiny Plan. This "adivsor fund" was a contractual plan with a 50% front end load and a 15 year commitment to make monthly contributions (read more about these rip-offs here). The selling point was that with such a high front end load, people would be inclined to leave their money in the plan for the long haul, which of course everyone knows is what you have to do to (please read some sarcasm and cynicism into that). Well, a few months ago I recieved a letter from Fidelity telling me that such plans were now illegal. It turns out that other "financial adivsors" were all but stalking military personnel and aggressively selling plans like this one, and worse. The Military Personnel Financial Services Protection Act (H.R. 5011) banned the selling of such plans. You know an investment has to be bad when it is even obvious to Congress. I had just been putting my money into the plan and not following it closely, thinking that I was stuck with it until my 15 years were up. After getting that letter, though, I called and found out that I could terminate the plan at any time. Over the next few weeks, I cashed out of the plan. How did I do? Well, take a look at the performance of the plan over the past 10 years in the chart to the right. The Destiny II plan is the line at the bottom of the chart (never a good thing), and the lines higher up are market indexes. Keep in mind, that is just the cost of the shares themselves and does not include the front-end load and other fees. I'm still working on figuring out what my cost basis is (since the fund doesn't help me with that either), but I am thinking that I will be lucky if I broke even.
OK, I was stupid. But the problem is most people are stupid when it comes to managing money. A Financial Advisor is supposed to help financially stupid people make good investments. But how can they have their customeres best interests in mind when the biggest payoff for them often comes from the worst investments for their customers? The gentleman that sold me that Fidelity Destiny plan was a retired Army Colonel who had decided to stay in Germany and "help" young soldiers plan for their future. He seemed like someone I could trust. He may have even thought he was doing me a favor; after all, a career in the Army doesn't exactly make you a financial wizard. At least I learned my lesson while I'm still relatively young and am just entering my prime earning years (well, minus the impending lean years of graduate school).
So what do you do? Not everyone has the time or inclination to make themselves savvy investors. In my opinion, there are three approaches one can take to investing wisely, and I wish I had done any of them instead:
NOTICE: Before you read any further, understand this - I have no formal financial education, training or certification. What I have written here is my opinion and is based only on my life experience. Generally speaking, I have been a poor investor to date and have made some really bad decisions. What follows is my current thinking about how not to make similar mistakes in the future.
The first approach would be to find a financial advisor you can trust. I bet you weren't expecting me to say that, were you? A financial advisor can be a great help, just make sure you find one whose interests are aligned with yours. Remove the conflict of interest. You can do this in one of two ways (that I can think of). First, find an advisor who charges flat hourly fees. These types of advisors do exist and they tend to charge quite a bit per hour, but at least the conflict of interest is gone and you won't have that same feeling you get when you think the mechanic at the garage is making up charges about your car repair bill. The other approach is an advisor who gets paid based on his performance, such as a percentage of Assets Under Management. In this case, the advisor gets a percentage of total amount of assets he manages for you. The benefit here is that the advisor has incentive to grow your money. The more money he makes for you, the more he makes for himself. Now, his interests are squarely in line with yours.
The easier approach to take is to simply pick a few no-load index funds. The "load" is the sales commision that the much loathed financial advisor skims off the top of your investment. You skip the advisor and go strait to the fund manager when you buy a no-load fund. Basically, you are on your own to pick the funds and you would likely enroll and send in your money and never even talk to a single person (if you do it online). I would probably choose Vanguard's index funds or those of T. Rowe Price, as they are very reputable companies and their funds tend to have very low expense ratios (so most of your money actually goes into your investment instead of paying for the administrative costs of running the fund). Index funds seem to be very much in vogue right now as many (most?) actively managed funds don't even do as well as the market as a whole. You could potentially earn better returns in other funds, but picking those funds is the trick. 
The major indexes are what fund manager's performance are gauged off of, so investing in them means you will always do "average". Don't let average sound bad. Remember: 50% of everything is below average. Spreading your investment across a few no-load index funds means that you should at least keep up with the market and feel comfortable that you are keeping your money for yourself. With this approach, I'd probably at least split my investment across three funds, probably a broad market or S&P500 fund, and international index fund, and round it with either a Value or Large-Cap index fund.
The last, and probably best option: stop being financially stupid. Put the time and effort into learning to understand investing. You don't have to be an expert, but at least learn how mutual funds and the stock market works. Learn what dividends, yields, loads, expense ratios, bonds, large/medium/small caps and value/growth stocks are. The concepts are not hard and the information is available for free via the internet (some links on the bottom). Perhaps start reading Kiplinger's or a similar magazine. Your success in investing will likely play heavily in your ability to retire well, or retire at all. Don't you think it is worth your effort to understand what your nest egg is doing (or how to build one)?
Obviously, I'm working on the last approach. The anger that built over realizing how incredibly foolish and naive I was to make such an investment has spurred me to take much more interest and become much more active in my investments. I'm even doing a little "discretionary investing" (i.e., money that won't hurt my retirement if I lose) directly in the stock market . Hopefully, at least one person who reads this can learn from and avoid my mistakes.
--Chris
Resources:
My interview time has been confirmed for Monday, February 5th, and all travel arrangements made. Thankfully, I was able to get reasonably priced tickets into Hartford as well as a good hotel deal via HotWire.com. If Elizabeth could have been able to get some time off work we would have made a weekend trip to Boston out of it, but since she can't, I'm flying into Hartford Sunday evening then right back home Monday afternoon. I'm looking forward to it!
--Chris