Who comes to mind when you hear, “Give me all your money and everything will be okay” ? If you said a robber at gunpoint or a financial advisor, you’re spot on. This minor unfunny joke aside, it does beg the question about how responsible we are about our own money, or at least should be. What if passing the buck to another person created a financially devastating situation?
The Dirt: I have a financial advisor
As with many things, it’s always good to have a competent expert at our side when dealing with important matters. We want to make sure our mechanic knows where the engine is in the car, the doctor can find our appendix, and our accountant knows something about taxes. This is why we have licensing, regulation, and oversight boards. We tend to
It’s no different when it comes to our money except that the consequences for malpractice are larger and more consequential to our livelihood than in any other area. As such, there are a host of rules and regulations that are supposed to help protect us from financial ruin. One of the most famous is the fiduciary standard. The fiduciary standard simply states that an advisor must put their clients’ interest above their own. It sounds good on paper and its underlying intention is perhaps noble, but it could lead to false sense of security that may not be fixable until it’s too late.
First we should address the rule itself and then we shall consider the consequences. Think about this rule for a moment. We have a rule to tell someone, whom we are paying for a service, that they should do what’s in our best interest with our money. Isn’t that like trying to pass a law that says all married people must love each other? Sounds great at first, but wouldn’t that be a little weird? Must we legislate morality? Why should that not be implicit in such a relationship? Moreover, trying to or having to legislate it is almost a sign that there’s something very wrong. That the system of marriage isn’t working for without love, there shouldn’t be marriage.
So we now have a rule that we shouldn’t have to have. Like in Florida how it’s state laaw that having sexual relations with a porcupine is illegal or Rhode Island where you may not bite off another person’s limbs (I can’t make this stuff up). As with any rule that should not have to exist, we could be headed for serious issues. Look, I’m glad the rule is there anyways. But before we sit back and assume the rule is there to ensure we have a nice, financially fit life, let’s consider a few caveats.
No guarantee of competence
Licensing doesn’t guarantee competence. Have you heard the old joke about what you call a medical student that graduates at the bottom of their class? Doctor!. Neither license nor the fiduciary standard can guarantee even a degree of competence. Would it surprise you to know that according to CNBC in 2017, as few as 35% of financial advisors have their own financial plan? I’m not sure how you can give advice that you don’t follow yourself, but it can sometimes turn into the blind leading the blind.
If this were buying a car and whoops, it didn’t work out, okay. That’s not the end of the world. But this is our entire life after our family and it IS our entire life when it comes to supporting our family. And we won’t find out until it’s too late. There must be a base level of competence in money in order to choose and to monitor anyone handling our money. Imagine our mechanic suggesting that the way to fix our transmission would be stick a banana inside. Now, I’m no expert on transmissions, but I know enough to ask a few more question before signing off on the work order.
No guarantee that it will work long-term
There are a host of financial strategies out there, but when it comes to the mainstream, long-term horizon type vehicles, there are a few basic ones. In all of them, we are paying for the service, not necessarily the results. What that service entails depends on with whom we are working.
Ideally, there should at least be a plan or strategy. In other words, exactly how much will you need first year of retirement in order to produce the income you need to live off your money and not live off your job or business. One of the names for this is FIN – Financial Independence Number. Without it, you do not have a plan. In other words, how can you get ‘there’ if you don’t know where ‘there’ is? You may have someone trading mutual funds or stocks, but if not advising you on how to get to a goal, what exactly are they advising you on?
It doesn’t create vested interest
Advisors generally get paid for holding your assets, not necessarily for growing them. At least in a proportional sense, it’s far more profitable to grab your pile of dollars from another advisor than to grow those dollars long-term. What this means is that your advisor can often retire whether or not you can. If there are enough assets under management, they will continue to get paid on that pile of money for as long as you decide to leave it in their control.
I’m not suggesting that we hoard our money in the mattress, but we should understand that we make money if and when they do the right thing and markets cooperate. They make money. No, that wasn’t a typo. They make money. So while good advisors always strive to build and hopefully protect our wealth, it’s not as consequential to them if they can’t or don’t.
The Fiduciary Standard protects them
Oh, you thought the standard was to protect you? There will certainly be a large difference of opinion on this one, but at the end of the day, it is at least also for their protection. It’s a door that swings both ways, but ultimately in favor of the advisor. The worst part is that you won’t find out until it’s too late.
If my transmission was broken and the mechanic didn’t fix it, I would have legal recourse to go back and either have them redo their work or get my money back. If my advisor doesn’t perform as I need or hope, I would have little to no recourse as long as they did their best under the fiduciary rule. Obviously, if things do go haywire with your retirement, they cannot send you a check every month to pay bills, travel to see the grandkids, and take a European vacation. And no judge will rule in your favor if your advisor followed the law. Nonetheless, it is you that will suffer the consequences.
A few key points to consider on finding the right person to work with:
- Licensing matters. Obviously this should be a minimum baseline before considering giving anyone your money. Check with state and federal agencies to verify licensing.
- Understandable. Can this person explain what they’re doing in a way that you understand? If it’s too complex to explain, either they don’t understand it enough or you probably shouldn’t be doing it.
- Take their own advice. Are they drinking their own Kool-aid? What would they recommend to their mom, child, brother, etc. that was in your situation?
- Not a one-trick pony. There are many folks that can only offer you their own products. They are called captive and they may have great stuff, but would you agree that no one company is best in all areas? Make sure you have a broad enough selection to choose what’s best for your family.
- Helps you create a plan. Remember, without an end goal, like your FIN, and a plan to get there, you probably won’t end up where you want to be. It’s easy to sell a product, but be sure that whatever you do is commensurate with a solid, written plan.
By the way, in no way am I suggesting folks (myself included) in the financial industry are bad people. Sure, there are always a few bad apples in any industry, but the vast majority are well-intentioned, good, family-focused people. At the end of the day, if we don’t take a large degree of responsibility in our own money, we can’t really anyone else to do so. So competence must start with us. Do we have to be experts? Of course not, but we should at least be able to ask the right questions and use a few pieces of critical thinking and basic money education. You know, those two things that we often aren’t taught in school
The good news is that there is a huge amount of information out there about money. And the majority of it is not complex at all. The industry may paint a complex picture mainly out of self-preservation, but with just a little bit of effort and a simple plan, we can have control over our finances and therefore our lives.
“The reason so many financial advisors are called brokers is because they are often broker than you.”
I appreciate you for sharing time with me. I challenge you to share this with 3 people who love their financial advisor. It just might save their lives. Meet you at the top ‘cause the bottom’s way too crowded.