Should I Hire a Financial Advisor?

A couple of years ago we decided that the answer to the question "Should I hire a financial advisor?" was yes.  I guess a more accurate way to describe the situation is that we allowed someone to sell us on the idea of hiring him as financial advisor, and if you read my prior posts on the subject, you'll learn that we fired the financial advisor, so in some ways I'm telling you here what the conclusion of this post will be--sort of--but stick around, it's not quite that cut and dried.

First, Decide Why You Want to Hire a Financial Advisor

As far as I'm concerned, there are three reasons to hire anyone to do anything:

• I'm not able to do it.  That's why the electrician was here installing a ceiling fan, and why the dentist pulled my tooth.
• I don't want to do it.  That's why my son cuts my grass.
• I could do it, but you'll do a better job.  I could have painted the house, but the painter did a much nice job than I would have, and I don't have to think very hard to come up with a way I'd rather spend my weekend.

I think that if you are going to hire a financial advisor, you first need to decide which of those reasons applies.  Maybe you really know nothing about finances.  On the other  hand, you may know enough to know you hate fooling with it and gladly outsource the job.  Of course you may think that a professional will get better results that you would.  

Secondly, Decide What You Want from the Financial Advisor

Yes, I know, you want the financial advisor to take your dimes and turn them into dollars overnight--but you and I both know that's not going to happen.  The key to being happy in any professional relationship is having clear expectations and having those expectations met. You may love your doctor because he gets you in and out of the office promptly and always gives you a prescription for something (who knows or cares what) that fixes the problem.  I may hate the same doctor because he always rushes through the appointment and doesn't take time to explain the various options for treating my symptoms and he always just tried to stick a prescription in my hand without explaining what it is, how it works or what the alternatives are.  Our expectations are different.  The fact that I don't like him doesn't mean your doctor does a bad job; it means he isn't the doctor for me.

Back to the finanical advisor.  What do you want from him or her?  Part of this ties back to the reason you chose to hire one.  Do you see yourself offloading a chore that you could do, but choose not to?  Are you trying to find someone who knows more about at least some aspects of finance than you do?  Here are some things people want financial advisors to do:

• Help them minimize taxes
• Help them set out a savings and investing plan
• Select investments, monitor their performance and move in and out of them at the proper time
• Help them set up their finances  to account for long-term goals like retirement or the care of a special-needs child

In our case, what we really wanted was help developing a long-term plan to invest my inheritance and to decide how much to save for the rest of our working lives so as to fund our retirement and the long term costs of providing for my autistic son.  We also were in favor of minimizing taxes.  At the time we hired the advisor, we  had not been keeping up with the investments we had and really weren't up on what mutual funds were considered the best at that time, so having someone pick a portfolio for us didn't seem like a bad idea, but it was pretty low on the list.  Mostly what we wanted was a plan.  

The advisor we hired was our CPA--the guy we go to when I run into issues with our tax return.  If I don't run into issues, I do our taxes.  Like any good businessman, once we used him for one thing, he tried to sell us another and since we knew we were about to get a nice-sized pot of money, we bit.  For us, hiring this advisor was the wrong choice.   

We should have asked more questions up front and made it clear that we were looking for a plan, particularly a plan to deal with my son.  Unfortunately, it became clear after we were working with him that he had little knowlege about the programs for and laws about finances and the disabled.  That was strike one.

We wanted to minimize our taxes (doesn't everyone?). We had money in IRAs and money that wasn't in IRAs and both pots of money were invested in the same way.  I don't claim to be a tax expert, but it seemed to me that taxable accounts should invest in things expected to grow over time, but which do not throw off a lot of current income, and that if you are going to invest in something that throws off current income, an IRA is the place for it.  The only tax advise we got was to consider a Roth conversion but he wouldn't endorse any calculator we found that showed the likely results of doing so because he couldn't guarantee investment results.  Strike two.

Before You Shop for an Advisor, Consider What You'd Consider a Reasonable Fee for the Services You Want

Eveyone has to eat, and everyone deserves to be paid for their work.  However, all of us have to consider how much we are willing to pay for any service, and the best time to do that is before you start to shop.  You may have to change your number once you look around, but have one in mind.  I would gladly have paid someone $200/hour to develop the plan we were looking for and the same to yearly review our investments and savings and to advise us if we were on track.  I would expect this person to be up-to-date on the laws and programs regarding the disabled.  

Financial advisors charge in a lot of different ways, but it seems hourly is not a popular choice.  A percent of assets under managment is popular and with the size of our account, over about two years we paid over $6,700.00 for a computer to put us into that company's model portfolio for people of our age and risk tolerance.  We got little to no plan, just a projection like you could find on the website of just about any mutual fund company.  And no, they didn't earn their commission by the outsized returns--the money we managed ourselves did better.  Strike 3.  

If You Are Considering a Financial Advisor

If you are considering hiring a finanical advisor because you want to dump this problem in someone else's lap, and you understand the fee structure and consider it worth it, go for it.  Make sure the person you hire is competent and honest but maintain enough knowledge of the markets and finances to monitor what is happening.  

If you think a financial advisor is going to make you more money than a diversified portfolio of index mutual funds, ask the advisor to show you past performance.  Few mutual fund managers can beat the market on a regular basis; when you add the fees of a finanical advisor, out performing the market becomes very difficult.  

If you are looking for particular services, make sure the advisor offers them, and how.  I wish I had.

We Fired the Investment Advisor

Used with Permission

A few months ago I wrote a post about why we decided to hire a financial advisor.  I wondered in April if he was worth the cost.   Today I'm writing about why we decided to fire him.  To be fair to the advisor, who is a friend, I don't think he did anything awful, and I'm not mad at him.  However, after monitoring the money he and his firm were managing over the course of about eighteen months, it was becoming increasingly obvious that we were paying a lot of money for people to do something better suited to a computer.  

Our advisor is a CPA who works for himself.  He does financial advising through the brokerage firm of HD Vest.  The advisor interfaces with clients, gathers information about them, helps them assess their risk tolerance and then passes the information on to HD Vest which uses it to determine the appropriate basket of mutual funds in which to invest the client's money.  While they will honor requests for certain funds, or to increase or decrease the risk in a portfolio, HD Vest controls the investments in the account--they decide which funds to buy, and which to sell, and when to do so.  The idea is that they have people who keep an eye on the industry, who know which funds do well, and which do not, and know when it is time to get out of a fund that has been doing well (say when the fund manager changes).  

Transferring money from one manager to another takes time--several days.  Unfortunately when we moved from our prior investments to HD Vest, the timing was such that we ended up with less money in HD Vest than we had with the old custodians--the movement of the market over a few days made a difference.  That wasn't HD Vest's fault and I don't criticise them for that.  However, during the time our money has been with them, all of our other investments have made money; the accounts with them are still worth less than what was deposited in them.  A large part of the reason is the fee they assess (and which we agreed to pay) of slightly more than 1% of the account value.  I sat down the other night and did the math--had we invested my husband's IRA in Vanguard's Target Date fund for his age group, his account would have $8000 more than it has now.  HD Vest's fees on that account since we opened it have been about $4000.  In other words, had they invested our money in Vanguard's Target Date fund, and still taken their $4,000, we would still be $4,000 better off than we have been with their chosen funds.  

As I said above, I am not mad at the advisor; however, I am mad at HD Vest right now; not because they failed to equal my other investments (you win some, you lose some) but because they are charging us $95 each for three accounts to transfer the money out.  I saw an article today that talked about how Vanguard with its low fees was hurting a lot of Wall Street firms; I guess this is how HD Vest gets back at people for choosing not to stay with them.  Because of that fee, I'm putting their name in this article and I'm recommending staying far away from them.  All total, in the year and a half we have had those accounts, we have paid fees of $6678.72, including that last $285.00 hit.  Our account is worth $12,234.52 less than it was worth when we deposited the money in August, 2014.  This has definitely been an expensive lesson.

We got a little financial advice and a couple of dinners out of our advisor during the time we used him.  What I really wanted when we entered into this relationship was someone to look at our overall financial picture, especially the fact that we have a son who will likely need financial support his entire life (he's autistic), as well as our other goals and savings rates.  I was hoping for a plan that said "save this much", put together this type of trust, and fund it this way.  Instead, what I got was a mutual fund portfolio, quarterly meetings to explain that the market was down and that balanced portfolios were faring the worst, and a little generalized tax advice.  Frankly I've learned more reading blogs, and I don't think his predictive model was any more accurate than any on any mutual fund family homepage.

Have you ever used a financial advisor?  Were you happier than we are?

Why We Hired a Financial Advisor

In my opinion, there are two reasons to hire someone to do something:   1) I don't want to do it and/or 2) the person I hire can do a better job than I can (and that includes jobs that I am incapable of).  Why did we hire a financial advisor?  It was some of both.  My husband and I have always handled our own investments and at one time investing was a favorite reading/research topic for us.  Then kids and life got in the way (and took away much of the free cash we used to invest).  We were somewhat aware that the funds we bought way back when were not the ones recommended today, but inertia had struck and while we talked about making a change, we never did.  Then my dad passed away and I realized I would soon have a large chunk of money to invest.  I also realized that we weren't up-to-date on the best places to invest, nor were we sure what asset allocation was best for us.  While we have always lived beneath our means and saved money yearly, we really didn't know if we were on target to meet our retirement goals.  We have between ten and fifteen years left in the workforce and our house is paid for; now is the season for the race to retirement and we wanted to make sure we were on the right track and running fast enough. We want someone to keep an eye on the funds and to get us out of those that aren't doing what they were purchased to do.  We wanted a plan and we were willing to pay for it.