Posted By Paul
Hi Everyone,
I saw an article on CNN that I wanted to pass on. If you are a frequent reader of this blog you might get the feeling that I am "anti-adviser" from some of my earlier posts:
Adviser or Not?
What are you really paying for advice?
-and-
Article: Before of free financial advice.
It would be fair to say that I am very 'adviser skeptical' since it seems like so often the information they provide you can easily be obtained by just doing a little research, and the cost to you can be significant if you're not careful. There have been so many times where someone I know will mention a financial adviser that "works for free". When I ask my friend if the adviser has suggested a life insurance annuity and my friend says they haven't my standard response is: "Wait a few months, they will." I seem to always be right. To read more about annuities just select the posting label 'annuities' in this blog to bring up the articles where I discuss them.
Considering the role they play in your life, I think a certain level of adviser skepticism is healthy.
Here is the article:
Dirty tricks financial advisers play.
Showing posts with label adviser. Show all posts
Showing posts with label adviser. Show all posts
Saturday, May 22, 2010
Wednesday, December 3, 2008
Article: Beware of free financial advice.
Posted By Paul
Great article today on some of the things to watch out for when considering financial planners.
First some excerpts that I found interesting:
"Your bank may be very good and you may even play golf with your banker. Make no mistake that a bank is also in business to make money. So if your bank is giving investment advice, you can be pretty sure there is something in it for them. They may not charge you by the hour but they are making money nonetheless." -and- "What I consider to be abuses fall under two categories:
Beware of free financial advice
To add a little advice of my own:
I have heard people say that their financial planners are great, and best of all, they work for free. This reminds me of an earlier post:
Know Their Agenda: Some great advice I got.
The short version: OF COURSE they aren't working for free, the question is HOW are they getting paid.
I think that the most common way that financial advisers make their money is by recommending funds that have loads and fees associated with them.
What bothers me is that it is SO easy to check mutual funds to see if their fees are excessive or not.
I don't think there's anything wrong with having an adviser, knowing that you are paying them through mutual fund fees, and being okay with that. I just worry that people out there think that somehow the adviser really is working for free.
If you have an adviser that you think is working "for free" then you might want to take a look at the following articles:
A Few Quick Tips On Mutual Funds
What are you really paying for advice?
Paying an adviser doesn't mean you are getting swindled, but paying an adviser AND NOT KNOWING IT seems like a bad idea all around.
Great article today on some of the things to watch out for when considering financial planners.
First some excerpts that I found interesting:
"Your bank may be very good and you may even play golf with your banker. Make no mistake that a bank is also in business to make money. So if your bank is giving investment advice, you can be pretty sure there is something in it for them. They may not charge you by the hour but they are making money nonetheless." -and- "What I consider to be abuses fall under two categories:
First, there are the expensive mutual funds with front-end or back-end loads. These pay handsome commissions to the banks and, of course, have a great track record of under performing no-load mutual funds.
Second, there are the ever-popular permanent insurance policies that come in flavors such as whole life, variable annuities and universal life. These are even bigger cash cows to the banks that partner to sell them."
Here is the full article:Beware of free financial advice
To add a little advice of my own:
I have heard people say that their financial planners are great, and best of all, they work for free. This reminds me of an earlier post:
Know Their Agenda: Some great advice I got.
The short version: OF COURSE they aren't working for free, the question is HOW are they getting paid.
I think that the most common way that financial advisers make their money is by recommending funds that have loads and fees associated with them.
What bothers me is that it is SO easy to check mutual funds to see if their fees are excessive or not.
I don't think there's anything wrong with having an adviser, knowing that you are paying them through mutual fund fees, and being okay with that. I just worry that people out there think that somehow the adviser really is working for free.
If you have an adviser that you think is working "for free" then you might want to take a look at the following articles:
A Few Quick Tips On Mutual Funds
What are you really paying for advice?
Paying an adviser doesn't mean you are getting swindled, but paying an adviser AND NOT KNOWING IT seems like a bad idea all around.
Thursday, October 16, 2008
Insurance Agents and Financial Advisers: Getting Dinner From the Vending Machine
Posted By Paul
I used to have a job where I traveled a lot, and sometimes I wouldn't get to my hotel until 2AM local time. I'd usually show up tired, but also hungry, hoping to find someplace that served dinner.
I remember once where I found myself standing in front of the hotel vending machine with a stack of coins, trying to make a dinner out of what was offered.
I'm sure we'd all agree that a pack of peanut butter crackers, a couple of cookies, and an orange soda is a very poor dinner, but it was the best I could get from the machine. I was back in my hotel room munching away and looking out the window when I saw a Denny's practically next door to the hotel that I hadn't noticed when I came in. I ditched my vending machine meal and dashed to the diner where a club sandwich awaited.
This situation made me think of insurance agents and financial advisers. Sometimes people have experiences where they feel like their adviser or agent has been dishonest or is trying to swindle them out of a few bucks. I think that more often than not it's just that expecting to get the best deal for you out of your agent or adviser is like trying to get dinner from a vending machine.
After all, let's say that you can save some money on your car insurance by increasing your deductibles. It's not fair to expect your insurance agent to suggest that. After all, they're just trying to provide you coverage based on the products they have to offer. If the monthly savings versus the potential risk of paying a higher deductible is the better choice for you, then YOU need to make that decision.
Life insurance is also a great example. If it were free, then the more life insurance the better, and , your agent will almost certainly offer you a large amount of coverage. Your agent doesn't know at what point the cost outweighs the benefit to you. That decision has to be made by you.
The best example though are financial advisers. They generally represent a specific brokerage company and if you tell them you are interested in a Large Cap Value fund (or if they recommend that you invest in one) then they certainly have one (and often only one) to offer you. They of course offer you the one that they have, it's up to YOU to consider if that fund is worth it versus other options.
My point is that far too often people expect their insurance agents and financial advisers to do what's best for them, and I think that in general most insurance agents and financial advisers try to do just that. The key point is that you can't expect your agent or adviser to comparison shop for you, or try to weigh costs versus benefits for you. Just like a vending machine, they have a specific set of products that they can offer you. They may not be aware of your overall financial situation or your risk vs. cost preferences, you need to decide that for yourself.
By taking an active role in insurance and financial decisions your agent or adviser can be a great benefit to you. However if you end up following their guidance blindly you may find yourself doing the financial equivalent of getting dinner from a vending machine when there's a Denny's across the street.
I used to have a job where I traveled a lot, and sometimes I wouldn't get to my hotel until 2AM local time. I'd usually show up tired, but also hungry, hoping to find someplace that served dinner.
I remember once where I found myself standing in front of the hotel vending machine with a stack of coins, trying to make a dinner out of what was offered.
I'm sure we'd all agree that a pack of peanut butter crackers, a couple of cookies, and an orange soda is a very poor dinner, but it was the best I could get from the machine. I was back in my hotel room munching away and looking out the window when I saw a Denny's practically next door to the hotel that I hadn't noticed when I came in. I ditched my vending machine meal and dashed to the diner where a club sandwich awaited.
This situation made me think of insurance agents and financial advisers. Sometimes people have experiences where they feel like their adviser or agent has been dishonest or is trying to swindle them out of a few bucks. I think that more often than not it's just that expecting to get the best deal for you out of your agent or adviser is like trying to get dinner from a vending machine.
After all, let's say that you can save some money on your car insurance by increasing your deductibles. It's not fair to expect your insurance agent to suggest that. After all, they're just trying to provide you coverage based on the products they have to offer. If the monthly savings versus the potential risk of paying a higher deductible is the better choice for you, then YOU need to make that decision.
Life insurance is also a great example. If it were free, then the more life insurance the better, and , your agent will almost certainly offer you a large amount of coverage. Your agent doesn't know at what point the cost outweighs the benefit to you. That decision has to be made by you.
The best example though are financial advisers. They generally represent a specific brokerage company and if you tell them you are interested in a Large Cap Value fund (or if they recommend that you invest in one) then they certainly have one (and often only one) to offer you. They of course offer you the one that they have, it's up to YOU to consider if that fund is worth it versus other options.
My point is that far too often people expect their insurance agents and financial advisers to do what's best for them, and I think that in general most insurance agents and financial advisers try to do just that. The key point is that you can't expect your agent or adviser to comparison shop for you, or try to weigh costs versus benefits for you. Just like a vending machine, they have a specific set of products that they can offer you. They may not be aware of your overall financial situation or your risk vs. cost preferences, you need to decide that for yourself.
By taking an active role in insurance and financial decisions your agent or adviser can be a great benefit to you. However if you end up following their guidance blindly you may find yourself doing the financial equivalent of getting dinner from a vending machine when there's a Denny's across the street.
Thursday, March 27, 2008
What are you really paying for advice?
Posted By Paul
I don't want to come out as the guy who says "you're being robbed if you have an adviser" because it's really not true. I know people who have been with their advisers longer than they have been with their spouse, and trust them totally, and that's great.
HOWEVER, I wanted to lay out a little scenario so that people know HOW you're paying for advice and how much it might cost you.
Let's say that you have $10000 and you want to put it into a mutual fund. We'll go through it step by step, and cover the cases where you have an adviser and one where you don't.
Step 1: Opening the account
With an adviser: You tell your adviser you want to invest $10000 in a mutual fund, and they open an account for you, most no cost advisers work for a specific brokerage company, so you'll get an account with that company (for this example, I'm going to use Black Rock as the family of funds).
Without an adviser: You create an account somewhere by yourself, the advantage is that you can pick from ANY broker you want. So let's say you decide you like Vanguard funds so you open an account with them.
Time advantage:
With the adviser you probably save the time of picking a brokerage. You probably fill out more or less the same forms either way.
Money advantage:
None. Either way it's easy to find a place that will let you open an account for no cost.
Step 2: Picking the fund
With an adviser: Your adviser will probably ask you a few questions and say something like you want to invest in a "Mid Cap Value" fund (this is just an example) and present you with a fund from their brokerage company. In this case for this adviser it would be BlackRock Mid Cap Value fund (BMCAX).
Without an adviser: You would have to decide what type of fund you want, this could take some time but would probably come down to how much you are willing to risk loss of your investment versus potential returns.
There are tools that help you with this, such as this asset calculator.
For the sake of this illustration I'm going to assume that you ALSO decide that you want a "Mid Cap Value" fund. I did a quick check in Vanguard for their Mid Cap Value Fund (VMVIX).
Time advantage:
You saved the time of picking and researching the fund, which could be a lot depending on how much time you like to research that sort of thing.
Money advantage:
At this point, none.
Step 3: Investing the money.
With an adviser: You give your check to your adviser for $10000 and they deposit it in your account and buy the shares. HOWEVER, advisers generally sell loaded funds that have loads or fees involved. In this example BMCAX has a 5.25% front-load. So of your $10000, $525 comes off the top and the remaining $9475 gets invested in the fund (there might even be an additional transaction fee depending on your adviser).
Without an adviser: You give your check to Vanguard and they deposit it. VMVIX has no loads so your whole $10000 goes into the fund (I'm pretty sure Vanguard doesn't charge a transaction fee).
Time advantage:
None really. Putting the trade through is easy either way.
Money advantage:
The adviser route has cost you $525.
Step 4: Fees associated with the fund.
With an adviser: There will be fees associated with the fund.
Without an adviser: Again, fees associated with the fund.
Time advantage:
None.
Money advantage:
While your money sits there, some percentage of your investment goes to administrative fees. For our Vanguard fund it's .26%, for Black Rock it's 1.25%. As far as the fees associated with the fund the Black Rock costs almost five times as much.
Step 5: Fund performance.
With an adviser: You sit back and hope your fund goes up.
Without an adviser: Same thing, fingers crossed.
Time advantage:
None, you sit back and wait.
Money advantage:
Well that depends on how well your fund does. Here are the two funds for the last six months. Notice how similar they are? Maybe in some cases the fund your adviser suggests will dramatically outperform a similar fund, but I'd say most of the time it won't
Step 6: You sell it.
With an adviser: You ask your adviser to sell your fund.
Without an adviser: You contact the broker directly and put the trade through.
Time advantage:
Essentially none, contact your adviser vs. contacting the broker directly.
Money advantage:
In this case none, but be aware that many adviser based funds also have a deferred or "back end" load, which means that a percentage of your investment is taken out as a fee when you sell.
Total difference:
In my example for our $10000 investment, by using an adviser we paid $525 up front, about 5 times the annual fee percentage, and the same fee (zero) at the end. Fund performance was essentially the same.
For that money what we got was the suggestion of the fund category.
If the fund recommendation is worth the money to you, then by all means pay it. In general I would recommend that everyone go through this exercise with their funds and find out:
1) Are paying a lot of front and back end loads for their funds?
2) Are the fee expenses for their funds unusually high?
3) Are the funds performing better than similar funds that don't have the fees?
If you read my previous post:
A Few Quick Tips On Mutual Funds
You'll see how easy it is to use web resources to check your funds.
If you know the answers to these three questions then you can really decide if the money you are paying to your adviser is worth it.
I don't want to come out as the guy who says "you're being robbed if you have an adviser" because it's really not true. I know people who have been with their advisers longer than they have been with their spouse, and trust them totally, and that's great.
HOWEVER, I wanted to lay out a little scenario so that people know HOW you're paying for advice and how much it might cost you.
Let's say that you have $10000 and you want to put it into a mutual fund. We'll go through it step by step, and cover the cases where you have an adviser and one where you don't.
Step 1: Opening the account
With an adviser: You tell your adviser you want to invest $10000 in a mutual fund, and they open an account for you, most no cost advisers work for a specific brokerage company, so you'll get an account with that company (for this example, I'm going to use Black Rock as the family of funds).
Without an adviser: You create an account somewhere by yourself, the advantage is that you can pick from ANY broker you want. So let's say you decide you like Vanguard funds so you open an account with them.
Time advantage:
With the adviser you probably save the time of picking a brokerage. You probably fill out more or less the same forms either way.
Money advantage:
None. Either way it's easy to find a place that will let you open an account for no cost.
Step 2: Picking the fund
With an adviser: Your adviser will probably ask you a few questions and say something like you want to invest in a "Mid Cap Value" fund (this is just an example) and present you with a fund from their brokerage company. In this case for this adviser it would be BlackRock Mid Cap Value fund (BMCAX).
Without an adviser: You would have to decide what type of fund you want, this could take some time but would probably come down to how much you are willing to risk loss of your investment versus potential returns.
There are tools that help you with this, such as this asset calculator.
For the sake of this illustration I'm going to assume that you ALSO decide that you want a "Mid Cap Value" fund. I did a quick check in Vanguard for their Mid Cap Value Fund (VMVIX).
Time advantage:
You saved the time of picking and researching the fund, which could be a lot depending on how much time you like to research that sort of thing.
Money advantage:
At this point, none.
Step 3: Investing the money.
With an adviser: You give your check to your adviser for $10000 and they deposit it in your account and buy the shares. HOWEVER, advisers generally sell loaded funds that have loads or fees involved. In this example BMCAX has a 5.25% front-load. So of your $10000, $525 comes off the top and the remaining $9475 gets invested in the fund (there might even be an additional transaction fee depending on your adviser).
Without an adviser: You give your check to Vanguard and they deposit it. VMVIX has no loads so your whole $10000 goes into the fund (I'm pretty sure Vanguard doesn't charge a transaction fee).
Time advantage:
None really. Putting the trade through is easy either way.
Money advantage:
The adviser route has cost you $525.
Step 4: Fees associated with the fund.
With an adviser: There will be fees associated with the fund.
Without an adviser: Again, fees associated with the fund.
Time advantage:
None.
Money advantage:
While your money sits there, some percentage of your investment goes to administrative fees. For our Vanguard fund it's .26%, for Black Rock it's 1.25%. As far as the fees associated with the fund the Black Rock costs almost five times as much.
Step 5: Fund performance.
With an adviser: You sit back and hope your fund goes up.
Without an adviser: Same thing, fingers crossed.
Time advantage:
None, you sit back and wait.
Money advantage:
Well that depends on how well your fund does. Here are the two funds for the last six months. Notice how similar they are? Maybe in some cases the fund your adviser suggests will dramatically outperform a similar fund, but I'd say most of the time it won't
Step 6: You sell it.
With an adviser: You ask your adviser to sell your fund.
Without an adviser: You contact the broker directly and put the trade through.
Time advantage:
Essentially none, contact your adviser vs. contacting the broker directly.
Money advantage:
In this case none, but be aware that many adviser based funds also have a deferred or "back end" load, which means that a percentage of your investment is taken out as a fee when you sell.
Total difference:
In my example for our $10000 investment, by using an adviser we paid $525 up front, about 5 times the annual fee percentage, and the same fee (zero) at the end. Fund performance was essentially the same.
For that money what we got was the suggestion of the fund category.
If the fund recommendation is worth the money to you, then by all means pay it. In general I would recommend that everyone go through this exercise with their funds and find out:
1) Are paying a lot of front and back end loads for their funds?
2) Are the fee expenses for their funds unusually high?
3) Are the funds performing better than similar funds that don't have the fees?
If you read my previous post:
A Few Quick Tips On Mutual Funds
You'll see how easy it is to use web resources to check your funds.
If you know the answers to these three questions then you can really decide if the money you are paying to your adviser is worth it.
Thursday, December 6, 2007
Adviser or Not?
Posted By Paul
So it was about 12 years ago when I decided to try to find a financial adviser. I thought it would be a good way to get an early start on my finances.
I went with a financial adviser that was recommended by the head of accounting at the company I worked for at the time.
Here is a quick summary of the various actions I took based on the suggestions of my adviser and how good the advice was in my opinion:
1) He suggested that I start a Roth IRA. Overall I thought this was a good decision. I like the Roth IRA and I'm glad I started one early.
2) He suggested I buy a house. This was a great decision. I certainly would have purchased a house at some point but his suggestion to buy a house earlier than later was a great decision for me.
3) He suggested I invest in a Variable Universal Life policy. I was intrigued by this concept, and even started one for a time, but after researching it further and watching the returns, I decided that this wasn't something I was interested in and stopped the policy and cashed it out.
4) He suggested various mutual funds for my IRA. This generally worked fine as my IRA got returns that were decent (though not spectacular).
5) He suggested some low-risk funds for my "emergency fund". This also generally worked fine as my emergency fund grew at a conservative and tolerable level.
The reason I'm writing this article now is that as I got older and got more interested in finances, here are some things I decided I didn't like:
-The funds that he had suggested had high expense ratios.
-The funds that he suggested often had loads involved with them.
If you're not familiar with those terms then read my earlier article:
A Few Quick Tips On Mutual Funds
So I recently decided that I wanted to manage my money more directly. Towards that end I did the following:
-I moved my Roth IRA and Rollover IRA into Vanguard (I like their no-load funds and low expense ratios)
-I moved my emergency fund into a discount brokerage account (specifically eTrade).
I don't think my adviser was very happy about this, since I was essentially taking away the portion of the fund fees that were going to him. I decided that the money he was making off of me was essentially his cost for his advice. Ten years ago I was willing to pay for that advice but now I felt knowledgeable enough that I wanted to try it myself. So why continue to pay for advice that I no longer really needed?
It wasn't that the funds my advisor put me in were bad, in fact they were perfectly fine, but I decided that I wanted to find out if I could do as well (or maybe even better) on my own.
I figure that I can try this for a year or two and if I end up doing terrible then I can always call up my adviser again. I plan on simply buying some funds and holding, I certainly don't plan on crazy day trading or anything like that so I suspect that I'll do just fine, and hopefully enjoy the process and learn a lot.
So having gone down this road with my adviser would I recommend it to someone? I'd say yes under certain specific conditions.
For example, let's say that you DON'T KNOW MUCH about saving and investing and DON'T WANT to learn about it, then an adviser might be a good idea. However financial adviser plus no interest in learning about it yourself is a potentially dangerous situation. If you effectively give your adviser carte blanche to handle your money then they could easily steer your in directions that are somewhat lucrative for you, but extremely lucrative for them. If you want to not be involved in handling your own money, then I would not settle for anything less than an adviser that you trust completely (like a close relative or family friend if possible).
Also, if you think you might be interested in handling your own investing and savings at some point in the future but don't feel comfortable jumping in on your own, then an adviser might be worth it for a little while as a way to learn about things.
The way I see it, having a financial adviser got me focused on savings and investing very early and the money I saved (and made off of the savings) more than made up for the costs of the adviser. However, the very fact that you are reading this blog suggests that you are interested in learning about investing to the point where I would think your probably don't need an adviser. With the resources available on the Internet (like Frugalize!) it's easy to learn the basics of investing and as long as you don't do anything too crazy at the beginning (like sinking ALL of your money into one stock), then you'll probably be fine.
Instead of an adviser, I would suggest trying to find people to discuss your finances with like friends, family and coworkers. I know that money is often considered a taboo subject but it's not like you have to compare bank statements or swap paychecks to talk about saving and investing. I have a small group of people that I discuss finances with and I find their non-biased, first hand information to be incredibly useful.
If you do decide you want to get an adviser then I have some basic advice for you. First, make sure that you get one that is willing to clearly discuss how they make their money. If they ever try to make it sound like they're working for you for free, then be VERY suspicious. Second, don't think that having and adviser means that you shouldn't be VERY involved in your finances. An adviser should only provide you with ideas. The final choice of what you do with your money is ALWAYS yours. Don't blindly follow the advice of your adviser. Ask questions, bring up ideas of your own, track your returns. You are paying for their advice, make sure it's worth it to you.
Thursday, August 30, 2007
Today only....free advice from financial pro's
Posted by Matt
Hopefully our readers are finding some good info on this and other personal finance blogs on the web, but it certainly couldn't hurt to talk to a professional every once in a while, right?
Well, Kiplinger.com has been kind enough to pick up the tab. Check out the info on their "Jumpstart" program by clicking here. You can call a toll-free line to talk to a financial advisor between 6am and 3pm Pacific.
Be forewarned that financial advisers mostly deal with investment advice...not things like "how can I get out of debt?" or "what type of life insurance coverage should I have?" To put together a comprehensive plan, you should schedule a consultation with a fee-only certified financial planner (find one here).
And keep reading Frugalize, of course. :)
Hopefully our readers are finding some good info on this and other personal finance blogs on the web, but it certainly couldn't hurt to talk to a professional every once in a while, right?
Well, Kiplinger.com has been kind enough to pick up the tab. Check out the info on their "Jumpstart" program by clicking here. You can call a toll-free line to talk to a financial advisor between 6am and 3pm Pacific.
Be forewarned that financial advisers mostly deal with investment advice...not things like "how can I get out of debt?" or "what type of life insurance coverage should I have?" To put together a comprehensive plan, you should schedule a consultation with a fee-only certified financial planner (find one here).
And keep reading Frugalize, of course. :)
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