FMF Speaks: My Thoughts on Using Financial Planners (Or "Why I Don't Go to a Fat Doctor")

I started thinking of this topic the other night while I was riding my bike (20 miles per ride, four rides per week as the summer winds down) and hopefully it will be worth something to you. Then again, I was in an oxygen-deprived state at that point, so maybe it won't be that great. ;-)

The topic was sparked by a comment left by a financial planner on this site (I'm not going to link to it -- you can hunt for it if you like) that basically said, "I'm a financial planner and I know more [about this and other financial topics] than the guy writing this blog." That may be. After all, I've never claimed to be a financial "expert". In fact, I'm anti-financial expert because many of them simply want to make your money their money. However, the comment got me thinking -- what do I really think about financial planners?

So, here is what I think about financial planners:

1. I need a financial planner when I can't handle a financial issue and need someone with a bit more knowledge. So far, this hasn't occurred. I have consulted other advisors on financial issues (lawyer for a will, trusted friend in the business for ins and outs of insurance, etc.), but I've had no need for a financial planner to date. Maybe I'm leaving something on the table by not going to one. However, my philosophy is that 80% of the impact to your finances is achievable by simply focusing on 20% of all the possible financial steps you could take (things like spend less than you earn, eliminate debt, maximize income, etc.). I do these (and many more tasks) pretty well and I'm not sure a financial planner can add much to my results.

2. If I was to use a financial planner, I wouldn't want one who wasn't in better financial shape than I am. After all, why take advice from a person doing worse than yourself? Just like I wouldn't go to a grossly overweight doctor (my doc runs triathlons), why would I want to take advice from a planner who had a lower net worth than I have? Yeah, he may "know" more than I know about the legalities of personal finances, but something's not working if he's not up to my level. Because of my financial success to date, this eliminates most financial planners out there today.

3. Just because someone is a financial planner doesn't mean he is better at managing money than I am. I don't think that because I have a Master's degree in business that I'm automatically better than other business people. It's results that matter. That gets us back to point two.

4. If I ever go to a planner, I would employ someone I see eye to eye with and can relate to as a person and an advisor. Someone like JLP. If I lived in Texas, I'd go to him.

So those are my thoughts. Am I off my rocker? Or is this a decent approach? What do you think?

Comments

[javasoy]

I've never used a financial planner. Neither my friends, my family, my family's friends, my friends' families.

Most of us do very well for ourselves, and have pretty high net worth. It's this simply, when you are born and raised certain way, you learn to manage your money as something pretty natural. You know what to do with your money just like you know a good education will get you a higher paying job.

Your theory can extend to stock brokers etc... I've never used a broker. Neither my friends, my... you get the drift. Why pay the fat fee when YOU can pick better than they do?

[savvy saver]

Your analogy about the fat doctor cracks me up! I had a free consult with an Amex financial planner a while back and he actually scared me. There was no way I was taking any advice from him, he was unprofessional and I felt that I knew a lot more than he did. I'm sure they are not all like that.

JLP is a pretty bright guy, I wouldn't hesitate to recommend him to someone who was looking for a financial planner.

[Mark.]

Point 2 reminds me of my dad. He would ask stock brokers who solicited him to compare results. If their net worth was higher, he'd consider them. No one ever took him up on his offer.

Me, I just hang up on 'em. He would engage, and even argue. His other favorite response, to those calling from distant cities, was "I don't do business with someone whose throat I can't get my hands around if necessary". That scared off more than a few too.

[Financial Fruition]

I think this all depends on your definition of managing money. Most would think of that as investment management, or picking stocks and other investments. However, a true (not an Amex, now Ameriprise FP disguising as a product pusher), Financial Planner can review and foresee financial problems before they arise (and help take corrective action for things that happened in the past). This would be in the areas of insurance, investments, retirement plans, income tax, and estate planning.

While it is true that most can plan for their retirement and pick passively managed funds, it is the overall knowledge to anticipate issues with regards to the rest of the list above that will keep TRUE Financial Planners in business a long time. Besides, I would say the common consumer is not like us (bloggers and blog readers), in that we want to learn and read as much as we can about Personal Finance, so we have a complete head start in this area.

I await to hear JLP's response!

[Senor Effectivo]

I agree with poster #1 above. The only thing I personally could maybe see a need for is a CPA's advice for tax consequences and planning. No one in my family has used a financial planner either. I think a lot of knowledge on money and wealth is learned from cultural or family experiences. My friend and his brother on the other hand both do use a planner, and in talking with them I don't see what they gain from it. Perhaps they gain from the structure and fomality of having a 'plan' and investments that have been pre-cleared for them. It seems to me that their planner just dollar-cost averages their money into a few funds that he has selected (and that he has a relationship with). I believe that most larger planning firms (AMEX?) have a list of investor categories which their planners used to allocate money into the currently favored funds on the list. I'd imagine you'd need quite a bit of cash (and fees) before you could expect really personalized (trust-company style) portfolio management. What do you think?

[Duane Gran]

First off, in point #2 I believe you mean to say "would" instead of "wouldn't."

I think a lot of this comes down to how much of a do it yourself type you are and how cultivated you are in terms of investment intelligence. For one person, paying for advice or giving the broker 1% is a good return if they are basically investing on auto pilot (meaning, no goals and little monitoring).

A USA Today article I recently read (see http://www.usatoday.com/money/perfi/general/2004-09-14-small-invest-cover_x.htm) discusses the difficulty for small investors to get personal advice without high fees. Many first-generation wealth builders face an awkward situation where they may have tens of thousands to invest, which is a relatively large sum for them, but is table scraps to financial planners.

I've enjoyed lurking on FMF for a while, but I think this would be an excellent topic to raise for further discussion. Namely, at what point does it behoove a first generation investor to work with financial planners and/or brokers?

[FMF]

All --

Good discussion. I hope more people read and comment.

To add: I do use a tax professional to do my taxes each year. It costs me a bit over $500 but saves me 25-30 hours of work, so it's well worth the investment. PLus, they always find some obscure deduction I didn't know about. ;-)

FMF

[Future CFP]

Financial Planners cannot provide the same value to every individual. The more complex one's finances become, the more value a financial planner can add.

Most serious financial planners will not even talk to someone who has less than $100K (most likely $500K+) of INVESTABLE assets. Recently, some large institutions (like Ameriprise) have begun catering to the middle class but in general only very wealthy individuals will derive a meaningful benefit from having a planner.

To say "I've never used a financial planner. Neither my friends, my family, my family's friends, my friends' families" is not really meaningful. How many of those people have net worth's over $500k?

A financial planner is not meant to help you with personal budgets or simple financial calculations. Those things you can learn and do on your own. A good financial planner will be able to assist you with many obscure things that you may not have the time or inclination to learn. How many of you know how exercising an incentive stock option without proper tax planning could screw you under the AMT? How many of you would even know to ask? What about deferring capital gains through like-kind exchanges or setting up a rabbi trust to defer bonus compensation? All of these things provide a great benefit to those people who need it. It typically only takes about 1 tip like that per year for a high net worth person to recoup the cost of his planner.

My point is simply that true financial planning (and by this I mean planners that provide more than just investment advice - like estate, insurance, retirement, etc) is not meant for everyone. In fact, if you are reading a site about increasing your net worth by making simple lifestyle changes and saving pennies here and there then you probably DON'T need to see a financial planner anyways. They will be of little use. On the other hand, if you're a Major League Baseball player who needs to defer part of a $10 million signing bonus and exchange your investment property in San Diego for similar property in New York, then a planner would probably be useful.

[JLP at AllThingsFinancial]

I agree with FutureCFP for the most part. However, there are groups like the Garrett Planning Network (there's a link to them in the "Resources" section of my blog. FMF doesn't allow links) that try to cater to the middle class. I was a member of GPN but canceled my membership because it didn't seem to benefit my business.

There are different planners for different kinds of people. Not everyone requires a financial planner.

[FMF]

JLP --

What do you mean I don't allow links? Do you mean links where I earn an affiliate fee? Or maybe links to websites (not blogs)? I certainly have a wide range of links -- and you're at the top of the list! ;-)

FMF

[FMF]

Future CFP --

If you're going to limit your list of clients to MLB players, people who only have $10 million, or even those that have "only" $500k in investable assets -- then you're going to be in competition with a lot of other planners for a very small pool of people.

Or if you're going to limit yourself to people that are "exercising an incentive stock option" or considering "deferring capital gains through like-kind exchanges or setting up a rabbi trust to defer bonus compensation" then again the pool is very, very small. Do you think that you will ONLY serve this type of client when you get to be a CFP? What will make someone of this worth level trust you? A degree? Nope, not me.

In addition, people reading a site to "make simple lifestyle changes and save pennies here and there" are the people in the future who will have $500k in investable assets. As we've learned here, it's not your income that matters, it's your savings.

In the end, my point still stands -- I'd only want a planner who was doing better financially than I'm doing. Does that seem so unreasonable?

FMF

[Tim MMF]

Hey there FMF. Good, good article! I totally agree with you! I don't take advice from a financial planner either. I read, I think in The Millionaire Next Door, that most financial planners are not even that well off. Also, look at the performance of the vast majority of managed fund accounts - most don't beat the S&P!!

I don't go to fat doctors either.

[joe]

your comment

"Just because someone is a financial planner doesn't mean he is better at managing money than I am."

goes both ways, it doesn't necessarily mean that they aren't better than you either.

I am probably like you, I instinctively don't trust outsiders with my welfare and would like to manage as much of my life myself as possible.

I may be able to figure out how to do my own taxes or lay tile in my bathroom. The issue is (a) i'm spending my time doing this, (b) a guy who lays tile all the time will most likely be quicker and better (as long as you look for referrals to avoid getting ripped off) and (c) after going to a tax guy for the first time in my life, my $450 fee yielded over $1,500 more return than I would have gotten if had done it myself!

I realize this is just my relative lack of knowledge compared to yours, but that's my point - if one is not knoweldgable, one can't know how much they're missing.

[FMF]

A tax professional is different (at least for me) than a financial planner. I do use a CPA for my taxes (see http://www.freemoneyfinance.com/2006/01/why_i_use_a_cpa.html ) but don't have a great amount of use for the general knowledge of a financial planner for the reasons noted above.

I'd suggest people concentrate on learning about how to manage money themselves and building up the skills to know when the may need help and when they can do it on their own. After almost 20 years of learning, I'm almost always in the latter camp.

[Lee]

I'm currently both a commission based and an asset-based advisor on my way to being a CFP. I like working with middle-class, hard-working people who, even if they could handle money themselves, and some of them do, like to talk with someone who deals specifically with finances for a living, knows a lot more information than they do, is current on industry trends, and cares if their 33,000 grows to 34,000 in a month.

I can tell you that some of my clients have a far higher net worth than I do (and some of them have multiple advisors) and some of them have a lower one.

Part of their attraction to me or to any advisor is trust and service, in addition to how well their accounts grow. Also, their cares aren't always just about how to make money, but how to make the most of their money, which is something anyone could learn, but not everyone has the time nor inclination to.

I've also found that some of my clients need pushing to do things which they know are good for them, and to have a person on their side, checking to make sure that they opened a high yield savings account, that they paid off that extremely high credit card, that they've turned in the paperwork to start automatic deductions for their children's 529 plan, etc, can make all the difference.

Lee

[Duh.....]

The Fat Doctor analogy gets laughs but is not really relevant. Would you only eat at a restaurant with a fat chef? If you follow this logic, Bill Gates should follow no one's financial advice.... And that would have been much to his detriment... People who have attained wealth have become "experts" in some field for which they were compensated. That expertise does not necessarily transfer to financial markets where even mutual fund managers frequently get their head handed to them... Sure... avoid expert advice.. I just hope I get to take the other side of your trade!

[FMF]

You missed the point. The point is not to take advice from someone who isn't successful at taking and benfitting from their own advice.

For instance, doctors always want people to maintain a healthy weight. If a doctor can't do this himself, I don't want to deal with him. I'll go to a doctor who gives this advice and CAN make it work.

I'm sure Bill Gates went to advisors who were successful themselves. I don't see him going to people who were great advisors but barely solvent themselves, do you?

[Jim]

If you time and competence to do something yourself then it often isn't necessary or cost effective to hire a professional to do it for you. If you don't need a financial planner then don't hire one.

However I personally wouldn't use a litmus test of comparing bankrolls to decide who's smarter at finances. If someone has less money than me then I don't automatically discount their financial expertise, and on the same token if they have more money than myself I don't automatically take their financial advice. There are a number of very good PF bloggers out there with less net worth than myself, but that doesn't make their advice worthless to me.

Jim

[FMF]

Jim --

The issues to me are:

1. Are they taking their own advice?

2. Is this advice improving their net worth/has it gotten them to a place where they are in "good standing" for their age?

For instance, a financial planner who's 50 years old and has $1 million in net worth is someone I think worth listening too. He could be an over achiever or an under achiever, but he's still done fairly well. Even if his net worth was below mine, he'd be worth a listen. (Using the analogy above, my doctor doesn't have to be in better health than I am, but I do want him to at least appear to be somewhat healthy.)

Conversely, if the guy talks about how successful he is, how his system works, how he consults for the "big boys", etc. and yet his personal net worth is a pittance, I'll move on. Maybe he is the most brilliant financial mind ever, but why aren't we seeing any evidence of it. Unfortunately, this is where most financial planners fall -- they talk a good game but when you ask for details they'll back-pedal quickly.

For me it's a moot point anyway, since I manage my own finances. ;-)

[time]

Someone worth a million one day could be broke the next day and vice versa. Just a thought.

[JP]

Really old post to comment on, but...

http://healthland.time.com/2012/01/30/fat-doctors-are-less-likely-to-help-patients-lose-weight/