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May 06, 2008


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I've thought of this as a potential career... however I'm not much of a salesman and I don't know how well I would do. I can also definitely see a potential for conflicts of interest.. such as, do I suggest to my client a product that will generate me more income vs a product that won't?

J: I think the "better" kind of financial advisors -- the ones FMF was referring to -- aren't commission-based. So the point is not to try to sell clients products that generate *you* income. But it's more like advice along the lines of

- Spend less than you earn
- Invest in this low-cost Vanguard fund and that low-cost Vanguard fund.
- Let's redesign your budget thusly to avoid wasting so much money
- Max out your Roth IRA.
- Here is a good way to diversify your portfolio. 25% large cap; 25% international, etc.

I agree that commission-based advisors have a big conflict of interest.

Financial advisors are really not in the business of telling someone to spend less than they earn or redesigning budget. Generally clients of financial advisors already have substantial savings, and the financial advisor charges a flat fee of, say, 1% of assets. In exchange they tailor your portfolio to your needs and use their expertise to get the best returns possible out of a given risk tolerance (or to minimize risk while still earning a given rate of return).

Most financial advisors are not indexers, and if you are the type who really buys into the efficient market hypothesis then you probably shouldn't hire one. Just take some bond index fund and the Vanguard total stock market fund, and split your assets between the two. If you're 30 or younger, go 100% equity. If you're retiring in the next 2 years, make it 50/50. If you're somewhere in the middle, your allocation should be proportional to your progress towards retirement. Do as much of this investing as possible in a 401k or IRA of some sort.

That is obviously not an optimal system, but it covers most of what one really needs to know about retirement investing. What you're paying that extra 1% for is:
-- a more systematic asset allocation tailored to your needs and wants, covering more asset classes than just stocks and bonds
-- someone who you think can pick good fund managers
-- someone who can act rapidly to protect your account in the event of some catastrophe (i.e. 9/11 etc).
-- better tax efficiency in your portfolio
-- a "counsilor" of sorts who can help you realize what your priorities are, who can leverage studies to put your needs in the context of others' experience, etc.

I would not underestimate the importance of any of those factors. But if you don't have a few hundred thousand dollars in your portfolio, these guys are probably not (yet) for you.

FMF, you say that you think folks should learn more about personal finance and manage their financial affairs themselves. I agree with you in principle--falls in line with my libertarian philosophy--but in practice, I just don't think it's realistic. There are just too many people who are either incapable or unwilling to understand all the different facets of personal finance.

Like it or not, personal finance is pretty complex. It's downright inscrutable to some, who wouldn't know a 401k from a 529 from a CD from a hole in the ground. And it's in the interest of the financial services industry to keep it complicated, so they can pitch themselves as experts. Add to the mix our confusing culture that glorifies instant gratification and over-the-top displays of wealth. And it's no wonder so many people are in financial straits.

And I think therefore there is plenty of room for good financial planners. And by "good" I mean knowledgeable financial planning experts whose incentives are in line with their clients; i.e. fee-based not commission-based.

Josh --

Actually, I think the basics of personal finance (spend less than you earn and the like) are pretty simple. If people would take only a bit of time and effort to understand and apply these principles, their financial lives would be much, much better.

Even easier. Be a the rich. Study how they think and what they do with their money to grow it.

Good call, sow. As far as fee-based planners, would they operate as described above by Jake?

How do these types of planners make their money?

I agree with Josh who said personal finance is simple. But there needs to be somewhere to get that education besides the internet. On the internet you must seek it out. I think high school would be the best time to start our young people into learning about personal finance, and make it a mandatory class. What other high school class do they take where they will use that information every day for the rest of their life!

FMF, I think if it were that easy, people would be doing it. But they aren't. The fact is that most people don't understand personal finance and mess themselves up badly.

It seems pretty simple to you and me, but it can seem overwhelmingly complex to many folks. I think you may also be discounting how powerful our culture is and how deep its hold is on people. TV and movies glorify ostentatious displays of money. And commmercials are all about why you've got to have a 60" flatscreen TV, the newest iPod, and a Lexus or two in the driveway, AND that you deserve it. It's easy with low interest financing. Life works with Visa, Mastercard is priceless, etc.......

Mo --

Actually, I said it was simple.

Josh --

I see the problems as the following:

1. People THINK it's difficult to understand/apply, but it's not really.

2. It requires discipline -- which most people don't want to deal with. They'd rather take the easy way out.

3. A confusion between needs and wants. Caused at least in part by society as you mention.

There are many reasons people work with a financial planner, and portfolio performance is the least compelling reason yet it is always assumed to be a factor. A planner does the following:

1) Connects you into a network of service providers (attorneys, insurers, etc) that have a track record of success with other affluent people.

2) Keeps your portfolio to plan. It really helps to have someone who has weathered a few bull markets to put things in perspective.

3) A planner aligns your life goals with investment objectives. It may sound pithy, but money isn't the purpose or point to any of this -- living out your ambition is.

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