Financial Advisors: The Good

Like everything there is a good to the bad...here is the good on Financial Advisors. (please see last post for the BAD).

The main reason I see someone needing a Financial Advisor is to do what you can't. No shame in that. I can't repair a car to save my life. An Advisor can advise on how you should plan your financial future.

An Advisor can help with:

• Asset building investments (stock picks, mutual funds).
• Retirement: If you're close to retirement they can help figure out how much you need to live through retirement and what your allocation/investments should be to meet these needs.
• Estate Planning: If you're not of the mind set to die penniless, cause ya can't take it with you than an Advisor can help plan so your heirs get some of your hard earned money.
• Goals: Working with an Advisor you can plan out goals and how best to achieve them. Ex. you want a shiny new car but don't think you can or should afford it...well, an Advisor can help work this out. And let's not forget about the kids college savings plan you wouldn't mind some help with.
  
• Monitoring your investments: If this is something you don't enjoy than why not let someone else do it.

The most important point is the management/monitoring and setting/achieving goals. While you should remain observant, why have a second job of money management when a professional can do it for you. Furthermore, do you know you financial goals and how to get there? Again, an Advisor might be a good idea.

In the last post I suggested caution around the fee structure. With that in mind, every person needs to ask themselves if an Advisor is right for them and is they one they're contemplating the right one (kinda like getting married).

So, what did I suggest to my friend's dad? Based on the fact the he is pretty hands-off on his finances and doesn't have much interest in being hands-on I think an Advisor is right for him. However, the one he described (fees from the Mutual Funds) seems to have a conflict of interests, so I suggested that he begin interviewing other Advisors. In other words, date around before getting that marriage license.

Financial Advisors: The Bad

Please note that this is a twofer post. The Bad and the Good. This here is the Bad.

I was just speaking with a friend about his father's interest in using a Financial Advisor*. He was asking me since at my last job I was the technical manager of one of the larger custodians for Financial Advisors (i.e. where the Advisor keeps your money and the technology they use to manage it). The first thing I asked was what were the fees. His answer: None! Why what a deal! However, after some probing I discovered that the Advisor receives his fee directly from the mutual funds he recommends. Now, if your livelihood is based upon commissions, say as a car salesman, are you going to recommend the retail priced BMWs on your lot or tell him to go down the street where they always have deals? Is this type of Advisor going to recommend his funds or the best ones for you...say low cost Vanguard funds? This here is the BAD. Kinda scary to trust someone with your hard earned money, isn't it?

There are several reasons why I'm cautious about Financial Advisors. It really comes down to can I trust them and even if I can, do they know what they're doing. I don't want the slow kid from school (you'd rather guess on the test than cheat off of them) managing my money. Paying 1% per year is fine if they can make me more money than I would on my own, and parking me in some Index Funds isn't it.

Be cautious on these fees. Say your Advisor is managing your entire nest egg of 1 million dollars. The Advisor charges 1% and the mutual fund they put you in has a 2% expense ratio (term for the fee the mutual fund charges). At the end of the year the fund went up 10%...nice! You make $100,000 minus the $10,000 going to the Advisor and another $20,000 going to the mutual fund for a total of $30,000 in fees (basically if not for these fees you would have had a 13% return instead of a 10% return). Not too bad you say. Well, let's say the fund went down 10% for the year...you just lost $100,000, ouch! Well, both the Advisor and the Fund take their 1% and 2% cut, respectively. If not for their fees, you would only have been down $73,000. Again, just something to be aware of. Oh, and some Adivsors give your money to "Money Managers" who advise the Advisor on investments...they too potentially take a cut.

I was once at a Advisory conference and one lecturer said something very interesting. She listed clients (you) as three main types: The hands-off, the keep me updated, and the hand-on. She said the hand-on are people with technical or engineering backgrounds who always need to know what's being done and why. They are they ones who will questions every move you make and those are the clients as an Advisor you don't want. My thought was, "Well, that's the type of Advisor I don't want." The point is, make sure that your needs are going to be met by your Advisor. If you need to know they details, your Advisor must be willing to provide them. If you don't want to know the details, your Advisor should not force them on you.

I poked around and found a good article on the topic of choosing an Advisor: http://finance.yahoo.com/columnist/article/millionaire/10590
One thing stuck out was the question on how much money is under management, the number of clients, and the average size of their clients accounts. If you're giving them your 1 million, but their average account size is 100 million, they are most likely going to focus their attention on the larger accounts and give your's to the junior guy. There is something in the industry called the "Nephew Account" where the loaded uncle insists his Advisor takes on his nephew's $100,000 account. Since the Advisor can't say no, they take it and pass it along to a junior associate or some automatic software. Try to make sure you're not the "Nephew Account" to the Advisor.

So, what did I advise my friend's father to do...I'll save that for the GOOD.

*A Financial Advisor is someone who typically advises you on all financial matters, such as stock picking, retirement, and estate planning. They help you run your financial life and for this they typically take 1% of your money under their management (per year, of course). There are other fee structures, but this is the most common one. Now an important point is that a Registered Financial Advisor has a "Fiduciary Responsibility" to uphold your best interests. As opposed to a stock broker who can recommend some stock they're trying to unload, a Financial Advisor by law must attempt to do what's best for you.

The Beginning...

This is my first entry in my newly created financial blog. My goal is quite simple....create a blog where I can discuss all my personal financial musings, conversations, etc. that I am constantly having with and/or imposing on friends and family.

I work in an IT department of a financial services firm in downtown NYC. This means I can discuss programming (Java), project management, and financial instruments (Derivatives, Equity Markets)...topics that have little or nothing to do with personal finance. Personal Finance is more of a hobby of mine. I love to plan, discuss, and think of creative new ways to save and invest. Hopefully this blog will be a good outlet for my thoughts and will spur conversations with like minded people.

Over time I plan on detailing my personal financial status and goals. But that's for a later post...