This blog post was originally published on the MoneyGeek.ca blog by Jin Choi. The website no longer exists, but Jin has graciously allowed us to re-publish his research for the benefit of future investors forever.
A recently retired couple had once trusted a financial advisor to invest their savings. This is what happened (explanations to follow).
3 Major Advisor's Failings
If you talk to other people near retirement age, you'll find that this couple's story is pretty typical. There are 3 major failings, as I see it:
- Wrong recommendations: Obviously, this couple didn't have a big stomach for risk. But from the sounds of it, the advisor sold them products with more risk than they could handle. In a way, this is understandable. It's very hard to gauge risk tolerance without using concrete numbers.
For example, let's say an advisor told you that a mutual fund came with 'medium risk'. What does medium risk mean, exactly? Could medium risk mean a possible loss of 5% in a bad year? Or is it really 15%? Who knows? You can only get a good idea of the risks involved if you use numbers.
Unfortunately, most financial advisors lack the tools to draw up realistic numbers. Sure, the firms could spend a little bit of money buying such a tool, (heck, I'd even be willing to sell it to them). But the chances are, they won't. They won't, because providing the numbers might scare customers like you away from buying their products.
- Lack of communication: When you use a personal financial advisor, as opposed to a website like ours, you're supposed to have better communictaion. An advisor is supposed to check up on your portfolio periodically, raising alarm bells when times are bad.
But as this couple's example shows, this is not always the case. Instead, let me tell you what actually happens. When times are good, you'll hear from your advisor pretty often. That's because they want to remind you how much value they've provided to you. They want you to tell your friends about this financial wizard that grew your savings.
But when times are bad, advisors will go into a cocoon. They'll hope that you haven't noticed the drop in your investments. They don't want to answer awkward phone calls. They don't want to give you any reminder that they exist, because then you might talk about this awful advisor that lost you money.
- No disclosure on fees: As the video's question implies, the stock market returned 3.7%/year for the past 20 years. (If you look at the past 100 years, it would have been close to 9%, but that's a side issue).
The average stock mutual fund in Canada charges 2.3%/year, which means the couple probably only received 1.4%/year after mutual fund fees. The mutual fund would have taken some of the 2.3%/year, and gave it to the couple's financial advisor.
Currently, the law doesn't require financial advisors to disclose their fees. Our regulators are currently discussing the possibility of increased disclosure on advisor fees, but given the entrenched interests of the big banks and other financial institutions, I'm not sure if it'll pass.
Personal Thoughts
When I was first starting to learn more about investing many years ago, I seriously thought about becoming a financial advisor. I found investing fun, and I thought that I would be helping people with their finances. I even met with an experienced financial advisor, to see if the job was right for me.
However, it didn't take long for me to realize that most financial advisors were just salesmen. The focus of their training was on sales, not investment knowledge. I've met financial advisors, for instance, who didn't even know what an ETF was.
That's why I created MoneyGeek. With MoneyGeek, I wanted to address all of the 3 major issues above. Using our sophisticated tools, our members can understand their risks better. I maintain regular communication through my newsletter and my blog, and be rest assured I won't stop communicating when the times get tough. Finally, our members know exactly what the fees are, which by the way, are far lower than a personal advisor's.
Review Your Advisor
Finally, there might be some of you who already have financial advisors, and are wondering if they gave you good advice. If you'd like me to evaluate their recommendations, send us an email at info@moneygeek.ca. I will get in touch with you to go over the recommendations.
The couple in the video trusted a financial advisor, and they didn't get the results they were looking for. You can avoid the same mistake by equipping yourself with knowledge. Read our free book and follow this blog. Your bank account will thank you.
This blog post was originally published on the MoneyGeek.ca blog by Jin Choi. The website no longer exists, but Jin has graciously allowed us to re-publish his research for the benefit of future investors forever.
