In the past few years I have had an epiphany about financial advisors. Everyone says weathermen and economists have the best jobs. They can be wrong and no one cares. Expectations are so low, they get a pass.
I’ve noticed another group that gets a pass. Financial advisors, by various titles, can perform poorly and keep clients. Over many years, I made it a point to ask dozens of friends, relatives, and business associates this question: “are you happy with your financial advisor?” Here’s the response, no exceptions, “I’ve been with the same person/institution for x years. “We’re friends, we(fill in the blank/play golf,vacation,fish,socialize,etc) together.
When I ask the next question, “what kind of job does he/she do?” I get a blank stare and a qualified response. “OK, I guess”.
Most of these respondents wouldn’t tolerate anything but a top notch performance from a house painter. But, they make a financial advisor a member of the family and accept whatever they get.
I have yet to find one person who measures an advisors performance against indexes. Does it make sense to pay someone a lot of money to perform below what an index fund does? You can buy those index funds for a lot less money.
There is zero transparency for data in this area. You can’t comparison shop. Financial advisor A doesn’t publish his annual results to compare against advisor B.The same with bank A and bank B. Or, even wealth manager A vs. Wealth manager B.
This is an entire industry being run on a relationship basis, not a performance basis. Millions of people turn their hard-earned assets and financial futures over to a friend, then have no tools to measure what performance that friend is doing for them.
Everyone of us has no greater priority than to hire the very best we can find to do this job. But, we choose to put it way down the list and never face whether old Tom or Dick or Mary is even average. We just let them play the friendship game and hope they are good.
Of all the people I’ve talked to the past 15 years, I’m the only one I know who treats financial advisors like house painters. They are not my friend, they are an employee, paid much more than a house painter. And, from my experience, far less talented than a good house painter. Very few ever beat the indexes, but every one can snow 99% of their clients. If a painter paints the windows and ruins the carpet, you notice. If a financial advisor does the equivalent, either you don’t even notice, or he convinces you everyone painted windows and wrecked carpet that year. It was just a bad year for painters.
So, here’s my free advice. First, request data from your financial person. Performance against the appropriate index for the last several years. If it’s good, you have the right person. If it isn’t, ask why. If you get a snow job, you have to face a problem. You can pay a lot of money to watch your future lifestyle and security diminish, or you can start shopping for a new advisor.
It won’t be easy to get hard data from prospects. You will get a lot of “trust me” responses. It will take time, energy, and dedication. But, what the hell, it’s only your money we’re talking about, not painting your house.
Here are index comparisons to get you started.The numbers in parenthesis are the index performance for 2011. Large Cap: S&P500(7.83%), Mid Cap: Russell Midcap(5.39%), Small Cap Russell 2000(2.75%),International Developed:MSCI ACWI ex USA ND(-5.90%), International Emerging(MSCI Emerging Markets ND (-11.54%), Municipal Bonds: BC Muni 5 Year(4.47%), High Yield Bonds: BC US Corp HY 2% Cap: (4.09%). Three year index for high yields: (25.93%).
Good luck.
