Friday, June 1, 2007

Financial Advisor? No Thanks!!

Many of my friends insist that a dedicated financial advisor is a necessity. I get the "If you needed brain surgery, would you insist on doing it yourself?" questions occasionally. Others insist they just don't have the time to do their finances justice. But, when I ask myself whether a financial advisor makes sense for me, the answer is clear...No, thanks!!

Personal finance is not brain surgery. And, you can be virtually certain of beating the market with as little as a couple of hours of preparation and setup and 15 minutes per month for maintenance. If you don't know how, spend half of your preparation time reading some of my previous articles on dollar cost averaging, diversification and rebalancing.

Admittedly, you'll beat the market averages by only 1-4%, while you could dream of wildly outperforming the market. But a small margin of outperformance will work miracles over the long term when combined with the power of compounding. If you can consistently outperform the markets by 2.5% over 40 years, your nest egg will be over 60% larger than it would have been just matching the markets.

And, using a financial advisor does not guarantee outsized returns. In fact, if he tries to justify his fees by trying to chase trends, or by using more sophisticated investments and frequent trading, I believe the likelihood of outperforming the markets is decreased. But, if you can outperform the markets, why couldn't the advisor do the same? He could, if he used the same methods! But, then his fees would eat up half the outperformance. And, why exactly would you pay him to do what you could easily do yourself with minimal effort?

Of course, there is the chance the advisor could be brilliant and dramatically outperform, but the chances of this are small. It amounts to whether you want to go to Vegas to seek your fortune or would prefer the near certain path to financial security. To me, the latter sounds more appealing. Perhaps this example sounds extreme, but I have heard numerous horror stories from colleagues about the results they obtained with their financial advisor. Remarkably, some of them still used the same advisor, or switched to a different one for similar service!! I can only conclude that gambling is indeed an addiction!

Of course, there are times when expert advice is needed, such as estate planning or second opinions on your strategies, and I've used advisors in these cases. But, I'd rather pay a few hundred dollars for the specific advice I rarely need than to pay a substantial percentage or fixed fee on a regular basis.

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