Financial Planners. How do they survive?

Steady readers know that I have a problem with professional financial advisors.  I am so disappointed at how they appear to do well by their clients during bull markets (when their services are not needed) and do poorly during bear markets (when their help is desperately needed). 

I know these people cannot produce miracles, but in my opinion, the advice they peddle is essentially worthless.  I believe investors would do better to save the fees and spend time learning to become a do-it-yourself investor who adopts conservative option strategies.  And if that idea is unsuitable, owning a mix of index funds and bonds would probably produce results that are as good, or better – with no fees.

I found some interesting blogs on this topic yesterday:

Harriett Johnson Brackey, financial columnist for the Sun Sentinel, asks

"Why is it so hard to find a financial adviser (and I didn't even say a good one)?"

There has to be a reason, but I’m not sure what it is.

Why don’t advisers try to connect with the public? How do they expect the public to find them?"


Good questions.  Perhaps the answer is that they are too embarrassed by their inability to help clients.  How about it planners:  Are you allowed to advertise?  Why don't you?  

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Then I found this piece on how well financial planners have done when earning money for themselves.  Of course, these are the fees they collect from clients, and not the result of their investing prowess:

Eric Shurenberg had this comment in April, 2009.  It's a video worth watching.

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2 Responses to Financial Planners. How do they survive?

  1. Income Trader 07/31/2009 at 8:03 AM #

    Hi Mark,
    There is a big disconnect between the interest of the financial advisor as it stands today at most (certainly not all) firms and the client.
    The current financial advisor is a “sales person” as opposed to being a fiduciary and doing what is best for the client. Again there are good advisors who have their clients best interest at heart and then there are the bad “advisors” who are only good at one thing and that is to separate you from your money for a commission.
    I for one blame the employers of these advisors, the brokerage firms. Because of their need to generate revenue, they push advisors to push the highest commissioned product as opposed to what is best for clients. I believe all financial advisors should be taken off sales commissions and put on a fixed salary which could be based on their level of expertise, portfolio size etc, plus year end bonuses based on performance (how their client’s portfolio performs vs the bench mark indices for example). If the client makes money the advisor makes money. If the client looses money but less than the index, the advisor can earn a performance bonus as well.
    There are fee based advisors out there but they are still in the overwhelming minority. Why? because you need a substantial book of business to earn a living from .05% to 1% annual fee…So for most smaller advisors building a book, it is not a feasible proposition.
    The only way to make the client advisor relationship work the way it should, is to aligh interests (brokerage firm, client advisor)…That way, an advisor can be motivated to learn about options as a means to “insure” a portfolio against catastrophic losses etc.
    If this past downturn doesn’t get the ball rolling on reform I am not sure what will!

  2. Mark Wolfinger 07/31/2009 at 8:23 AM #

    IT,
    Can’t argue with that.
    The truth is that Wall Street has always been run for the firms first and the customers last. Why they don’t grasp the idea that successful, wealthier clients would mean more business in the future is beyond me.
    They want the bottom line – and that means profits for the firm today. From a business point of view, you can’t blame them. There are plenty of suckers, oops, I mean new clients to be had, and there’s no need to take care of current client. And if they abuse those clients, whose going to tell those clients that they have been screwed?
    But what can a financial planner do? Certainly not pick winning stocks. So theya re left with traditional ideas. Buy and hold – and hope it works. The idea of hedging with options is foreign to them. Asset allocation and diversification? Sure they have a good reputation for doing the job, but it today’s world there is increasing evidence that those ideas only work during bull markets. The planner is strapped, so he/she makes reasonable recommendations, being certain he/she takes care of the firm first. But who needs reasonable ideas for a fee? No one.
    Just look at the banks and bonuses. They do not care what anyone thinks. They take the risk – and we pay when they lose. When they win, they keep all the cash. No ethics. No morality. That’s how a profitable business works. Not all businesses, but Wall Street works on the premise that they can do as they please. And they have been getting away with it for so long, there is no incentive to change.
    Aligning interests? You mean getting paid for results? Not going to happen.