Why Does Everyone Hate on Financial Planners? Defending Financial Advisors

Almost every personal finance blog out there (even the best of the best on my blogroll) hates on financial planners, financial advisors, investment advisors, etc., but I don’t understand all the expressed hatred.  A financial advisor could be very useful for those that need help, despite all the negative information out there.

Before even starting, I will concede that there are bad apples out there that don’t care nor understand the basic tenants of financial planning.  However, that being said, I spent an entire semester in law school taking ethics and learning about lawyers that didn’t act appropriately (and the New York Law Journal goes over Attorneys on a daily basis that get disbarred).  Fine…fine…maybe those aren’t great examples, but what about Doctors acting unethically, teachers who cheat, secretaries who commit fraud, and who the hell hasn’t felt completely ripped of when an auto mechanic tells you that your flux capacitor is dead.  Oh yeah…can anyone say enron, worldcom and Arthur Andersen.

For purposes of this post I am going to focus on financial planners/advisors, and less on investment advisors who actively trade on the part of the client.  The reason I am making this distinction is because I don’t work closely with investment advisors that are trading for clients on a daily basis.

First Complaint About Financial Planners: I can do What Financial Planners Do

I think those that talk about money on a daily basis (PF Bloggers and money journalist) take for granted what it means to have both, basic and advanced ‘money skills.’  Right or Wrong this is the case.

I’ll never forget when I as a wee young lad, and asked my Uncle what he did for a living.  He responded that he invested people’s money (he is one of those active traders for people, and from what I understand a very good one).  Well being the pain in the ass child I was, I responded why does anyone need him for that?  Can’t People just invest themselves?  His response stuck with me, his response was,

Why does anyone pay to have their oil changed by a mechanic?  Did I think that his occupation was less technical than someone paying to have their oil drained and filled up?

and Thank you reader, for giving me the opportunity to use the statement ‘wee young lad.’

Basic Money Management

I do not deal with this world in my office, because quiet frankly I am a person that believes most people should be able to handle this including both planners and their clients.  That being said, there are a ton of planners/advisors out there that budget and work with clients because if everyone had this skill (and yes I think it is a skill) then America would be in much better shape.  Should someone get paid for this skill? OF COURSE.  Organizing anything for anyone is a trade which should be compensated for.  Anyone remember the Seinfeld episode where Jerry was going to hire the virgin closet organizer? Oh come on…it is the episode where they had the bet to see who was “master of their domain.”

Advanced Asset Allocation and Investment Management

Why do people assume that everyone should understand even the basics of asset allocation?  portfolio analysis? correlated and uncorrelated asset classes? Even with bad ass free tools like Morningstar Portfolio X-Ray it is not as simple as lets say…changing a light fixture (which trust me took a long time for me to master, and that was recently and I am not a master).

I am all for index, passive investing, and I am not saying that most people can’t understand it, I am just asking why people assume that this is the portion of their life that they are going to undo,

ἓν οἶδα ὅτι οὐδὲν οἶδα hen oída hoti oudén oída

The above Greek statement is what Socrates allegedly said in response to the inquisition that he believed himself to be smarter than everyone else.  It is loosely translated as, “The only real wisdom is knowing you know nothing.”  So if someone is going to help you with investments…doesn’t that lead us to payment.

Second Complaint about Financial Planners: How Planners Get Paid

The industry gets SLAMMED for its payment methods.  There are those planners who get paid by product.  For instance a planner/advisor may help you out with your money management skills, and asset allocation just to make an insurance sale.  Concurrently, there are planners/advisors who will handle your investment management for no fee, but will get a commission on the sale of a mutual fund.  Then there are fee based planners who will just work for an hourly fee, much like an attorney, but may then get an additional compensation for products sold.

The combinations are endless and the commissions/fees paid can be confusing (A Shares, B Shares & C Shares).  I bet that most people if given an option for an up front fee or taking it off the backend of an investment would choose the latter, but for whatever reason it is an easy subject to attack.

I blame the bad apples insofar as they probably didn’t explain how they got paid, or the differences between A, B and C shares or the insurance product or even that it was $150 an hour and there is no cap as to how many hours the planner will spend on your case.

What other Complaints are out there? Education, no standardized acronym? What do you think of these counter arguments? Am I full of it?

31 Responses to Why Does Everyone Hate on Financial Planners? Defending Financial Advisors

  1. Hey Evan,

    Nice post!

    Agreed that financial advisors get slammed too often. There are just some complex issues that most people don’t understand. For example, I’m not going to pretend like I know the first thing about estate planning. A financial advisor could certainly help you there.

  2. I’m a firm believer that a great financial adviser is a must have. Unfortunately, it is so hard to find a great financial adviser because of all the things you mentioned and more. In my experience the biggest problems are miseducation and incentives.

    • It is true the incentives might swap a planner twoards one product over another, but what about pharma reps! They parade cute girls (usually or at least the ones I know) in front of doctors in an effort to keep drug sales up.

      I think as long as the person is a professional that argument *should* fall away.

  3. You are not full of it. Planners do get slammed, just like car salesman, attorney’s and doctors. In most cases the professions brought it on themselves. Not because of the many hard working decent planners but because of the few that were not.

    But the other side of this coin is not in the planners, it is in the clients. Their lack of understanding causes them to question everything they hear even from a good planner. Added to their own doubt a few stories and this is where we find ourselves.

    If you are a planner it is part of your job to connect with and educate your clients. You have to overcome the objections and gain their trust and earn the money that you deserve…. but no more!

    • I couldn’t agree with you more! I believe that the main job for the planners here, is to educate. Once you start educating is when you take yourself from a product salesman to a professional

  4. Great post. Whenever I grumble about financial planners, I’m grumbling specifically about two who swore that they would help me and didn’t. What I didn’t realize at the time due to my financial immaturity was that I needed a fee only planner. Had I realized that, I’m sure it would have been a different story for me. Although I did simply hire a Money Coach and that is working out really well for me.

    But generally, I think financially planners are great. I like to joke with my husband and say that someday, I’ll have enough of my debt paid off (maybe in two years) to start working with one.

    • I’d love to hear more about your money coach. Also you may not need a planner in 2 years…there are planners out there who will keep you accountable to your debt repayment plan/investing plan. Like I said though they don’t work for free, nor should they.

      Love your site by the way even though you are an attorney lol

  5. Great post to start a good discussion.

    Personally, I think financial advisors have an overall negatve reputation because the nature of the industry can be overwhelming to an average person. With all the things to check for in a good planner, such as appropriate licenses, professional designations, clean background checks, and fee structures just to name a few, a person may wonder why all those elements are necessary. Or, they may see those things as a way for the advisor to release themselves of any liability to the client for wrongdoing.

    Another reason could be that negative news in the world of finance seems to occur more often, or is more magnified, than negative news about teachers, car salesmen, and mechanics. The Bernie Madoff scandal immediately comes to my mind. Teachers get hired to teach, so there’s not much controversy that can occur in my opinion. But financial planner’s get hired to manage hard-earned money. So when they lose a lot of that money, whether through schemes or just plain bad decisions, they lose the trust and respect of clients.

    I myself went through an education program to potentially make a career move as a financial planner. Although I haven’t totally ruled it out yet, there seems to be a lot that a planner has to overcome in the eyes of a client.

    • Interesting points. I am not sure if I agree because any time a teacher does something wrong (I am thinking dating a student or cheating) it is on the news for weeks.

      That being said, maybe financial planners have a higher rate of fraud

      • I can see your point about teachers. And though I have heard of stories in a news about teachers dating a student, maybe my mind is more in tuned when I hear stories of financial controversy.

        To my knowledge, advisors have fiduciary responsibilties to their clients. If they push a product that gives them the most commission, but isn’t necessarily the best for the client(which I think occurs often), then they’re not holding up their end of the bargain.

        But I’m not sure if teachers are responsible to their students. I believe they’re only responsible for teaching the material, and have authority to fail the student.

        I guess that’s why I think advisors are viewed more negatively than teachers.

        • “But I’m not sure if teachers are responsible to their students.”

          Not sure I agree with that one! I hope that teachers feel some sort of responsibility.

          Regardless, I absolutely agree that planners should have some sort of fiduciary duty, but I am not sure they all actually have that responsibility by law or contract.

          • Evan, I hope teachers feel some sort of responsibility towards their students too. And not to get too much off topic, but I believe No Child Left Behind requires teachers to demonstrate a certain level of quality (credentials, etc.) in order to teach, just as advisors are required to be properly licensed in order to offer products.

            But as far as I know, the accountability for teachers ends there (if I’m wrong, please correct me), while advisors are accountable to be both licensed (if they offer products) and to act as fiduciaries.

            Regardless, this is an interesting discussion, and thanks for bringing this up!

  6. I think with the way the economy has been the past year or so people have lost trust in anyone related to finance. You hear financial planner and you think Bernie Madoff even though they are different.

    Another problem is there is no agency to police financial planners like the bar in law or what governs CPA’s. Literally anyone can call themselves financial planners.

    And too many have been on a commission basis. I get calls from major firms that want my business so the can sell their product. I remember once going to a major bank and discussing investing through them and the person immediately started talking about their banks products that had loads/fees.

    Of course there are probably way more good financial planners and its just a handful that make the industry look bad but that’s the press that’s out there now.

    • I think FINRA has some authority if the planner is Series 6, 7 or 63 registered, but for the most part I think you are correct.

  7. I don’t hate personal planners.

    As a matter of fact, I think focusing on the idea “everyone” “hates” them is way of pushing off some very real critisms of the current situation. Every profession has bad apples and it’s silly to focus on those other to the extent of encouraging sane regulation.

    There’s nothing wrong with using a personal planner, especially if you have money that should be invested. I would pay a planner a percentage of the return on the money that I would propose to invest. It is worth money to have time back.

    However, the “average” person might be better off learning how to not waste money rather than visit a financial planner. And that takes personal discipline. Visiting a doctor 4 times a year is not helpful if you eat junk on the 361 days a year.

    And yes, the commission scheme is a serious problem with financial planners. There is no alignment between how effective you are for the client and pay rate. The current structure encourages fly by night sales people who are better at pushing products than what’s best for the client. It doesn’t matter to a certain extent that a client might prefer it that way because clients who prefer that haven’t become serious yet about not wasting their money.

    Fee based financial planners are the only way that creditiblity is going to be increased. Doctors aren’t allowed to take kick backs on the drugs they prescribe (can you imagine how you’d feel about that??) Financial planners can’t take commission on the products they propose to invest to their clients.

    • Amy,

      I think my attempt on being cool failed LOL. I meant like “hate on” – from Urban Dictionary,

      “to insult or verbally attack someone. originally implied jelousy, now also used for more generally applied abuse.”

      I failed! But I digress lol,

      “There’s nothing wrong with using a personal planner, especially if you have money that should be invested. I would pay a planner a percentage of the return on the money that I would propose to invest.”
      – Depending on who the planner is working for you are not actually allowed to do that! Crazy, right?

      “Doctors aren’t allowed to take kick backs on the drugs they prescribe (can you imagine how you’d feel about that??)”
      – I know a lot of pharma reps and while they don’t give docs money they absolutely rock out the dinners and ball games

  8. If you truly understand the economics of the financial advisory industry, then you would understand that the best advisors only work with high networth individuals. Because of the high amount of assets, they can limit the number of clients, hire a proper team to service their customers. They are normally the most knowledgeable bunch as well. They tend to know about estate planning and complicated financial issues. The really wealth folks never ever use fee only planners. It is an absolute myth that fee only planners are better. When you are serving high net worth clients, you have to know what you are doing. The weak ones do not survive for long in this segment.

    The reason why most “folks” or rather folks who just surf the net and hang out at pf blogs hate financial advisors is because most are not wealthy enough to have worked with the best folks out there. And we read too much about Susie Orman and how not to get suckered etc and too many blog saying invest in indexes etc and DIY…

    Look, anyone who has an 8 or 9 figure wealth all have proper finance guy they work with.

  9. with or without financial planners, I believe investors need help to better manage their financial investments or portfolios. As investor,you need to protect and grow your investments that’s why many investors these days are attracted to muni bonds investment which could offer them exemptions from federal and state income taxes. If we want to grow our finances then we need to learn and utilize finance and investment tools available.

    • Shane,

      While I think you are generally correct, there is a line as to how much they should learn. What do you think about using their time to learn about something else? or advance their career and job? and outsource this part of their life?

  10. Great post! Yeah, financial planners like a lot of professionals can be great or they can be not so great. Just like you can have an excellent doctor or a mediocre doctor in life. You just have to pick wisely and make sure they’re out for you, not themselves. =)

  11. Great post. To those who say that financial planners are not policed by any organization, you need to check your state’s securities laws. Many states have started to regulate ANYONE who calls themselves a financial planner (whether fee or commission). Trust me – I dealt with my own state one this (though everything worked out fine for me because I was following the rules).

    Also, there’s a difference between fee-based and fee-only. If a planner says he is fee-based, then he could receive an hourly fee (or flat fee or % of assets fee) and STILL get a commission. If he’s fee-only, that means absolutely NO commissions.

    I chose to set up my business as a fee-only planner because I don’t think it’s right to “plan” when you’re going to get commissions. Specifically, I work only on an hourly or flat fee basis because there are some serious conflicts-of-interest with the assets under management model (% of your assets type of fee). But of course, no compensation model is completely free of all possible conflicts.

  12. I would never hire a financial planner. I would hire a tax accountant. I can do a better job than a financial planner. By the way I do change my own oil not just to save a few bucks but because I had a guy strip out my oil drain plug and that cost me some dough. I put the filter I want on my car not the one that the oil change place thinks is best for them. Yes I worked as an engineer in an engine factory for years and I know what I am talking about.

  13. I guess there are planners that want to do nothing but sell you something. Those are the ones to avoid. Find one with the heart of a teacher… those that want to give you the right advice, whether they can make a sale or not.

  14. I work as a financial advisor and have to agree whilst the industry does get a great deal of negativity unfortunately it is primarily the fault of the industry. The commission based models along with the soft licensing have not done it any favors. That said it does depend on the clients since often many advisors deal with unsophisticated people that may earn good money however they have unrealistic expectations and are totally responsible for their own financial issues. The annoying thing is when a good advisor explains what needs to be done and is totally frank with them it comes as a shock, i.e often making sacrifices with existing lifestyles if they have left retirement planning too late for example. Clients may take up a plan or recommendation have it explained to them in great detail, costs, surrender charges etc and after a short period of time they lapse back into their old ways and realize they want to stop current investment or make radical changes because they think they know better and ultimately lose money – who would get the blame? the advisor of course despite having explained the risk previously. I only deal with sophisticated investors, I will pitch good ideas and explain the risk and then they make the decision to go ahead, if they lose money they knew the risk and don’t bitch and moan like most unsophisticated clients do. You have two choices either build your wealth up slowly staking little risk and treat good years as a bonus or build fast but understanding the dangers involved – That’s it! people always want to high returns low risk and expect and advisor do achieve that and complain when they don’t. People also complain about commissions but do not want to bay upfront fee’s which are expensive, remember it is a service and if you feel it’s of value pay for it, if you don’t then don’t and invest your own money. Another thing is always read the small print where your money is concerned. Even if you trust your advisor never take just their word for it. It is the clients responsibility to check they understand what they are investing in. The advisor is there to help you and assist you in growing and protecting your wealth. They are not responsible for it. That is you the client. If someone says they don’t have any time to look after their money I tell them that is no excuse and need to start taking responsibility otherwise prepare to be poor. A good teacher can teach you almost anything but you need to be the one to actually learn and apply the knowledge. A good advisor and educate and provide you with a range of options but you need to be the one to ultimately take action and make it happen.

  15. I have been in the business, being a financial advisor for over 16 years. And I have seen all. I always work for my clients as an independent and fiduciary financial advisor.

    Always try to get the best investments and strategies for all my clients.

    What I have seen is those that tried to manage their own money ending up losing it at some point. Maybe because of the lack of knowledge and time.

    Also I had clients that took my advice and went back to their old advisors – the ones that never did anything for them.

    At some point they came back to me asking for more advice but it was too late…when they should have done and follow my advice from the beginning…

    People should blame themselves for the choices they make and not to blame their financial advisors.

    At the end, it is the clients choice.

  16. I have had 3 advisers. First one was totally influenced by a mutual fund company, second was good, and my current commissioned sales idiot is not customer oriented and is very easy to see he is in it all for him. If he worked for his clients the rewards would follow. His profile online sounds good but he has not done anything he says he does. I can only say as every day goes by the hatred grows!!

    • “my current commissioned sales idiot is not customer oriented and is very easy to see he is in it all for him”
      – So why is he your current advisor?!

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