“If you’re starting your investing journey, keep it simple.”

I’ve heard much ado lately about recommendations for financial advisors. While there are many advantages to having an investment professional in your corner, there are some distinct risks as well. 

• Talent. In short, the lack of any. While the world is full of talented investment folks there are an equal number of hacks. Depending on the company they represent, they may be little more than a salesperson without any real deep knowledge of the market to speak of. 

• Thieves. It seems that headlines are full of investment folks who get busted swindling their clients. Rest assured; you only hear about the large dollar cases like Bernie Madoff where the damages run into the millions. Theft is just as prevalent at the lower levels as well. A brief review of FINRA bulletins shows that. In the words of JL Collins- “Any industry that gives access to someone’s life savings will be a magnet for con men and grifters.”

• Fees. The most common pricing model currently is “Assets Under Management” and is generally 1-2% of whatever portion of your portfolio they manage. That’s 1% per year whether you make money or not. Some of those guys are going to work pretty hard for that…some won’t. Either way, 1% is a drag on your portfolio that goes on forever.

While this isn’t meant to paint a bleak picture of the entire financial services industry, it certainly brings up a good point. By the time you learn enough about managing your own investments to sort out whether your advisor knows their butt from a hole in the ground or isn’t an outright crook with a suit and tie…you probably know enough to effectively manage your own accounts a lot better than you think.

If you’re starting your investing journey, keep it simple. You could do much worse than simply sticking money in a target date index fund or a simple S&P500 index in your 401k or IRA and those are nearly free. Your savings rate is going to control most of the heavy lifting until your portfolio is into the multiple six figures. For that matter, I know several folks who manage multi-million dollar portfolios with just a handful of mutual or index funds. 

Do I think advisors are worthless? Not at all. There are people with complex financial situations that would greatly benefit from professional help. At some point, if you’ve successfully achieved financial independence, your own situation will get a lot more complicated than you’d like through simple inertia. If you do decide on hiring help, here are some things to remember.

• They work for you, not the other way around. They owe you diligence. You owe them their fee…nothing else. 

• The words ”Fee-Only Fiduciary” are a good starting point. If your financial advisor isn’t a fee-only fiduciary in all of your interactions, be aware they have a significant conflict of interest and make money from parties to sell their investment products to you. You’re paying someone to sell you what they’re being paid to sell to you from someone else. That’s a problem.

• If you don’t understand what you’re being pitched, full stop. Really good investments are simple to understand at the third-grade level. If an investment comes with pages of flowery language, provisos, caveats, and restrictions; it would be in your best interest to do a double take, get a second opinion, or simply walk away.

There are a few situations where I do think financial advisors truly earn their keep (good ones at any rate). The first is when you need a second set of eyes to look over your assets before cutting the cord on employment. I think there is substantial value in a tax savvy de-accumulation strategy as you start spending your assets. The second is when you start to experience cognitive decline. A good many people stay mentally sharp right up to the very end, unfortunately some don’t and those people likely shouldn’t be trading stocks with their life’s savings. In that case, having a relationship with a trusted co-pilot who can take over the controls will be in your favor.