HOW TO USE A FINANCIAL ADVISOR

Most financial advisors and RIA’s (Registered Investment Advisors) are very good at:

• developing customized financial plans,

• tax planning,

• estate planning,

• insurance advice,

• and dealing with complex one-time financial transactions.

They have in-depth knowledge and lots of experience helping people with these specific challenges. These services are typically one-time events. Consumers don’t need these services on an ongoing basis. Most advisors charge about $200 per hour for these services and that is an excellent deal. You can get all these services for around $1,000 once and you would only need to spend about $400 to $500 every three or four years to update and revisit your plans.

But there is not an adequate business model that allows financial advisors to make enough money offering these services in this manner. They end up subsidizing these services by charging an ongoing fee for managing investments. The typical fee they charge for investment management is 1% of your total investment portfolio. They would charge roughly $3,000 per year to manage an investment portfolio of $300,000. The management fee charged typically decreases to about 0.8% for portfolios over $1,000,000. You would pay about $8,000 per year to a financial advisor to manage a $1,000,000 portfolio. For larger investment portfolios like this, you would typically get all the financial and tax planning services at no additional charge.

But there is a big problem with this business model. Paying thousands of dollars per year to a financial advisor for investment management is not a good deal. Financial advisors are not very good at managing investments. They offer mediocre investment management for a very high price. This is not their fault. They were trained by the big financial services businesses who also don’t have good investment management solutions. The SEC (Securities Exchange Commission) does not even allow financial advisors to talk about investment results. The regulatory environment encourages advisors to offer plain vanilla investment strategies. Advisors who offer unique and better solutions risk getting fined by the SEC. As a result, advisors offer the same mediocre investment strategies that end up lowering your investment returns. Paying thousands of dollars or tens of thousands to a financial advisor is one of the worst investments you could make.

The industry (advisors and the big financial firms) tries to justify these fees by making the investment process much more complicated than it needs to be. They use fancy terms like asset allocation models and risk-adjusted returns and correlation. They take you through a lengthy process to assess your risk profile. They build portfolios containing lots of different investments that look very sophisticated. Advisors often invest their clients’ money in many individual stocks or stock sectors. They balance stock investments across large cap, small cap, international, growth and value stocks. They allocate money to bonds or bond funds. They may invest some money in commodities or real estate investment trusts. A complex portfolio like this must be worth thousands of dollars per year, right?

The answer is actually no. The entire financial services industry wants you to be confused with all this complexity and all their fancy terms. They want you to think that you couldn’t possibly figure all of this out on your own. But the investment results they generate with all this complexity is much worse than you could generate on your own. If you simply put all your long-term investments in an S&P 500 index fund, you would generate significantly better results than any advisor or investment professional. And these complex portfolios that they construct do nothing to protect you from bear market collapses. Look no further than your 2022 investment results. As you can imagine, they do not want you to know this.

The investment professionals are not bad people. In fact, they are great people, and they genuinely want to help people. They were just not trained properly and the regulatory environment that was designed to protect consumers is doing the opposite. Investment advisors believe that what they offer for investment advice is actually very good.

The best way to navigate this broken system is to pay by the hour for the excellent things that investment advisors have to offer:

• developing customized financial plans,

• tax planning,

• estate planning,

• insurance advice,

• and dealing with complex one-time financial transactions.

And for investment management, you can easily do it yourself. Invest all your long-term funds in index funds that track the S&P 500, or the Nasdaq, and you will outperform every financial advisor and every highly paid fund manager for time periods beyond ten years. For people with portfolios greater than $300,000, you will save thousands of dollars per year in fees, and you will gain thousands of dollars per year in investment results. It is not often that you can pay less for something and get better results. This is one of those situations.

And to avoid the pain of bear market collapses and to achieve even better investment performance, you should follow along with our Beyond Buy & Hold system; the only system that beats the S&P 500 consistently and that avoids losses in bear markets.

Happy investing,

Phil

---

Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.

Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.