Take it from me, as a former adviser and stockbroker: You cannot trust the expertise or intentions of most financial advisers.
Let’s start with expertise. The education and other credentials advisers possess vary radically, but most advisers simply aren’t good investors, whatever their credentials. They aren’t worth listening when it comes to allocating a portfolio.
Why do I say this? Well, there’s lots of research to support this claim, like this paper, which may be just the most famous example. In fact, research over many decades has shown that the vast majority of professional investment managers cannot outperform markets or broad indexes, even before fees are considered. Many of the few exceptionally successful investors, like Warren Buffett, often agree that most investors are best served by buying index funds.
It’s true that some advisers have finance, accounting, or economics degrees, perhaps even at the graduate level. In addition, they may advertise professional designations such as CFP, CPA, or CFA. While earning these degrees and certifications may help advisers avoid the most basic investment mistakes, and perhaps help them significantly when it comes to estate and tax planning, the majority of them still are not good investors, meaning they cannot consistently beat the markets over the long run.
Many advisers though have no relevant education or professional designations within the field. They have FINRA licenses, at best, the earning of which require very little knowledge about investing. They are simply sales people and their goal is to build rapport and sell financial services based on criteria other than investment performance and fees.
Many advisers have incentives that conflict with the best interests of their clients. For example, many receive commissions on the sale of certain investment products, such as mutual funds, which typically charge higher fees to cover commissions paid to advisers. Of course, most of these mutual funds cannot outperform the market, even before fees are considered. Everyone wins in these sales, except for the clients.
That is not to say that all advisers are merely salespeople, or that none can outperform the market. It is to say that those who can are very rare, and they deserve to manage all of the actively managed investment dollars. The fact that they don’t is a condemnation of not only most of the investment management industry, but also should serve as a wake up call to investors. Don’t be sold on personality, education, professional designations, or years of experience. Be sold on investment performance, period.
Current regulations in the field make it difficult to report investment returns legally, and it is probably a feature, not a bug of financial regulation. Regulators often act in the interest of the broader industry which does not invest money well. But, that is the subject for a future post.