Thursday, July 5, 2007

Musings on financial planners

I don't use a financial planner. I'm a do-it-yourselfer when it comes to financial planning. I can't justify spending the several hundred dollar fee for a planner when I have access to so much free information about financial planning. I think I can do just as well or even better with my money and investments without using a planner. I know I'd also be a tough client, constantly asking why the planner's suggestions weren't doing as well as benchmarks if performance fell behind.

I think that there are a lot of planners out there that are most interested in generating commissions for themselves and selling their own firm's products. That's not to say that I think all planners are bad. But if I ever did use a planner, he or she would have to be an independent one that was fee-only.

Expanding into younger markets

Planners are now focusing on the emerging mass affluent market of younger people (free WSJ Digg link).

Financial planners are beginning to pay closer attention to people in their 20s and 30s, a group that has long received the brushoff from the financial-services industry because of its lack of wealth.


For the most part, [this age group] are largely underserved by the financial industry. Research by the Financial Planning Association, an umbrella group for planners, shows that just 11% of the industry's client base is under the age of 40, though that same research also indicates that people approaching 40 are the most eager for financial advice.


The best time for young people to consider hiring a financial professional "is when you land your first real job," says Barbara Roper, director of investor protection for the Consumer Federation of America. "At that point, you have a variety of financial issues to consider, such as your 401(k) plan and your benefits," and a financial plan will set you on an appropriate course, she says.

For savers with modest assets, Ms. Roper says, a fee-only planner is generally the best match. These planners only sell their time, at a cost of between $100 and roughly $250 an hour, depending on where they're based geographically. Because they don't pitch products tied to a particular company, "it minimizes the potential conflicts," she says.

I'm still not convinced that planners are worth it for my financial situation. I know I can research and plan for the majority of financial topics mentioned in the article (IRAs, 401(k)s, college savings plans, etc). I also don't think planners are always a good bet for the mass affluent segment to use, based on the limited service they can provide in relation to their cost. Maybe if I had a particularly tricky financial situation, or were pressed for time, I would consider using a planner.

But they're good for some people

To be fair to financial planners, I'll point out this article from the Times that demonstrates a person who had good success with a financial planner:

Two years ago, Marty Dragutsky was downsized out of a job selling pharmaceuticals. That startling event forced him to finally take account of his finances. After 30 years in sales, the last 17 years with a division of Abbott Laboratories, Mr. Dragutsky had accumulated a nest egg of nearly half a million dollars in his 401(k) account — nearly all of it in Abbott Labs stock.

Mr. Dragutsky, 59, of Gainesville, Fla., knew that would not be enough to sustain him and his family through retirement. He had a brokerage account with PaineWebber but rarely used it. So he turned to Davis, Monk & Company, a Gainesville financial services firm, which urged him to diversify.


"I listened to my adviser, Greg Grooms, and in two years, I've had about a 30 percent gain in my portfolio, while Abbott shares lost about 11 percent last year following an 8 percent drop the year before," Mr. Dragutsky said. "A novice like me really needs somebody to look at the state of my financial affairs."

Mr. Dragutsky is one of the mass affluent: the 22 million American households with $100,000 to $1 million in assets, excluding real estate, that can be invested. Despite a collective $6 trillion in estimated assets, according to Beacon Advisors, a market strategy firm in Boston, this group is being given a perfunctory look by the big brokerage houses and investment firms that prefer high-net-worth individuals with more than $3 million in their portfolios.


The mass affluent are either fending for themselves or struggling to find good financial advice. "For this group of investors, the smaller firms actually offer an advantage because it's the relationship that is the critical asset, the differentiator, not the product push," said Constance M. O'Hare, managing partner of Beacon Advisors. Her firm recently published a study on the mass affluent.


In general, I think that the more you have to invest, the better your outcome with a planner will be. In the above case, the gentlemen had almost $500,000 to invest.

There are firms that will give you free advice if you invest a certain amount of money with them. I'll write about that topic at another time.