I used to change the oil on my truck every 5,000 miles. The $100 fully synthetic oil change every 5,000 miles was “too expensive”. I could change the oil myself for around $60. This went on for a couple of years until one day I stripped the threads on the oil pan that holds the eight quarts of fresh oil. With no way to hold the oil the truck could not be driven so I hauled it to a mechanic on a trailer. The mechanic quoted $700 to replace the oil pan.
Complexity creates the need for specialization. There is a reason you outsource 99% of everything in your life. Planting, growing, harvesting, and storing your food requires specialized knowledge and tools that are not worth acquiring so you can do it all yourself. Designing, stitching, dyeing, and printing your own clothes requires a skill set that you most likely would never fathom pursuing. Thinking of the list of items we outsource day in and day out caused me to think about what I refuse to outsource and why.
The Financial Planner
Today is one year from the bottom of the stock market Coronavirus crash. March 23, 2020. It was one of the fasted drops in history as investors tried to comprehend what a pandemic ridden world would do to businesses. Here we are a year later, and the last 12 months have been historic. The S&P 500 is up 76% from a year ago today. This is the largest 12-month gain since 1934. Who would have guessed?
But that is the exact point. Who would have guessed? No one. It is unpredictable. The best result for most people is to stay on their current track. Stay invested and keeping investing. This is easier said than done and sometimes help and accountability are worth pursuing to stay on track.
Why do so many people not outsource financial advice? Most of the blame for this is on the profession that provides the financial advice. The history of financial services is tainted by sleazy sales tactics and unqualified professionals trying to jam their handful of financial products onto your balance sheet like hammering a square peg into a round hole. The financial advice arena has come a long way since these days but there is a new problem.
The issue that now faces consumers is the fee model. If you have less than $500,000 of investable assets your options for high quality unbiased fiduciary financial advice are extremely limited. The common fee model is charging a percentage (typically 1%) on your investable assets. The best financial planners naturally swim upstream and only work with those with more assets. The best advisors should receive the highest fees, but the fee model prevents those with less assets from paying that higher fee should they want to. This tweet summarizes this better than I can.
What to Do About It
Where does that leave you? There are bad mechanics out there, but is that a reason to try to change the oil yourself? Not necessarily, but it does increase the burden on you to do your research and find the right professional. If you have $500,000+ of investable assets your search is much easier. Start with referrals from your local network such as friends, CPAs, or attorneys. Take time to carefully vet and research each referral. Pay more attention to how the advisor is paid, not how much they are paid. NAPFA is an organization of fee-only advisors meaning no advisor in this organization can charge a commission or receive payment aside from the fee you pay. Try to get a sense for how much of the advisor’s focus is on investments and how much is on wholistic financial planning where the advisor is discussing estate planning, tax planning, insurance analysis, education planning, etc.
There are great financial planners in all fee models, and many do not have the CFP® designation however, I highly recommend working with an advisor with a CFP® certification as it increases the odds of their competence and planning focused approach.
For those with less than $500,000 of investable assets it is an uphill battle. There are groups of advisors that charge by the hour that can be found at Garrett Planning Network and Alliance of Comprehensive Planners and also groups that charge a flat annual retainer based on complexity at XYPN. Do not be afraid to expect a lot of your advisor as you are trusting this individual with your financial livelihood.
Researching, vetting, and selecting a financial advisor is not an easy task but the importance of this decision is hard to overstate when we are looking for someone to help you efficiently achieve your financial goals.
I ended up purchasing a new oil pan from O’Reilly Auto Parts and spending eight hours with a friend replacing it for $280 instead of paying the mechanic $700. I was lucky and had no issues, but I should have just paid a mechanic to change the oil from the beginning and never would have been in that situation. Sometimes we can get on a streak of beginners’ luck and have success when we take matters into our own hands. I no longer change the oil in my truck. I do not want to risk relying on beginners’ luck or spend the time acquiring the knowledge to become a good mechanic. Do you?