I've never used a financial adviser. I've talked to several of them in the past, but always stopped short of actually engaging their services. My distinct impression was that none of them would be the best person to manage my money.
The best person would be me. Assuming, of course, that I first put in the effort to learn about personal financial planning. Which I did - through reading lots of books on my own. That was years ago. Nowadays I actively manage my own investments (and I do a rather good job at it).
Now it's 2007, and ironically I find myself having to take the same exams as would-be financial advisers. I must say that it's quite interesting. I'm learning some useful ideas on how to manage my own portfolio. None of this, however, changes my earlier conclusion that financial advisers are not for me.
I'd go so far to say that any reasonably intelligent person willing to put in some effort learning about personal finance is probably better off managing his own money than using a financial adviser.
The best person would be me. Assuming, of course, that I first put in the effort to learn about personal financial planning. Which I did - through reading lots of books on my own. That was years ago. Nowadays I actively manage my own investments (and I do a rather good job at it).
Now it's 2007, and ironically I find myself having to take the same exams as would-be financial advisers. I must say that it's quite interesting. I'm learning some useful ideas on how to manage my own portfolio. None of this, however, changes my earlier conclusion that financial advisers are not for me.
I'd go so far to say that any reasonably intelligent person willing to put in some effort learning about personal finance is probably better off managing his own money than using a financial adviser.
I've just been studying the chapter on "Financial Needs Analysis". A fancy term for a straightforward process. FNA is what happens when the financial adviser sits down with you, pulls out a long questionnaire and starts asking a long list of questions - your age, occupation, monthly salary, bank credit balance, number of dependents, type of home, outstanding mortgage, existing insurance policies etc.
All this information is relevant for your financial planning. The problem is - human beings tend to be rather complicated. They can't be easily categorised or classified. I'm quite confident that in many cases, standard questionaires will regularly fail to capture important pieces of information about a given client. The questions asked will simply miss out on special circumstances relating to that particular client.
Which means that the financial adviser's recommendations will, in the end, be less than optimal.
Why won't the client just tell the financial adviser about his special circumstances? Well, in many cases, the client will want privacy. In other cases, the client, not being knowledgeable about financial planning, will simply not even know that his special circumstances have any financial significance.
Some examples to show how easily this could happen:
Mr Tan has an illegitimate child that his wife doesn't know about. Mr Tan wishes to provide long-term financial support for his illegitimate child. For privacy reasons, he doesn't tell his financial adviser. Thus when the financial adviser draws up a financial plan for Mr Tan, the child is omitted altogether.
John, a father of three young kids, works in the manufacturing industry. His job is particularly vulnerable to being outsourced to China. Not being in the manufacturing industry, the financial adviser doesn't understand that. The adviser recommends a long-term savings plan whereby John will commit a good part of his monthly salary towards his children's future university education. Actually, the much more pressing thing is for John to build up cash reserves to deal with the prospect of impending retrenchment.
Linda is HIV positive. She still looks and feels healthy. However, the HIV condition has massive implications for her financial planning - there are immediate and high medical expenses; her life expectancy is reduced; saving for retirement is no longer a high priority; and it is foreseeable that eventually she will become too ill to work. Due to the stigma of HIV, she doesn't disclose it to her financial adviser.
Alfred is an extremely high achiever. He works in a growth industry and possesses a highly sought-after skill set. He can reasonably expect his salary to double in three years, and to double again in another three years. Not wanting to sound boastful, he doesn't tell his financial adviser that. The financial adviser therefore projects Alfred's salary to grow at a modest 2-4% per year for the next 7 years, and recommends an investment plan based on that.
Kumar is a 40-year-old male. His financial adviser recommends a critical illness plan suitable for the average 40-year-old male. Actually Kumar is a California Fitness personal trainer who exercises five times a week, consumes an extremely healthy diet and always ensures that he gets enough rest every day. Kumar's scientific risk of getting a critical illness is much lower than average. Rationally speaking, he should spend much less on critical illness coverage, and channel the money into pure investment products.
In each example, the client will receive less-than-optimal recommendations from his financial adviser. That's because each client had some special circumstance in his life, which a standard FNA questionaire wouldn't have picked up.
Who could have picked it up? The client himself, of course. Each of us is in the best position to understand the unique circumstances of our own lives. That's why we are all the best persons to manage our own money.
Provided, as I said, that we also do some financial self-education. Go buy yourself a good book today.