Nobody Can Manage Your Money Better Than You Can
“Imagine a business where people hand you money and you hand them back absolutely nothing. Now that’s the real American dream.” — Rush Hour 2 (2001)
When we tell people that we’re financial planners, they sometimes respond with questions like:
- “If I give you my money, what kind of return can I expect?”
- “If I give you my money, what kinds of stocks will you invest in for me?”
- “If I give you my money, how much do you charge as a management fee?”
When we hear these questions, we know that the person thinks that we’re wealth managers rather than financial planners. So what’s the difference between these two professions?
Fee-based financial planners have a simple business model: they assess how much you can save and then advise you on how to invest it. They don’t invest your money for you, however. Instead, they educate and empower you to take control of your own financial life.
A financial planner’s job is to listen to your situation, educate you on your options, advise you based on your personal circumstances, and provide an easy and digestible plan that you can follow by yourself.
A wealth manager’s job is to take your money and invest it for you (usually in the stock and bond markets). His goal is to develop a strategy that he thinks will beat the performance of the overall stock market. Why would you pay him to manage your money if he wasn’t better than the market — which is just the cumulative activity of all the investors out there, whether they’re hedge funds or day traders?
The manager charges you a percentage of your assets every year as a fee (usually 1-2 percent). So if your portfolio grows this year to $10,000, the manager takes one percent of that, or $100. If your portfolio grows next year to $12,000, the wealth manager takes $120. If the portfolio shrinks the following year to $8,000, the wealth manager only takes $80.
This pricing scheme might seem to benefit you as the customer, because it rewards the wealth manager for his skill in growing your portfolio and acting in your best interests. If you make money, he makes money, and if you lose money, he loses money.
You might be thinking, “Boy howdy, that sounds like a great deal! I should definitely hire a wealth manager. They’ve worked in the industry for years and they’re rich as heck! They must be great at investing.”
But what would you think if I told you that wealth managers are a waste of money? That they provide no value? That millions of Americans are paying wealth managers billions of dollars each year and getting absolutely nothing in return? How is this possible?
Here’s the problem: no wealth manager can beat the market in the long run. It is, for all intents and purposes, impossible. Book after book, study after study, concludes that investors, even professionals, fail to consistently beat the market. Even Warren Buffett, the most successful investor of all time, has underperformed the market during four of the last five years.
Because of this trend, a wealth manager is under severe pressure. He needs to constantly buy and sell stocks at just the right moment and in the right amount to beat the market and make you as much money as possible. The whole time he’s running into two problems. First, the data shows that the role of skill in stock picking is statistically negligible. You’re either lucky or you’re not — and you’re generally not. Secondly, every time the wealth manager buys or sells stocks he incurs transaction fees. These fees are small but they add up very quickly and they’re passed on to you, the customer.
At Monte Largo we are financial planners. This means that we provide a service where we help clients understand their current finances in depth and we work with them to develop a detailed, personalized plan for future financial success.
We are financial planners because we believe that this business model is in the best interest of our clients, not our pockets. We differentiate ourselves in the financial planning market by working with clients near the beginning of their careers so that they can reach financial independence much sooner than most people. While we believe that the financial planning model is better for clients than the wealth management model, there are still financial planners who assume that you can’t retire before you’re 65, and that saving five percent of your income is all you need to do.
Personal finance is an opaque subject for many people our age, and understanding the role that financial professionals play is critical to making informed decisions about how to invest in your future. Ultimately, we’ll only succeed as a business if we serve as a good investment for our clients, and we’re working to develop tools and processes that will reduce costs and help our clients help themselves more efficiently. Our business model is key to that effort.
Alejandro is a financial planner with Monte Largo Financial Advisors LLC.