I hate to be the bearer of bad news the often the smartest person in the room is often the absolute worst with money. This is a story of a College Professor vs. the Fiduciary Independent Financial Planner. We can guess who has the higher IQ but we quickly find out how has the highest FIQ (Financial Intelligence Quotient). Would you believe sometimes the smartest person in the room is the worst with Investing?
Sometimes the smartest thing you can do about your money is admit that you don’t know everything. Even geniuses can be not-so-smart about money issues. Procrastination can derail even the best and most well researched investment portfolio. Is it possible to be too smart to invest well? I don’t think so- but again I’m not a College Professor. I just help smart people make smarter financial decisions.
By David Rae Certified Financial Planner™, Accredited Investment Fiduciary™
I just had an interesting first (and probably last) meeting with a well-respected college professor from a major university. (The name has been changed because in my profession everything said with even a potential client is confidential). I met with him at the urging of his colleague who I have advised for many years. Let’s call him Professor Toosmart.
Like many people, Professor Toosmart didn’t really know what to expect when meeting with a Financial Planner like myself. Nor did he really understand what a fiduciary financial advisor actually does to help his clients and their investments. Whereas most people seem to think a financial advisor is just in the investment picking business. What I actually do is more akin to behavior modification . . . all in the service of setting financial goals and more importantly action steps to make your life dreams a reality. Building portfolios and managing investment is part of that process, but by no means the only part.
Think of it this way; do you go to buy the best carburetor wrapped in a BMW? No, you buy your ultimate driving machine that happens to come loaded with a carburetor enabling it to drive like a charm. In other words, the carburetor is a built-in benefit, not a reason in and of itself. Similarly, no one sets up a financial plan just so they can log in on a computer to see that they own a bunch of stocks, bonds, ETFs mutual funds or whatever. Yes, that’s a benefit but it’s not the point. Rather they develop a financial road map to help them meet a goal, whether this means sending the kids to college, retire well, buy a house, get that BMW or some marvelous combination thereof.
Smartest Person in the Rooms Theory:
Professor Toosmart – an expert in his field, which is not business, finance or even economics btw – had a theory that if you hire (pay) a professional fiduciary financial planner you will end up with less money than if didn’t hire said financial planner, all other things being equal. To prove his theory he had written a 100-page thesis in his free time over the past three or so years.
I don’t technically disagree with his theory as he stated it: If you have two people who do everything exactly the same as far as investing behaviors, investment choices and timing contributions, they should end up with the same end result. But if one pays for advice from a financial planner and the other one doesn’t, the person who doesn’t pay should end up with more money. While this might make sense in a theoretical vacuum laboratory environment using identical twins, it doesn’t begin to account for messy real life realities. Nor does it take into a consideration a person’s Financial Intelligence Quotient (which is actually a thing, you can look it up). I personally believe a person getting great investment advice will make smarter choices than a person left to invest alone at the mercy of stock market roller coaster.
Procrastination is detrimental to your financial health:
Beyond procrastination, the college professor is making a common mistakes getting bogged down in minute details. I need to point out that he didn’t start working towards his various financial goals during the three years he put together his thesis paper. That means three years less he has saved for his bottom line, and worse three less years his savings have to compound. The right investment allocation, and whether to choose a financial planner or not are debatable topics. However, compounding interest and saving lost opportunity for three years are not.
To put dollars and sense to this. Based on the professor’s own assumption missing those three years will cost him about half a million dollars in lost retirement savings*. That translated into about $25,000 per year in retirement income. That number would be much larger if we used the actual stock market returns of the past three year. I prefer to not dwell on the past, or rub salt further into the Professors wounds. Saving money not paying for expert financial advice, is turning into a huge and costly mistake.
Real world wake up call (from the independent financial planner)
Do you think it’s reasonable to assume that you would make better financial decisions (investments, insurance, taxes etc.) and exhibit smart, strategic investing behavior (same contributions, withdrawal, not freak out when the next market crisis happens) over the next 30 years if you didn’t actually work with a highly-trained, professional fiduciary financial planner like myself?
Professor Toosmart hypothesis assumes that a financial planner adds absolutely no value to your chances of reaching financial independence. For him, it just represents an expense that eats into the nest egg over time. I get it, but he’s assuming the financial adviser would only help him pick investments, charge a fee and therefore lower his net returns on those investments. In fact, I’m all about the comprehensive financial plan, not about the individual investment you pick.
I didn’t want to discourage the Professor Toosmart too much. He’s used to being right and in his area expertise he often is. But I’d like to leave you with two thoughts:
- Vanguard, which is well known for being the land of do-it-yourself investing – and certainly not known for promoting the use of independent financial advisors – recently issued a report stating a financial advisor may boost a client’s portfolio by as much as 3.76%. That’s 3.76% from a lowly financial adviser, who often is just helping you with your investments. Now a real deal, big gun Fiduciary Indepenent Financial Planner may be able to add even more to that by helping you develop and stick to a financial road map, tailored specifically to you and your financial goals. (Full disclosure: If that Fiduciary Financial Planner happens to be me, ahem, I also make all this potentially dreary stuff as enjoyable as humanly possible, just a nice BONUS)
- Lastly, every year DALBAR produces a study (Quantitative Analysis of Investor Behavior (QAIB) comparing the average returns of the stock market over the past 30 years versus the average investor’s return over the same time frame. The results hover around someone like you getting just 1/3 of the stock market’s return over the long term. The exact percentage varies over each 30-year period, but the critical point remains the same, people continue to make investing mistakes whether the market is going up or going down. The take away from this is that investing success is not simply a function of picking the “best investment” but rather handle whatever investment you end up using to fund your financial plan. If an advisor can help you avoid just few of those mistakes that drag down peoples returns, even just some of the time, you could potentially increase the returns on your investments.
Who do you think is Investing Smart – Certified Financial Planner or the College Professor?
While I salute Professor Toosmarts’s DIY spirit, sometimes it pays to trust a qualified independent financial planner professional. (I’ll cover some points on how to find the right, trustworthy fit for you in a future post.) Put it this way, if I have a toothache I suppose I could pull it out with a pair of pliers but why would I want to when there are qualified dentists around who have done it thousands of times and know how to do it relatively painlessly? So, I suppose you could try and manage your money by yourself but why would you want to when there are experienced fee based independent financial planners around who have done it thousands of times and know how to do it relatively painlessly too? Doesn’t take a college professor to give your the correct answer to this question.
Your money matters, if you want some help taking the pain out of your financial planning, reach out for an initial consultation, with me or another independent financial planner on my team. We will do our best to make it way more fun than a typical trip to the dentist. Why stress about stock market volatility when we can do it for you.
Live For Today, Plan for Tomorrow. Start Investing for goodness sake.
DAVID RAE, CFP®, AIF® is a Los Angeles Independent Financial Planner with DRM Wealth Management. He has been helping friends of the LGBT community reach their financial goals for over a decade. As a regular contributor to The Advocate Magazine and active Huff Po blogger, he is an in-demand guest for TV, radio and podcast news shows. Follow him on Facebook, or via his website www.davidraefp.com
The opinions voiced in this article are for general information only.*Professors expected to have $1.5 million at retirement after earning 11.26% per year. If you could add three more years of 11.26% growth on $1.5million you would have roughly $2million. Discuss investment options with your independent financial planner. Stock Market volatility is normal. There is no such thing as the perfect investment.
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