How many times have you heard "before you make any big money decisions, check with your own financial advisor"? NPR’s Marketplace Money program says that all the time. It can’t be taken at face value because it assumes that everyone has a financial advisor.
I’ve never had a financial advisor. I’m guessing the percentage of the population who have a financial advisor isn’t that high. If they all say people should check with their financial advisor, why don’t most people have one?
1. Too many sharks. For those who have a financial advisor, I’m guessing again that most are not working with a fee-only advisor who acts as a fiduciary and only gives advice in the best interest of the client.
There are many salesmen and saleswomen out there selling expensive products to unsuspecting clients. Advisors who work in bank branches and "full service" brokerage firms are notorious for this. Ameriprise advisors don’t have a good reputation either. When people can’t tell an unbiased advisor from a salesman/woman, they are afraid of getting burned. They end up not using an advisor at all.
2. Too expensive. If people are not paying the advisor through expensive products, a fee-only advisor can still be expensive.
Some will take you only if you let them manage your investments and pay them 1% of your assets. Some won’t take you at all if you don’t have at least a six-figure minimum asset level. 1% on $100k is $1,000 a year. 1% on $500k is $5,000 a year. And that’s just for investment. There’s much more to financial advice than just investment.
3. Easy to DIY. If you set your mind on it, it’s not that hard to learn about these financial planning topics, although the same can be said of almost anything: plumbing, exercising, lawn care, you name it.
You can educate yourself by reading books, newspapers, magazines, and now blogs, listening to radio programs, and watching TV and video. You can Google or get on Internet forums and message boards and get all kinds of information.
You have the same problem with not being able to separate the good from the bad if you don’t know much about the subject to begin with. You still have to be able to apply what you read or heard to your own situation. By definition the books, radio and TV programs, blogs and Internet forums can only be generic. Thus the "check with your own financial advisor" CYA disclaimer.
For the most part, people are on their own. If news media reports are representative of what’s happening in the real world, people on average are not doing a very good job at managing their finances. I would think we will be better off if we can get unbiased advice at an affordable price. The price paid for doing it right will be recovered many times over by avoiding costly mistakes. Still, given that there are many sharks out there and even good advice can be expensive, DIY seems to be the only viable alternative.
How much should unbiased financial advice cost? Suppose I convince you that you can trust me for giving you good quality, unbiased, individualized financial advice. What do you think should be a fair price?
Let’s get specific. Suppose a couple want to save for college for a child. They want to know which account type (UGMA, Coverdell, 529, Savings Bonds, Roth IRA, regular taxable, etc.) they should use, which provider, and which investment options they should choose. What do you think they should pay? $0 because people can just Google? $5? $25? $100? $200? $500?
If you have a trusted advisor to whom you can ask unlimited number of questions and get advice whenever you need it, how much should it cost? $0? $10 a month? $20 a month? $50? $100? $200? $500?
I ask these questions not just as a hypothetical. I’m willing to help others with their personal finance questions. If I start giving individualized advice though, I’ll have to become a licensed advisor and maybe get a CFP. I don’t necessarily have to make much money from it (my full-time job covers my living expenses), but I do want to at least cover my cost of regulatory compliance and liability insurance. However, if people are not willing to pay much for such advice, obviously there’s no point of getting licensed and certified and paying the associated costs.
So do you think there is an under-served market for unbiased financial advice? I can think of some friends and family members who can use some advice if it doesn’t cost an arm and a leg.
Usually an under-served market exists when there is a big gap between what customers are willing to pay and what it costs to produce what they want. I suspect that’s the case in the financial advice market.