"I'll just pay someone to manage my money"

Posted at 6:17 on Thursday July 27, 2006 | Filed Under Investing

It's one thing to pay people to wash your car and mow your lawn. But paying to have your money managed exposes you to a field rife with people who make money off commissions, not off your success. Plus, you adopt a hands-off approach that's just dumb when it comes to your own money. Oh yeah, and it costs tens of thousands of dollars (or more) over the lifetime of a typical investment.

It's not that hard: Sensible buy-and-hold investing means you win. Learn about it.

To post this on your blog, MySpace, etc:

See Part 1 of this series.

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Comments (17)

1.: I really like this series. It kind of rings of PSA to me, but the sensical text accompanying the pictures is a lot better than any government sponsored crap. And while I'm a fan of bold investing, I think you mean "buy-and-hold" :)

Thanks for improving personal finance awareness.

Posted by Ryan at July 27, 2006 07:51 AM

2.: Thanks for the compliment! Also, thanks for the pointer about the typo. It's fixed now.

Posted by Ramit Sethi at July 27, 2006 07:59 AM

3.: Just to fix another typo, you've got "But paying to have your your money..."

I enjoy the pictural series, particularly the text over the eyes.

Posted by Mike at July 27, 2006 10:10 AM

4.: Fixed. Thanks, Mike.

Posted by Ramit Sethi at July 27, 2006 10:12 AM

5.: Having a trained person to manage your accounts is a normal thing, not cheap, but at least you will know how to invest your money in the future.

Posted by Mike at July 27, 2006 11:48 AM

6.: So do you consider lawyers and accountants a waste of money too?

A good financial advisor (and I have one of those) is not a glorified salesperson, just like a good accountant is not simply a sub for a tax prep program.

Of course, the advisor is just that an advisor but advisors can be a valuable part of an investing team.

Posted by K at July 27, 2006 12:37 PM

7.: Actually, yes, I do consider a financial advisor a waste of money for young people (unless they have extraordinary circumstances like a huge inheritance).

This is stuff we can learn ourselves. And paying someone to do it isn't like paying a gardener. It costs much, much more, both in money and in our lack of developing the right habits for the long term.

Let me add that I consider commission-based advisors a waste no matter what point you are in life.

Posted by Ramit Sethi at July 27, 2006 01:12 PM

8.: Ramit, I could learn about investing aggressively for the rest of my life (I plan to) and not know everything there is.

That's what I pay my financial advisor for. To come up with different ideas. (That and to give me a second opinion, oh and to save me from the dual demons fear and greed).

One single investing idea that I would have missed has paid for about 10 years of fees.

I've had this financial advisor since graduating. He took me on as a client not based on my huge dollars (I was investing $25 a month at the time) but because of my passion for investing. I wanted to build a relationship with an advisor (test him out, etc) before the numbers got too big.

Posted by K at July 27, 2006 08:03 PM

9.: Love the series!

Im one of the 'young ppl' and its proving to be quite helpful... i was thinking about getting a mutual fund.. but now im thinking of re'thinking my strategy

Posted by mansoor at July 28, 2006 12:33 AM

10.: Ramit,

Have you had one before? If so, why is 1% such a big deal (that is pretty much the norm)? I think it's more than worth the wonderful job they do (that mine does).

Data to back this up would be nice. (That is said with complete sincerity.)

I think most young people don't have the time nor the intrigue to actually manage their money successfully.

Delegating someone to perform crucial money-related tasks is difficult, but finding the right financial advisor that you trust and that delivers the goods is priceless.

Posted by Noel Jackson at July 29, 2006 11:52 PM

11.: 1% can add up to a lot of money. And for people who don't have time to research specific stocks, there are always index funds (which usually outperform actively managed funds over time). Thing is, people want the big returns, but they realize they don't have the expertise to do it, so they hire someone. Is this smart? Does it make sense? Isn't buying into a mutual fund managed by Bill Miller and paying the 2% as opposed to the .2% for a S&P 500 index fund along the same lines? No, not really. You could buy shares of Berkshire Hathaway, and pay nothing to have one of, if not the, greatest investors manage your money. Or you could buy into funds managed by the all stars on your own. Read a Kiplinger's once a month for ideas. Get your hands on the quarterly round up of mutual funds in the WSJ. Or if you despise investing, and you want to invest passively, there are ways to do it that don't involve paying someone else (Index Funds!).

Posted by Carlin at July 31, 2006 05:35 PM

12.: The only opposition I have to dismissing professional advisors completely is that by meeting with them face-to-face, they're able to listen to what else might be going on with you financially. I have about 10K in an IRA and a cash account distributed among five of the huge actively managed American Funds (AGTHX, AIVSX, AEPGX, CWGIX and CAIBX), all acquired through Edward Jones (most before I understood those huge 5.75% front-end loads and how that will affect my bottom line). That being said, American Funds do tend to outperform the market (all five met or beat the S&P 500 during the first half of 2006).
http://articles.moneycentral.msn.com/Investing/Morningstar/BestOfTheBiggestFunds.aspx
so at least I'm not too upset since I'm earning higher-than-VFINX returns. I also still drop $100/mo into CAIBX through my advisor (or rather, she takes $5.75(!), and I invest $94.25) and write a $30 check every December to cover my IRA fee. Quick math means I'm essentially forking over $99/year to my advisor in fees. Now that admittedly sucks, but why do I think this is worth it? Because my retirement account at work is through TIAA-CREF, my advisor isn't pulling any commissions off my (or my employer's) 403b contributions every other week. That account is not a ton - about $4K in contributions a year - but because I am a client of my EJ advisor, and because she wanted to keep my portfolio balanced (by that I mean balanced between US vs. international stocks; I am all equities right now and not bothering with bonds), she was perfectly willing to help me select which TIAA-CREF options to select when I became eligible for my 403b. She also has been helpful in explaining things (e.g. mortgages, points) when my wife and I bought our first home, what I should look for when I switch jobs, and other money-but-not-investment-related matters. I guess what I'm saying is that yes, paying loads is a pain and *may* cut into returns if you're in funds that simply meet the indices, but at $99/year, especially in this stage of our lives (we're 25), I'd say it's worth it having a real person who knows me available to answer any of my questions.

Posted by B at August 1, 2006 12:18 PM

13.: Personally, I have to agree with Ramit on this one, at least in terms of my own situation.

I looked into using one of Schwab's premium client services last year and after accounting for fees, the return was no better, or even worse, than investing in an index fund.

Couple of things I asked: the service's performance over the last several years, if the Schwab rep I talked to used the service (he didn't, opting for mutual funds instead, not a good sign). I've been meaning to write about this but have yet to find where on earth I packed those numbers since our move. Ugh.

Posted by ricemutt at August 1, 2006 07:14 PM

14.: Out of the 3 in the series so far, I like this one the best and have put it up on my blog's homepage.

Ramit, you might want to consider the size of the images more carefully, some blogs don't have those width in their sidebars. It's a bit hard to incorporate the other sizes. This one just fits, but I can't put it on my other pages except the homepage.

Keep this series going!

Posted by Investorial at August 2, 2006 07:24 PM

15.: If all you're paying an advisor for is investment allocation and rebalancing, you probably are wasting your money. But several posters have pointed out other areas that a financial advisor will help many people with.

Posted by cmadler at August 5, 2006 04:35 AM

16.: I disagree with your suggestion that using a Financial Advisor is always a waste of money. People need to understand their owntemperament and ability to manage theirinvestments (gets even harder when you are married with children).

Why do people have a hard time admitting that some people are better with Finance/money management than others. No problem admitting that some people are very talented tennis players or runners - but, don't say that about fiinance or economics.

In an era where the IRA has replaced the Pension Fund - If you had a pension fund you would have professional management.

Seeking out Professional Financial Manager for your IRA might save a lot of people from eating cat food in their retirement years. There are no guarantees and you might choose a rotten Financial Advisor. But, a simple option is that you can choose to have the financial advisor mange just a portion of your retirement nest egg.
***I am not a financial advisor or in the Investment Services racket - just a well educated guy trying to save for my family's future.

Posted by BillNJ at September 21, 2006 08:28 AM

17.: Who said always? Not me.

Posted by Ramit Sethi at September 21, 2006 09:00 AM

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