For my friends who are financial planners and financial advisors, this is not meant to be a critique of you or your profession. I often still contemplate working towards my own CFP certification. This article is simply my expression of why I've always felt a disconnect from the standard advice of most financial planners and how I've realized that my goals are different than the vast majority seeking financial help.
When looking at a financial planner, let's first start with a basic understanding of what a financial planner actually does. Generally, financial planners help clients understand their current financial situation, and help them navigate and differentiate the various investment options that can help them on their path to their financial goals. There are a several setups that financial planners generally use and they are compensated based on a few different structures: commissions, fee-based/hourly, assets under management.
- The financial advisor recommends a specific fund. If you choose that fund, they make a small percentage at the sale. For example: You invest $5,000 in the fund they suggest. They get 3% of the $5,000 or $150, and your remaining $4,850 goes into the fund as your investment.
Fee-based or Hourly:
- The advisor will charge you a flat fee based on the product or advice that they're providing you, or can charge an hourly rate. This might cost more up front, but for people with lower amounts to invest, they can be sure that they're getting the same amount of detail and attention as other clients since the planner is paid the same regardless. In this example, you might pay $300 for a financial plan that you can follow for the entire year, which can provide you with several strategies like investing in your 401k, paying down student loan debt, and saving up for a house.
Assets under management (AUM):
- Under the model financial planners are paid a small percentage of the total value that you invest with them. Say you invest $5,000 with them, they will get something like 1% or $5 a year in fees from your account.
Commissions-based advisors should probably be avoided in most cases, since they are strictly compensated based on the products that they sell you. Not necessarily how well those products perform, or how large your account grows. Naturally if your investments do well with them, you're more likely to keep investing, so there is some incentive there, but the short-term incentive is for them to sell you the products with the highest fees, so if you don't already have a good working relationship with an advisor like this, it's hard to know where their priorities really lie.
Financial planners who bill clients based on assets under management (AUM) can be great since the planner wants your assets to grow so that their total fees can increase, but you're also not their only client. Advisors who are compensated this way are incentivized to focus on their highest earning clients, or their clients who already have large balances to invest. The most logical thing for them to do is to make sure that they keep their clients with large investments, and to make sure that those investments stay safe and large. For that reason, if you don't already have a large amount to invest (think $500k-$1M+) or a high income, a financial planner isn't going to provide you the information on how to get there, since the base-level advice is all the same. Diversify. Invest in ETFs, small cap growth funds if you're young, large cap funds and bonds if you're closer to retirement, etc. If you're just starting your career and your goal is to retire at 65 with $1M of total net worth, then do this. Over 35 years, you'd only need to invest around $7k a year with average returns to get there.
My goal isn't to retire in 35 years with $1M though. I want to have $1M invested in the next 3-5 years and $10M in the next 9 years. A safe, over-diversified fund won't get me there.
I treat my personal investment fund similar to an extremely selective venture capital fund. I don't have time to invest in things that I don't understand, so I'm only looking for 5-7 total opportunities that have the potential to grow exponentially. That's a big part of why I've become so enamored with things like the BRRRR strategy from Bigger Pockets, or alternative assets like Bitcoin. I need to find a few investments that have a decent probability for exponential growth. Even if most of my investments fail, I only need one or two to perform near their maximum potential in order to meet my goals. It isn't my goal to become an expert in all investments and I don't think that's a great strategy for building wealth. It's a strategy for maintaining wealth, which is another reason why the rich justify the costs of financial planners and why planners tailor their knowledge to them.
Think of every affluent person you know of with humble beginnings. Every one of them had one significant investment or strategy that exploded their net worth. Bill Gates, Steve Jobs, Jeff Bezos, Elon Musk, Warren Buffet, Oprah Winfrey, Michael Jordan, Jay-Z and the list goes on and on. The only person you could argue made money diversifying was Warren Buffet, and even so he had one very simple strategy of investing in companies whose stock price was lower than what their overall value should be. It's the same for all the rest. The overwhelming majority of their net worth came from one niche that they understood better than almost anyone else. They then used that understanding to create value in ways that no one else had. That's the only way to make truly life-changing wealth. Find a few basic things that you can understand better than most other people and use that knowledge and understanding to invest in the future.
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