So you think your financial planner is an investment expert?

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So you think your financial planner is an investment expert?

If you’re thinking “I hope so, that’s what I’m paying them for” I’ve got some bad news for you.  It’s highly likely your financial planner/adviser is not qualified to manage investment of your money.

For starters let’s clarify what I’m talking about.  I’m talking about the day-to-day management of your investment portfolio (e.g. whether you sell BHP shares to fund the purchase of NAB shares or move your money out of cash and into shares to make some money over the next 6 months).  This is distinct from the strategic management of your investment capital and we’ll get into this soon.

Your Financial GP

Imagine you woke up this morning with some soreness, with a bit a rash and maybe a bit of swelling with no apparent cause (I’ll let your imagination determine where).  I suspect most of us would jump on the phone and make an appointment with a GP.  When you walk in the consulting room you hope the GP will have the solution for your condition, but you recognise they are not a specialist in all areas of health care and where they do not have the requisite knowledge and skills for your condition you expect, and it is their duty as a professional, to refer you to an appropriate specialist.  It involves knowing what they do know and knowing what they don’t and acknowledging their limitations.

The nature of a financial planner’s role is similar to that of a GP and I like to think of good financial planners as financial GP’s. As a financial GP your financial planner should do the same, but this isn’t typically what consumers expect planners to do.  Financial planners are expected to be the investment solution and for decades financial planners have typically promoted themselves as the solution and been reluctant to acknowledge it is rarely a specialist skill they possess.   That’s not acting in your best interests.

Medicine is a very broad field and while not quite as broad the financial aspects of our lives are also very diverse.  So, why is it that consumers of financial planning services expect financial planners to be investment experts?

It’s Not Your Fault

I’m assuming that if you are reading this you are a consumer of, or potential consumer of, financial planning services, and you’ll be pleased to hear it’s not your fault.  It’s the fault of financial planners.

For decades financial planners have allowed themselves to be thought of as investment experts and there are some understandable, not necessarily good, reasons for this.  Like many good stories it all began long, long ago, back when financial planners used to be the gatekeepers to professional management of your money.

Financial planning wasn’t the broad field it is now and financial planners were little more than salespersons for stock broking firms and fund managers, collecting a commission for every dollar transacted by the broker or directed into a managed fund or whole of life or endowment policy, for those old enough to remember them.  It was a gravy train worth riding, so many have continued to by perpetuating the belief financial planners are investment experts and charging an “appropriately” significant fee, typically based on a percentage of your money, just like a commission.

All the while this has been supported by the professional investment management industry, as they need financial planners for distribution of their products/services.  If you want to make serious money from managing other people’s money you need distribution, you need financial planners on your side.

It will surprise many (maybe only some by now) that the vast majority of financial planners/advisers do not have any formal qualifications focussed on securities analysis or portfolio management.  Some have done a unit or two as part of an economics or commerce degree or industry qualification/certification, while many have no formal training at all.

If you’re thinking a unit or two should be enough, it’s a bit like the introduction to a book.  It will give you some idea of what you have ahead of you, but it won’t give you the depth of understanding you get from reading the whole book.  It’s certainly not enough to be let loose on someone else’s money.

A Wealth of Experience?

“Well, what about their experience, they have been doing it for decades?”

This can be a real trap for both you and the adviser.  Channelling Donald Rumsfeld, if you don’t know what you don’t know then after 5, 10 or 20 years it’s highly likely you still won’t know what you don’t know, because the foundational knowledge and framework is missing.

We have all come into contact with someone that has been doing their job (I almost wrote practicing their craft, but that wouldn’t have been accurate) for a long time, but they still aren’t very good at it.  Often it is because they were never properly taught, or bothered to learn, the foundation knowledge and/or skillset required to perform the task at hand.

We’ll all learn something via trial and error over time, and there is definitely some value in working with someone that has seen what works, what doesn’t and the mistakes people can make.  This is provided not too many of the mistakes were personal experience.  Experience, or more accurately time, is not enough on its own though.

Limited by Time

While we are on the matter of time, for a GP to be a good GP and have the breadth of knowledge to help a wide range of clients they can’t have the depth of knowledge associated with numerous specialisations.  They may have strengths in a number of areas, but there will be plenty of areas they do not.  That’s why there are specialists.  We are all constrained by the week only having 168 hours.

Similarly, a good financial planner doesn’t know everything, but they do know a reasonable amount across a range of planning issues and where to find answers.  It also includes knowing when specialist skills are required.  Such are the time demands on a competent investment manager, it would be a rare financial planner that successfully covers both skill sets.

So what is a financial planner good for when it comes to investing your money?

A financial planner’s role when it comes to investment of your money is to work with you to determine the nature of your investment exposure, but rarely (very rarely) the day-to-day decisions on which specific investments you should hold.  By “the nature of your investment exposure” I mean:

  • making an assessment as to your return needs and tolerance to volatility (or risk), particularly negative movements in the value of your capital, as to manage your behaviour via realistic expectations for returns and avoidance of counterproductive emotion driven decisions;
  • determining an appropriate asset allocation (i.e. allocation to shares, property, fixed interest, cash, etc.), based on your needs and risk profile, with the specific allocations typically determined by an investment manager or research provider;
  • determining the structural framework for your portfolio (i.e. within super, in own name/s, via trust, etc.);
  • determining how your preferences are to be incorporated (i.e. direct holdings or managed, ethical overlay, self-administered or outsourced, etc.); and
  • selecting an appropriate manager, or managers, to make the day to day specific investment decisions (Again, this will typically be guided by a research provider.).

These are very important aspects in the management of your investment capital, but they are not investment management as generally understood.  They are not the day-to-day management of your investment portfolio.

If you come across a financial planner promoting their investment management talents, ask a few questions to clarify what they believe they do.  If their qualifications and experience don’t back up their claims, keep looking.

And what are you paying for?

You also shouldn’t be paying a financial planner based on a percentage of your money.  This is gatekeeper, commission based, thinking.  It is also a deceptive pricing structure.  As humans we aren’t good at equating percentages to dollars and planners know it.  Investment managers and investment platform providers know it too, which is why it can be hard to find managers and platforms that don’t use percentages.

A percentage based fee represents a conflict of interest with you, the client, as there is an incentive to create or maintain a higher balance, whether this is in your interest or not.  A fixed dollar, fixed period, fee is the only conflict free advice fee arrangement.

Most investment managers charge a percentage based fee and this is often the justification for a financial planner to charge a percentage.  The problem is your financial planner is not an investment manager.  Of course there is the conflict of interest issue too.

If your relationship with a financial planner is very heavily focussed on your investments, with little time spent conversing on everything else that is going on in your life and the various strategic aspects to your financial affairs, you will not be experiencing all the benefits a good financial planner can deliver.  Further, there is a strong chance you are paying for something the planner isn’t really delivering.

What you should be paying for is what good financial planners can deliver, which is comprehensive strategic advice, of which broad strategic investment management is an important part, but it is by no means the only part, or often even the most important part.



This advice is of a general nature only and may not be relevant to your particular circumstances.  The circumstances of each person are different and you should seek advice from a financial planner who can consider if any strategies or products mentioned are right for you.