After I wrote recently about how to ballast a portfolio against volatility and determine a responsible retirement withdrawal rate (not rocket science, but advanced stuff), I received an email from Donny (not his real name), a financial representative working for Northwestern Mutual in upstate New York. He wrote: "Thank you for confirming that absolutely no one should attempt to manage their own retirement."
His perspective is that retirement planning is too complicated for regular folks to handle. Now, Donny's right about the first part -- retirement planning can be complicated. My fiancee and I recently battled the bureaucracy of the North Carolina government to roll her pension into a self-directed IRA without incurring a dire 20% withholding penalty. (And the Tar Heel state seemed less than willing to help us keep that from happening.) But we persevered and the situation is right -- and we didn't need a guy like Donny keeping a chunk of change to shield us from the experience. None of us does.
Take charge of your future
As Peter Lynch observed in the millennium edition of One Up on Wall Street, "In 1989 the pros enjoyed quicker access to better information, but the information gap has closed." In fact, the law says that information available to the pros must also be available to you -- the individual investor.
So if the pros have the same information that folks like you and I have, then why do they get paid top dollar to dispense financial advice? Donny's answer would be "expertise." As he writes in his email to me:
There is no way that any one individual can possibly wrap their mind around, or sift through, the amount of knowledge and experience contained inside the walls of an organization like mine. I don't care how many books, articles, or websites you check out. It simply is not possible that an individual's knowledge could ever be as vast or experiential in nature as [an] organization like the Northwestern Mutual Financial Network.
Now that sounds promising, but while Donny may be willing to help you, many times the pros won't actually help you at all.
The cons of pros
Like a lot of financial firms, Northwestern Mutual is criticized for its aggressive sales tactics. Many, such as Merrill Lynch (NYSE:MER), even settle claims of compromising the integrity of client transactions for large sums without ever admitting or denying guilt. Last year, the National Association of Securities Dealers charged H&R Block (NYSE:HRB) with selling $16 million worth of worthless Enron bonds to customers, pocketing $500,000 in the process. As NASD Vice Chairman Mary Schapiro said in a press release, "This is an especially troubling case where hundreds of unsuspecting individual investors innocently relied on their H&R Block brokers to give fair and honest advice concerning investments." Cozy relationships with Enron also hurt the reputations of giants such as Citigroup (NYSE:C) and JPMorgan (NYSE:JPM).
Investor's Business Daily recently reported that Morgan Stanley (NYSE:MWD) is laying off 10% of its lowest-performing brokers and cutting the trainee program from 2,400 to 1,000 to focus on recruiting "proven, experienced brokers who are focused on serving high-net-worth individuals."
That may sound like an organization growing stronger, but I'd guess that the lowest-performing brokers are not the incompetents. Rather, they are the lowest fee-earners for the company. In truth, the lowest-fee earners are probably the best of the group. Because the goal of financial companies is to make money and the goal of future retirees is to save money, there is an obvious conflict of interest. Although your retirement goals might be reached by stashing your nest egg in a low-cost index fund, the Donnys of the world might sell you on a growth fund with a high expense ratio. Why would they do such a thing? One word: commissions. The most successful brokers and planners are often trained to be salespeople first, not advisors.
As for Donny ...
Even if I wanted to hire Donny and his vast network of knowledge, he wouldn't have me as a client. His practice "prides itself on delivering top-shelf wealth accumulation and preservation solutions to high-net-worth business owners and affluent families." As a young guy with investable assets of less than $50,000, I'm not worth Donny's time. And since the first rule of retirement is "start early," if I can't do it myself and I can't be Donny's client, he'd have me up a creek without a paddle.
The good news is, I don't think I'd want to be Donny's client anyway. Just look at how he tries to sell me on his services:
Tim, let me ask you a question ... the last time you had "car trouble" did you fix it yourself or take it to a professional? What about the plumbing in your house? Would you ever operate on yourself?
Since time is the biggest barrier to working on your car or your plumbing, the comparison here tells me that even if Donny is the best financial planner in the world, he doesn't seem to respect his clients' intelligence. So thanks, Donny, but I'll pass.
Foolish final thoughts
All of this is not to say that all professional financial planners are bad. There are good ones out there, and often the best they can do is inspire you to make a plan and start saving. Even though retirement planning isn't rocket science, sometimes it can be nice to have a research assistant.
Reformed Wall Street financial planner Robert Brokamp writes the Motley Fool Rule Your Retirement newsletter to empower more folks to manage the future. If you'd like to see what the service is all about, you can start by taking a 30-day free trial. You'll enjoy access to back issues, interviews with authors and experts, retirement calculators, how-to guides, and the Fool's informed and helpful community of discussion board users. We strive to help every subscriber -- regardless of whether you have $2,000 or $2 million. Click here to learn more.