A friend recently met with her elderly mother’s financial advisor.  My friend figured that the financial advisor was a clever fella because her mom made a 15% return last year.

A 15% return-on-investment sounds good to the uninformed, but it isn’t necessarily so great.

The S & P 500 represents the 500 largest publicly traded companies.  That went up 19% last year. 

A person who knew little about investing would made almost a third more than her financial advisor by buying an index fund, and would have paid a fee of 0.015%.  The elderly mother paid a fee of much more than that to her financial advisor, but she may not know it.

My nephew-in-law (NIL) is a financial advisor.  When they were visiting this summer, we talked about the business.  He is very forthright and makes sure that his clients know what they pay him.

If 4 out of 5 financial advisors do worse than a low cost index fund, what value does the financial advisor bring? 

My NIL says that his value is in getting his clients to stay on track.  Even level-headed people are subject to being triggered by world events.  This guy gets elected, this nation gets bombed, whatever.  A client gets jittery, and wants to do something irrational.  He talks them down.

That makes sense.  My nephew-in-law is probably very good at his job.

My parents were not investors.  When Dad retired from American Airlines, he took the lump sum retirement option.  He received something like $150,000.  That’s wasn’t nothing in the 1980’s.

In college and while I was an engineer, I got educated on investing.  I tried to get Dad to peal off a little chunk to put in Fidelity’s Magellan Fund.  That’s where I was, and the fund was averaging an annual return of 29%.  Dad felt better leaving it in the credit union to earn 5% or so.

Fine, let’s just be poor.

I’m not a genius at this stuff.  I just talked to people and read the Wall Street Journal.

A person who bought an S & P 500 Index fund three years ago, would have seen their investment almost double.  A financial advisor that isn’t doing better than that, isn’t winning.

It was good that my friend talked about how impressed she was by the financial advisor, and good that I told her that she should not be so sure.  We don’t talk about money enough.  It’s gauche and boring to talk about getting your hair done by Madame Pompidou or how much you can afford to blow on some other extravagance.

We should be talking about how money works, and comparing notes.  My guess is the WW II parents didn’t invest in the market.  Baby Boomers pay a financial advisor to hold our hands as we make some cautious investments.  Our children buy a third of a share of stock on Robinhood or get swept up in a GameStop stock mob. 

My retiree friends are starting to inherit.  I always advise them to just by an index fund, and let it ride.