Excerpt:
We shouldnt discount the value of professional expertise. In a world where fans think nothing of suggesting a $10 million dollar bonus for their favorite football player (surely an expert at throwing or catching or tackling), its ridiculous to assume that investment experts have low or little value. In fact, this is a variation of the do-it-yourself argument. The root lies in fear. Fear that a consumer is easy prey for a trained salesperson. The expertise is devalued because so much of it is false expertise. Expertise is often a ruse to sell products.
Think how commissions distort expertise: What if your medical doctor earned commissions from the medicines prescribed? What if doctors gave away free office calls, but kept half of the cost of each prescription? What if one antibiotic paid a higher commission than another? What if one hospital paid your doctor $1,000 cash for each admission, while a different one paid $500?
Investments dont have to be this way, either. Take the commissions away, and the false expertise disappears, too. The professional now lives or dies by what he or she knows. False expertise wont survive in a competitive marketplace. Like an accountant or lawyer, bad reputations kill bad professionals.
The fee-only advisor is probably a generalist. When necessary, they refer clients needing them to product specialists. Those specialists have precise knowledge about complex situations. Theres a place in the world for both generalist and specialist.
Fee-only advisors bring expertise unbiased by a sales commission. Expertise is one of those overused words that almost lacks meaning. Still, its a very real concept and necessary to investment success. The truth is that investments are pretty complex. There are thousands of choices, with variations of each. No one person can know everything thats necessary. So all of us, even professionals, rely on people with specialized knowledge.
Forget about investments for a minute. Just think about some of the cross-discipline areas with impact on personal finance accounting, tax, law, insurance, purchasing, and banking, just to name a few. To be successful, we need to have a smattering of knowledge in each of these areas. When a critical situation occurs, we may require substantial knowledge in one or more of these areas.
Now consider the complexity of important financial issues. Take the subject of retirement planning, and consider some variables. A persons age, income, health, spouses health, genetics, children, geographic location, and lifestyle are important. Add in the level of investment sophistication and risk tolerance and youve created a very complicated matrix for decision-making.
Or how about education expenses? How old are the children or grandchildren? How are their grades? What field(s) are they likely to study? Public or private college? Any other sources of college funding?
Nick Murray, in his incredible book The Excellent Investment Advisor, identifies five Great Goals of Life for personal finance. From family to family, he says that we all seek comfort in retirement, financial help for our adult children, educational assistance for grandchildren, help for aging relatives, and gifts to meaningful institutions.
Ponder for a moment the complicated decision making matrix for each of those goals. Clearly, no one can really do-it-themselves. Everyone needs outside expertise.
Another point to consider is the depth and breadth of personal knowledge. In legal circles, a Last Will and Testament provides a good example. In the course of our lives, most of us will encounter very few wills. A parent, maybe, or another older relative. We may eventually ask our family attorney to help us create one of our own (recommended if we have children of any age). All told, our experience with these important legal instruments is a few brief encounters over the course of our life.
An attorney with any kind of estate planning practice has seen hundreds of wills, including ushering them through the entire probate process. Theyve witnessed family feuds, estate tax debacles, and contested provisions. They have practical experience way beyond anything weve ever encountered.
That attorney brings those experiences to the production of our own legal documents. Thats why the expertise is important. Could we buy a fill in the blank Last Will and Testament from the office supply store? Of course we could. Would it do what we want with the least amount of hassle and expense? Thats another story.
I remember reading a magazine article where the author bragged of having written his own will. He ranted against the cost of lawyers (for clarification, Im not an attorney), and professed that hed saved hundreds of dollars. And the whole process worked just fine, according to him.
What he didnt say was that wed not really know how well it works until after his death. For his familys sake, I hope hes right. I hope it flows effortlessly through the probate court and that no one contests the provisions. I hope they avoid estate tax snags and that everyone is comforted by the results. And, again for his familys sake, I hope they dont find out for a good long time.
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