Advisors routinely tell me that if they used index funds, their clients wouldn’t need their services, consistent with the Dilbert cartoon below. I disagree vehemently. Here’s my top 10 list of reasons why [everyone needs a financial advisor].
So writes Robert Seawright (rpseawright.wordpress.com) in edited excerpts from his original article* entitled Financial Advice: A Top 10 List.
[The following article is presented by Lorimer Wilson, editor of www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Seawright goes on to say in further edited excerpts:
1. Goal Formation
In my experience, individual investors have a great deal of trouble establishing appropriate, realistic and manageable goals. Often they don’t even know what they should be concerned with or what they should include as part of a list outlining what they want or need to accomplish. A good advisor will.
2. Investment Policy Statement
An IPS should state one’s investment philosophy, goals, guidelines and constraints to be adhered to with respect to money management. It also instills structure and discipline. Every investor should have one but only a competent advisor is likely to be able to make sure the IPS created does what it is supposed to do. A (much broader) financial plan also makes great sense.
3. Asset Allocation
The total return of any portfolio has three components, which may be positive or negative:
- returns from overall market movement;
- incremental returns due to asset allocation; and
- returns due to market timing, security selection, and fees.
The best research suggests that, in general, about 75% of a typical portfolio’s variation in returns comes from market movement (1), with the remaining portion split roughly evenly between (2) and (3). To the extent that research differs from that stated above, it concludes that asset allocation is more important and the elements that comprise (3) are less important.
The exercise of allocating funds among various investment vehicles and asset classes is at the heart of investment management. Asset classes exhibit different market dynamics, and different interaction effects. Thus the allocation of money among asset classes and among investment vehicles within asset classes will have an enormous effect on the performance of an investment portfolio. Passive market weighting cannot do anything like that.
Various studies demonstrate that certain investment characteristics can, and do, outperform with persistence over time (even though they can and do underperform for significant periods). These include:
- size (the small-cap premium),
- low beta and
Passive market weightings cannot take advantage of these opportunities. By following competent advice, investors can and should.
5. Risk Management
Passive management (at least as generally construed) looks to “stay the course” through all times and seasons. Thus it can only manage risk by adjusting one’s asset allocation and, even then, will only do so on account of non-market factors (such as advancing age, a change in goals or a change in circumstances). Good advice can make such adjustments more effective. It can also provide other tools for managing risk, including asset/liability matching and tactical adjustments due to long-term factors such as a secular bear market or low expected returns (even though I recognize that the distinction between market-timing and tactical adjustments can seem mighty small indeed). Good advice can also offer various hedging and insurance strategies.
6. Behavioral Management
We are all prone to behavioral and cognitive biases that impede our progress and inhibit our success. We are prone to flitting hither and yon chasing after the next new thing, idea, strategy or shiny object and, since we frequently act too fast, a good advisor can also slow us down to allow us to “check our work.” Losses on account of delay will almost always be out-weighed in the aggregate by more careful and thoughtful analysis keeping us from taking action too hastily and without sufficient reason. A good advisor will help to manage our cognitive and behavioral tendencies. Doing so is vital, not the least of all because we tend to disbelieve that we are susceptible to them.
7. Productive Simplicity
Simplicity is a good thing, but with a careful qualifier. Per Einstein, the goal is to make things as simple as possible but no simpler. A competent advisor will know the difference.
8. Senior Protection
Research confirms what most of us have seen among our families and friends. The ability to make effective financial decisions declines with age. Thus those age 60 and up unnecessarily lose nearly $3 billion to fraud annually. To put it starkly, research shows that financial literacy declines by about 2% each year after age 60. Despite that decline, our self-confidence in our financial abilities remains undiminished as we age. That’s a scary combination that a good advisor can guard against.
9. Tax Efficiency
Experienced money managers routinely argue that you shouldn’t “let the tax tail wag the investment dog.” [While] it’s true that a poor investment isn’t often salvaged by good tax treatment, tax efficiency still matters a lot and a good advisor providing the best approaches for dealing with taxes offers tremendous value.
10. Financial Planning
Each item on this list relates to financial planning in one form or another, yet consumers often mistake investment management with financial planning. Financial planning is much broader, involving far more than the managing of investments. It involves:
- appropriate insurance,
- comprehensive planning for lifestyle,
- crisis prevention and
- crisis management.
Great investment management can be undone in a hurry with poor financial planning [but] a good advisor – a good financial planner – can work to help individuals:
- adjust and
their personal and financial goals. Real expertise is required to do so.
In a world where personal financial issues have become increasingly and often unnecessarily complex, a good advisor can and will help you figure out:
- what is true and
- what isn’t,
- what works,
- what matters,
- what is useful, and
- what can go wrong.
There are few enough people with the expertise sufficient to begin to do the above for themselves. Nobody can do it objectively. That’s why, irrespective of any active v. passive investing debate, good advisors are an absolute necessity.
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[No one would argue that] diversification is not a sound investment practice but exactly how much risk reduction, in actual numbers, is obtained through application of this philosophy? This analysis is an attempt to quantitatively determine its relevance – [and you will be surprised by the answer. Read on!] Words: 1317
Individuals are long-term investors only as long as the markets are rising. Despite endless warnings, repeated suggestions and outright recommendations – getting investors to sell, take profits and manage…[their] portfolio risks is nearly a lost cause as long as the markets are rising. Unfortunately, by the time the fear, desperation or panic stages are reached it is far too late to act and I will only be able to say that I warned you [- unless you take the time to read, and study the contents of this article]. Words: 1945; Charts: 10; Tables: 1
Protect your money by steering clear of these 10 most dangerous investing mistakes. Words: 716
80% of my investable income is in cash, precious metals and a small number of stocks. That might seem crazy, but the Pareto Principle, Zipf’s Law and the bell curve have convinced me that it’s a waste of time and money to get any more diversified. [Let me explain why that is the case.] Words: 396
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Investment “rules” that were relevant for a century are obsolete. They were based on a world where economies grew, people’s standard of living increased and outcomes tomorrow better than today. Arguably each of these conditions will not hold in the future but if they don’t, neither do the rules of thumb that guided investing last century. These guiding principles developed and worked in a world that that no longer exists but applying them in the future will result in devastating financial outcomes. [Let me explain.] Words: 1261
Bill Ackman, founder of Pershing Square Capital Management, believes the following books are essential financial reading. Enjoy the summer! Words: 235
When the stock market reaches extreme levels of distress, the average investor – particularly those who have done their own research and made their own investment decisions – panic at seeing their savings diminish to such an extent. They often start questioning whether they should be making their own decisions and often their reaction is to salvage what is left and sell, sell, and sell some more. [Regretfully, that is not what one should do. Let me explain why that is the case and what you should be doing – NOW.] Words: 380
There’s a bewildering amount of advice on how to invest…so it’s worthwhile, especially in today’s volatile markets, to take a look at what has actually worked, as opposed to what people claim works. We’ve collected some of the finest wisdom on markets from the most respected and successful investors, past and present. Words: 865
Risk inherent to the entire market or market segment is referred to as systematic risk and modern portfolio theory says that a blend of investments has the potential to increase overall return for a given level of risk, and/or decrease risk for a given return that the investor is trying to achieve. The expected risk/return relationship is known as the efficient frontier. [If you have a portfolio of investments then you need to fully understand what all this really means and how you can apply it to your portfolio makeup to enhance returns under any circumstances. Let me do just that.] Words: 1325
There is a common notion that stocks, at least if held for a long-time, outperform other assets [and, as such,] should be the cornerstone of any long-term portfolio. [While that is indeed true,] it is best to focus first on how much you are able and willing to lose (i.e. what risk you are able and willing to bear) when determining the optimal allocation for your portfolio. [Only] then [should you] think about what potential investment returns you might be able to capture. [Let me explain.] Words: 1503
What hope can there be for motivated stock pickers – no matter how much they sweat and toil – to outperform the low-cost index funds that simply mechanically track the market? Well – in spite of the absurd rise of the Nobel-acclaimed, and highly promoted, Efficient Market Hypothesis that claims that individual investors can’t beat the market – it turns out there is plenty! Just ask Warren Buffett, for one. [Let me explain.] Words: 1574
The number, market cap and currencies of the constituents of the HUI, XAU, GDX, XGD and CDNX indices differ considerably from each other and, as such, each index presents a different picture of what is really happening in the precious metals marketplace. This article analyzes the make-up of each index to reveal the biases of each to arrive at the answer to the question in the title. Words: 1026
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People choose certain stocks for many different reasons: business location; sector strength; product innovation, but some investors choose what to buy based on company size, or market capitalization [believing that size does matter. Yes,] understanding the difference between small-cap, medium-cap and large-cap companies is the first step to making the right choice. [Let me explain.] Words: 600