An investment advisor’s most important job

Before deciding to have a child, my wife and I did a tremendous amount of research on how best to parent.  It occurred to us both, early on, that one of our jobs would be to comfort her when she was cast down, and challenge her when she was feeling too self-satisfied.

This reminds me, in a lot of ways, of what an investment advisor must do for clients.

Too many investment advisors are eager to give clients what they want, not what they need (we all know how that parenting style works).  In such a relationship, the advisor benefits at the expense of clients.  Not good.

Most investors get overly excited about market prospects after investments have made big gains, then become overly despondent when investments tank.  This is not some great sin on the part of investors–it’s a well tested and documented human tendency.

Investors who don’t exhibit this tendency, and there are quite a few, don’t really need an investment advisor.  If they tend to zig when others are zagging, their investment results are likely to be very good without the help and expertise of an advisor.

Investors who exhibit the all-too-human tendency referenced above, however, do need the help of an adivsor.  In fact, I would argue it’s the advisor’s most important job to prevent clients from buying at market tops and selling at market bottoms.

I’ve made this focus the centerpiece of client communications.  When markets look frothy, I write client letters and blogs that express concern and cautious action.  When markets look abandoned, I express enthusiasm and a need for bold action.

This is vitally important, because most investors won’t get anywhere close to meeting their retirement goals if they buy at tops and sell at bottoms.  If you need concrete examples, please see any of the multitude of studies showing how unprepared baby boomers are for retirement.

So, it was with great distress that I read an article in SmartMoney today highlighting that 1/3 of advisors moved client dollars out of the stock market and into conservative investments (cash and bonds, mostly) in 2009 and early 2010. 

In other words, those advisors were doing just the opposite of their most important job.  Instead of talking clients off the ledge, they were facilitating their jump. 

Even if you could argue that those clients needed to get out of the market for psychological reasons (can’t sleep at night), I would further suggest they didn’t belong in the market to begin with, and that their advisor should have been the one to figure that out before the market tanked.

Any advisor worth their salt should have been able to see that in early March 2009, the stock market looked likely to provide 20% annualized returns in the future (10% earnings yield, plus 6% economic growth, plus 4% dividend yield).  This is not rocket science, but many investment advisors panicked just like their clients.

It’s like a pilot running up and down the isles of an airplane with an engine fire instead of soberly resolving the problem.  Such a pilot is clearly not doing their job, and neither is such a panicky investment advisor.

Can you imagine if 1/3 of pilots panicked like passengers when problems occurred?  No one would be willing to fly on an airplane!

And, yet, investors have and will continue to pick investment advisors based on their community involvement and winning personality, instead of their sober-minded expertise and an ability to deal successfully with psychological stress.

Perhaps investors will learn their lesson this time, and turn to advisors who give them what they need, not what they want.

After all, isn’t that a parent’s job, too?

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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An investment advisor’s most important job

Judging expertise–the right way!

I was simply dumbfounded.

I was having breakfast with a good friend, recently, when she explained the good qualities of her financial advisor. Specifically, she referred to her advisor’s a) ever-present volunteer activities in the community and b) diligent hobby fly-fishing on every possible occasion.

First, let me highlight that my friend is no dummy. She’s one of those people that is fiercely dedicated to her job, an expert in all the important areas of her work, and possesses a mind-numbing amount of information about her interests. This is one smart cookie.

Second, I have nothing against volunteer activities or fly-fishing, or long walks on the beach for that matter.

Third, I’m not an unbiased observer. I am, after all, an investment advisor myself.

With all that, why on earth would you judge your financial advisor based on their presence in the community or their various hobbies!

When I look for a doctor, I don’t care if she sings in a barbershop quartet, or if she likes to play bridge. All I care is if she is an expert in her medical specialty. I want to know she reads the latest journals and works diligently to improve her results over time.

When a fireman comes to pull my unconscious body from my burning house, I don’t care if he enjoys flower-arranging or Internet chat rooms, I just care if he can carry me down a flight of stairs and then put out the fire with minimum property damage. I want to know that he can squat 300 pounds and studies fire damage to figure out how best to put them out in the future.

And, when I look for an expert in investments, I don’t give a hoot if they volunteer and fly-fish, all I care is that they are expert at what they do.

Personally, I want that doctor, fireman and financial advisor to be a neurotic, obsessive/compulsive individual so dedicated to their field that they seldom have time for much else.

So why was my friend so excited that her financial advisor was always volunteering and trying to fly-fish? I don’t get it.

Doesn’t she realized that when her advisor is doing something other than being an expert in their field, she’s the one losing. Doesn’t she realize that every hour volunteering or fly-fishing is another hour when the advisor’s competition is finding ways to get better returns, better plan for her future, or broaden their knowledge?

There’s a right and a wrong way to judge expertise. You don’t judge it based on ancillary interests or good intentions in the community. You judge it based on best practices, proper education, diligent improvement, and long run results.

And one more thing while I’m on my rant: when your advisor regularly calls you to suggest you make changes to your portfolio, and he’s compensated based on commissions, he’s not calling to help, he’s generating sales so he has more time to fly-fish while your portfolio is floundering.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.