Maybe it IS your financial adviser's fault

Most who have titles as "advisors" are really just salesman. Anyone with a brain can understand how to invest themselves and at least put their money in a very cheap and balanced index fund. Only you have your best interest at heart.

You know, folks, it never ceases to amaze me how these types of comparisons NEVER take into consideration the more than numerous idiosyncrasies that should be brought to bear relative to an individual's financial life. I have been in the business for 20 years, and work with extremely intelligent, high income earners, as well as those who are the average working class individual. 85% of those I work with are business owners, and need far more than just a % point comparison as to the importance of an advisor in their respecctive lives. As an example, one never hears about the resturcturing of a corporation, which once sued can easily have its stock awarded to a plaintiff through a judgment, into an LP/LLC multiple entity structure in order to take advantage of Accountable Plan rules under the Internal Revenue Code once Form 8832 has been filed in behalf of the LLC Management Company. Additionally, I never hear about these purported individual experts setting up Family Limited Partnerships for investment management, which under the IRC is a bonafide business, in order to mitigate the potential for creditors to attach the funds held individually in the name of an investor. Let's face it…these are strategies that a percentage point or two in performance can never quantify. Thus, the writers within this blog who purport to be able to "outperform" a TRUE advisor, frankly has an extremely limited knowledge base with which to make a legitimate, accurate comparison. How much is it worth to an investor to know that, if they perhaps are sued, that their investment portfolio is unassailably protected? When advisors work closely with tax accountants and attorneys, the types of conversations seen in a blog of this nature is actually comical in its lack of understanding the true nature, cost, and risk of taxation and legal ignorance.

I've done it both ways…with advisors and without. So far my own results have outperfromed the advisor's by a very long shot….the phrase "A Stock Broker is someone who invests your money till it's all gone" comes to mind…Now I do my own research, make my own choices.

Live with Intention,
Dr Bill Toth
CreateYourFate.com

I believe that most people are using "broker" and "advisor" interchangeably which is totally incorrect. Many people that call themselves advisors are really wolves in sheeps clothing; pretending to be knowledgeable in areas they have no clue about but would rather talk about how well their last pick performed….earning their big commissions along the way.

Advisors help guide their clients along the financial path of life. A true advisor does not receive a commission from their recommendations, rather a fee (preferably hourly) for the advice they are giving. They help people uncover holes in thier current plans or items that have been overlooked.

Performance is relative. You can "beat the market" and still lose money. You do not pay an advisor for performance of the portfolio. You pay for the advice to ensure that a portfolio is well balanced, taking appropriate risk for the potential reward, is tax efficient and to have an objective eye to YOUR SPECIFIC SITUATION.

As with any industry there are good and bad financial advisers. We at XL-Recruitment work in the financial services industry specializing in financial services recruitmentand we see both the good and bad. I very much think its dependent on whether the advice provided is done so by an experienced and well qualified adviser or one who has little experience in the field, market conditions accounted for of course

I completely agree with the article, as I also agree that mechanics spend less on car repairs and the amish spend less on clothing every year. You pay for conveniences. The cost of having an advisor assist you with your investment choices costs money. You WILL get a lower return than others that do it themselves. Advisors are for people who do NOT want to do it themselves. I just hope people that dont have advisors are all 100% knowledgible of the overall marketplace, as there are so many options out there today.

I wish someone would reference a proper study using the advisor community vs the brokerage community vs self directed. I have seen a bi-annual one done for the last 10 years based on rolling 10 year returns and brokerage is about 5 basis points ahead of self directed both of which were 8% behind the index with true advisor and institutional portfolios right at benchmark after fees. Can anybody spell "fiduciary"?

First, you can make the numbers tell you any thing you want if you torture them enougy.

Second, in descending order there are:
Liars
Damned Liars
Statistitians
Used car salesmen
Politicians
Investment advisors
.
.
and way down at the bottm me or your friends who give invsetment advice.

That said, I did OK over many years. I kept a well balanced portfolio with what was available at my employer, through thick and thin. For my personal IRAs I selected funds off the annual Forbes fund ratings more for how they performed in down markets than in up markets.

I didn't have a lot of home runs, but I had a consistently good above average performance for 27 years with the company.

When my company was bought out by a much larger Aerospace and Defense contractor, my 401K choices increased greatly. I continued to follow my philosopy and did even better.

One of the best things my new company did was hire an outsied investment advisor to give quarterly brown bag seminars. His seminars covered both the company available choies and a recomended change or two as well as what what happening in the market for the more independent investor attendees. It was obvious from questions that a percentage of attendees were also his clients or potential clients.

As I approached retirement I had observed him for 6 to 8 years and felt pretty comfortable that he and I would be on the same page. I had him do a free portfolio analysis, 70% equities and 30 fixed bonds. He recommened chabnges. I also asked for the names of at least 3 people in my company for references. I got the names of three emgineers that I worked with on at least a weekly basis, and whom I respected at thoughtful persons. When I retired I took him on as my investment advisor.

My stated main goal was capital preservation, and not having to touch my investments until required at age 70 1/.

In Jan 08 I went into my quarterly meeting prepared to discuss lowering my exposurer to equities from 40% to some much lower percentage.

Before I got the chance he stated the very same thought that we should start a systmatic equity reduction and got from quarterly meetings to every two months. By the Mar 08 meeting I was down to 20% equities and by June I was at 12%. At that point I was down only about 5%. By the Nov 08 meeting I was only down about 10%.

In Jan 09 we slowly started moving back into the market.

From August 1st of 08 the market dropped an additional 33% or so. In the year ending July 31 09. My total portfolio was up 34.4%. I avoided a big loss that did not need to be recovered. Year to date (Jan 09 to Aug 31, 09 I am up about 15.5%.

If you carefully pick your advisor and are "in tune" with him or her you can do very well.

I agree that the higher costs often associated with an advisor may depress the investment return, but most people still need an advisor to actually build their long-term financial plan. Investors can use sites like http://www.claroconnect.com to find an advisor.

Sorry Joe from Westland; I believe your analogy fails. The point of the article is to show that by doing less you're in a position to gain more. If you're portfolio is subject to constant turnover as is the case of actively managed portfolios, one exposes themselves to greater commission expenses and capital gains taxes which erode returns. By following a more passive approach where trades are limited, one is in a position to keep more of their gains, holding all else constant.

If you want to fix your own car, by all means, fill your boots. But, the effort you will need to spend will surely exceed that of the mechanic's. Most online discount brokerages can spit out an optimal portfolio to fill your needs by having you first fill out a basic questionaire. I doubt it would be that easy to rebuild a car engine…

So, in closing, keep your car mechanic, and take control of your own finances.

Take care.

I work in the mutual fund business, and we deal with both financial representatives AND customers on a daily basis. After dealing with financial planners for many years, I am convinced that on average, they are less intelligent than the average person. Those who compare financial planners to doctors, lawyers, or auto mechanics are comparing apples to oranges. I can justify spending money on a doctor, lawyer, or mechanic, as those are COMPLEX jobs which I would not feel comfortable attempting myself. However, the average person who reads this website is better qualified to manage their money than the average financial planner. A financial planner is not like a doctor, lawyer, mechanic, or electrician. When you hire one of them, you probably don't have a clue what they are doing, which is why you hire them. But if you hire a financial planner, it is VITAL that you understand everything they are doing, as they could being making very costly mistakes with your money or taking risks that you are not comfortable with. If you know enough to understand what your financial planner is doing, then you know enough to do it yourself.

Being a long time individual investor and a shorter time, hourly fee-only financial planner, I find this article to be useful and not hurtful to our “profession”.

While taking financial planning courses a few years ago, I found that most of my fellow students were commission based product salespeople (CBPS) or those who wanted to go into this direction. Most had/have 8th grade math skills and little in the way of information technology skills.

Also, conflicts of interest dominate. And guess what? Takeovers of broker/dealers by new management intent on culling out low “producers” are going to result in more of the same. Don’t take my word for it. Read Investment News or other trade publications to see what’s really going on in our industry. This doesn’t bother me in the slightest. An educated client is a powerful advocate.

I have long held the view that any knowledgeable amateur can outperform the average person using the average advisor. But don’t kid yourself, if you’re not willing to seriously learn financial planning. Money is a great magazine, but it’s FP101. Read only it and twenty years later, you’ll still be at FP101.

Please don’t be so harsh on statistical methods. The reality is that predicting the future at an event level really is impossible. Statistics will not tell you otherwise. That’s why I only stick to rolling period returns. And as was also mentioned in an earlier post, spend more time focusing on the volatility of returns than on the returns themselves.

Even before 2008, any adviser should have been able to articulate that:

1. The long term annualized return of the S&P 500 is around 10%.
2. The annual standard deviation of those returns is around 20%.
3. Therefore, a minus two standard deviation event will leave you with a -30% loss for this portfolio, in a given year, if it were to happen.
4. Year to year returns are not normally distributed, but have a fat tail, so the probability of a -2 standard deviation event or worse is not and never was miniscule. Better to expect it to happen once or twice in any twenty year period.

So last year’s slightly more than -2 SD event was horrible, but not unprecedented or even all that rare.

But two thirds of the time, markets go up. Most advisors pick expensive, actively managed funds, then layer on their own % AUM (assets under management) fees. The end result is that their portfolios would need to outperform index funds by around 2% consistently, in order to justify all their fees. Since neither brilliance nor luck persist indefinitely, the only way they can make up for the cost drag is to move their clients UP THE EFFICENT FRONTIER CURVE.

In other words, take MORE risk. So the approximately one third of the time that the market goes down, results in subpar performance. If you get frustrated and leave the advisor, they just go chasing after somebody else to bring in more AUM. In fact, they were probably doing this all along and that may explain why they did not have much time to explain the above to you.

The financial services industry is proof positive that you don’t always get what you pay for. I have seen it on both sides of the desk. Hourly, non-product selling, non-AUM based FP is the only alternative I have found that cuts out these conflicts of interest.

By the way, has everyone paid down their mortgage during this decade? A superior return (not always, but that's not the point) at zero transaction cost. Debt is nothing more than negative savings. True diversification is about much more than investing.

As an advisor, I educate my clients about the economy, tax law changes, etc. During this past year I didnt lose my clients a single dime. Why, because I preserve my clients capital first and earn modest rates of returns. Mostly with permanent cash value life insurance and annuties that have preservation of capital benefits. All the self proclaimed pundits out there dont know squat. They change their minds everyday as to their feeling about the market. I am securities licensed, just dont really trade equities because the market keeps artificially changing. Comapnies are doing better than a year ago because the majority of them cut out their most costly expense; the employees, therefor making revenues bigger and artificially increasing the stock price back up for that company. Why is it that everyone has an analysis AFTER something causes the market to go up or down. There like the monday morning quarterback who has all the answers after everyone plays on Sunday. 90% of the advisors out there are a joke because they follow the masses and dont do the research themselves. And by research I dont mean which stock or fund has outperformed the market. A freaking 2 year old can do that. I'm 25 years old and can outperform most of the advisors because I follow a process and dont chase for rates of return. But go ahead and keep listening to Suze, Kramer and all the other tv personalities out there because its their ideologies that other advisors follow that make clients hate their advisors.

Hm-m-m, let me guess… this article & "study" were published, quite selectively, by a publication that is supported by "no-cost", "do-it-yourself" advertisers. SO surprised, are you?
Study after study has shown people that have that real advisors, not friendly, charming sales people/brokers at BROKERAGE houses, do better for 2 reasons; 1) their OVERALL returns are better & 2) they save/invest more because they have the confidence & encouragement to do so.
So much of this publication & other do-it-your media (ala, screaming Jim Kramer) myopically focus on the investment half of wealth management & totally ignore the un-sexy, boring defensive side of wealth protection… insurance & annuities. Yes folks, those things that, heaven forbid, people get paid commissions on.
For any in this readership that even have such financial vehicles as part of their comprehensive, how's it feel after these last 2 years to have a portion of your portfolio in these "costly" devices that have saved you $000's in losses? Boring & safe feels pretty good, aye? BTW, remember those meager gains are tax-deferred if not completely tax-free.
Of course if you don't value tax advantaged financial products because you don't have tax problems… perhaps you should get a life/job MAKING Money, rather than just reading it. Isn't your time worth anything? Just because you could build your own house or cook every meal, do you?

As a 20 year+ veteran of helping folks with THEIR financial futures & security, I suggest that you DO shop around as you do with every other important life decision.
Arm yourself with some of the good basics that media such as this provide. And if the last 18 months hasn't proven to you that there IS a difference between the Lynch'em & the Blarney's & an INDEPENDENT, client-centric ChFC or CFP… then just keep on wasting YOUR time & talents on trying to do it yourself.
Just remember… "You know what you know, but you don't now what you don't know." (sorry editors) Nor do writers or editors of advertiser-sponsored media.

It's easy to say that a person investing on their own can out-perform someone using an advisor. That's the same as saying someone who fixes their own car will spend less money on car repairs each year than the person who has a regualr mechanic that they use and trust. Fixing things at your house that break on your own or doing any major project/renovation instead of having a licensed contractor do the work. Of course you will save money. Not to mention that advisors are generally there for those that do not know about the market, planning, and all of the other aspects of finances that go beyond what percent their account went up or down by. I go back to the fixing your own car theory, if you read an article on a car-buff website, I would imagine the over-whelming response would be that it's foolish to take your car to a mechanic, it's a waste, they are use-less, they over charge, etc. The large portion of the population that does not come to websites like these could benefit tremendously from an advisor.

I moved some of my $750k IRA / 401k portfolio into a "XXX" Managed Portfolio account. I rated a 7 on their 1-10 risk scale and instructed their agent (Rep in his 20's) to invest my asssets in such a way that the most I could expect to lose was 20% in a down market. My portfolio dropped much more than 20% going from approx $110k to $62k – Not to mention the "constant" trading that was occuring. 5% of my portfolio was supposed to be kept in cash. At one time there was less then $1,000. Furthermore, there was additional financial pain for the quarterly "management fees" plus a small redemption fee when "I finally wised up and closed the account". I learned a valuable lession…I now do my homework and manage my portfolio myself utilitizing the various tools available on the internet and todate have recovered over 90% of my "paper" loses …and I WOULD NEVER GO WITH AN ADVISOR AGAIN!

Statistics do, indeed, overgeneralize. Some professionals beat the market, some don't. I have a couple of concerns about using professionals. First, those who follow a system tend to be less nimble than a gyrating market would dictate. Secondly, the account fees, over time, wipe much of what a managed account might have gained, even assuming a client has been fortunate enough to hire a good advisor. I believe that these two factors increase the chances that a knowledgeable investor might outperform the professionals. One should not be surprised if the Germans are correct, using just the average of account managers' perfomance, especially when one considers that the arithmetic mean of all mutual fund managers also underperforms.

I worked as a rep for 7 yes on Europe and 3 yrs in the United States. My clients were all conservative and I was conservative as well. No losses, little gains but always above inflation, everything ok.

As far as the other reps, my conclusion was this: The best reps in returns were the ones with experience of at least one business cycle, with no "frat-boy" attitude, and no participation in corporate meetings (instead, they had many meetings with their clients and they focused more on the big picture than on individual stock picking). Also, all succesful reps in returns preferred dividend paying stock, and did NOT like speculative investments, currency trading, or heavy exposures to volatile sectors of markets.

Today though, I do not know what to say. It seems as if there is no safe choice for the long term in financial instruments. I would probably go with buying cheap real estate in a good area with low property taxes and invest on Health and Education.

This article is priceless. I am sure the author also fixes his car by himself, sells his house by himself, gets his mortgage on line, and grows his own food. There are good advisers and bad ones. Chances are, if you pick the 22 year old just out of the training program, then yes, you will probably not get value. If you pick someone that has been in it for years, then you will get what you pay for. Just like anything else.

Be careful if considering a self directed IRA. In spite of the safety typically associated with IRA funds, these are totally unregulated and rife with fraud. So called financial advisers who steer clients into self directed funds are particularly suspect as the adviser and custodial institution have no fiduciary duties and money can easily be laundered through self direct IRA accounts.

I've been a Certified Financial Planner® for 6 years and a financial planner overall for 12. As a CFP®, investment planning is 1/6th of what I do for each client. I plan for education goals, review spending patterns, restructure cash reserves, beg clients to get estate planning done, plan funeral and burial arrangements and update retirement plans annually amongst hundreds of other planning items. 38% of my assets under management have been in cash over the last year and we're moving back into the markets slowly so the majority of my clients have done much better than peers in their age group. While I'm not tooting my horn, if you plan more for volatility in your investment plan than returns, you're bound to do better. You can't be greedy one minute and crying the next!!

As my professor in college used to say: "Statistics, Damn Statistics and Lies." He went on to say that statistics can be contrived to support a conclusion that was already made. Regarding do-it-yourself-ers, there is a saying in the advisory business: "If we did to our clients what they do to themselves, we as advisors would be spending a lot of time in jail." My attorney friends say: "An untrained person representing himself in court has a fool for a client." Further, when discussing advisors it's important to separate out advisors from financial product salespeople. Just because someone has a Series 7 license or is acting as an investment advisor representative does not mean that the client's goals and objectives are at the top of the heap. Not all advisors are equal in experience. Not all place the interests of the client first. Same is true with attorneys, doctors, chiropractors, builders, etc.

I invested in the market from 1995 through 2004 and re-entered the market last October. My first three investments were made with a financial advisor. I quickly dropped the advisor because of the fees and the ability to save by using an on-line brokerage. My average annual return was about 38% over the 95-04 period. I have my money broken up into three "funds" at present and the one started last October has an annual return of 119%. My later funds are comparable. I see no advantage to having a financial advisor if you understand the market. I do think many people do not understand the market and can benefit from an advisor, but will never achieve the potential of the market by using one.

There are advisors and there are brokers. I still appreciate advisors (fee-only, especially) because they help you see your financial situation in its entirety and will advise you on things such as disability or long-term care insurance, taxes, etc.

Brokers just want your money in their game to "beat the market." What would be good is if brokers were NOT allowed to call themselves financial advisors.

I used a Merrill Lynch advisor for years, mainly because of family friendship. But she right away put my IRA into many funds, when I specfically told her to keep it simple and in no more than 5-6. ML also mislead my sister and lost them money. Is it a wonder that ML has been sued by people and governments so many times?

Currently you can put IRA money into real estate but only with an expensive advisor carefully looking it over. I hope Congress will make this far easier, as many of us would rather put at least some retirement into things we are more knowledgable and comfortable with.

While many who used advisers and who went on our own did take a bath in the recent meltdown, a lot of people who use adviser under-perform because the adviser first job is to keep his/her job and not make us money. Therefore, in many cases, they put their client's money in lower risk products that do not provide superior returns. Other grossly incompetent advisers take on way too much risk with other peoples money in high growth/ high risk products that eventually crash and burn. Case in point: all the money lost in the internet bubble.

James in Portland: You have missed one of the main facts in the article: older clients (who tended to have advisers) tended to _outperform_ younger clients (who tended to not have advisers). When the authors 'controlled for age', the clients with advisers did worse. You write in your post that older clients tend to have more conservative portfolios ("capital preservation rather than growth"), which would tend to underperform over long periods rather than overperform as the article is suggesting.

As smart or knowledgeable as any advisor or individual investor may be, it all boils down to trying to anticipate the future, which is a daunting challenge. People constantly try, but it can't be done consistently. Low fee index, diversified portfolio with an age appropriate allocation to fixed income and equities may be the most reasonable approach.

Contrary to what most advisors say, you do not need to be right twice. They will tell you that you need to be right on the BUY and the Sell if you try to time the market. That’s not true. You only need to be right once. If you are selling, you expect that the investment will decline in value sometime in the near to medium term and you can buy back in if you want at a lower cost. That is only ONE decision. If you are buying, you expect that in near to medium term the investment will be higher and you can sell for a profit. This too is only ONE decision. You are either right or wrong ONCE. No need to worry if you do not buy at the lowest point or sell at the highest point. For example, if you took money out of the market anytime in 2006 or 2007 you would have had many opportunities to re-invest at a much lower price. ONLY right ONCE, you expected the market to go down below your selling point and it did.

Advisers are just that…advisers.

That doesn't mean their advice will be right.

When is everyone going to learn that the stock market and everything associated with it is nothing more then organized gambling. No one is an expert at it and those that are are most likely using insider information or are cheating the system.

Financial advisors do not produce any added value to the society. They are just another drain, another unneeded expense.

Me and a couple of friends who discuss finances decided in early 2008 that it'd be prudent to reallocate funds within our 401Ks and IRAs to stable value or money market funds. It was my money and I wasn't going to see it go down the drain. I doubt if financial advisers with their biases towards the equity market would have EVER advised us to move our funds to low-risk funds. I certainly did not see too many articles by the experts at Money.com advocating such a move either.

Thomas in Corvallis – Age can have a huge impact on portfolio performance since an investor's risk tolerance (and therefore portfolio composition) typically varies based on age, with older investors generally biased more in favor of capital preservation instead of growth. One would expect a portfolio of bonds to perform much differently than one comprosied solely of equities, so that difference must be controlled for when comparing performance results.

Financial advisers are just another unnecessary expense on the path of financial security. Everyone should read articles on "Lazy Portfolios" index investing on Marketwatch.com, which is outperforming all benchmarks, all managed funds, and all financial portfolios managed by financial advisors. And Lazy Portfolios cost way less than what average financial advisors charge (fee or percentage) today by a wide margin. Actually, by indexing, one can save, reinvest and make more money than with any financial advisor, hands down.

We can all do it alone, we just have to break through the clutter of financial sales pitches. The choice is yours: utilize 'help" of a financial advisor if you always want to under perform benchmarks. It's a looser's proposition.

Of course we advisors will under perform the market. You have to pay us to put your money in funds more expensive than index funds and then trade more often than holding index funds. An accountant who can help you with tax considerations is better than an advisor and you might not even need that if you keep your money in a lazy indexed portfolio. Really dumb people might need advisors but more often than not they just need to learn how to control thier spending. The dumb clients are a win-win scenario. They have no idea how much we charge them and just putting thier money in the stock market or bond funds will make them more money than what they have been doing which is usually holding it in a 0 interest checking account.

Simple…and you advisers should know this…the more money you have to invest often allows access to funds that are substantially different than those the "joe schmoes" of the world get to invest in. Also, an experienced investor is less likely to listen to his advisor all the time and will challenge the advisors thoughts (that money didn't just appear after all). Younger, less experienced investors who are PAYING for expertise (cough…cough) are more likely to listen to/be intimidated by their investor.

I have an MBA and the ONE time I considered having an advisor they were recommending policies and behaviors that were 100% the antithesis of our discussions during the initial interview. More aggressive, more return "chasing", selling insurance with bells and whistles I didn't want…

The bottom line is an aphorism appropriate in all aspects of life–you get the behavior you incent. With all due respect, the strongest incentive for a financial advisor is to be "right" and seek returns above the buy and hold indexing approach. If they are incented by fees (more trades = more commissions" then that's what you're going to see.

An educated consumer, regardless of age, is best suited to manage their money and/or their advisor.

I am a financial advisor with Wells Fargo Advisors in Florida. I do not see the relevance of this "study" or age / wealth on the percentage return in a portfolio. As advisors we walk our clients through the events of life giving support and financial advice along the way. We are not market-timers. Anyone who is trying to time the market will underperform because humans are terrible psychics and to really make money you have to be right TWICE, not once (on the BUY and the SELL side). Sure there are folks who get lucky. But tell me this: is the fact that your friend won the lottery proof positive that buying lottery tickets is the way to plan your retirement? Luck and prescience are not strategies.

This was my experience with Smith Barney. My adviser refused to listen to me when I told her in mid-2008 that the market appeared to be going nowhere but down. She told me to keep on investing and I lost 50% of my portfolio. I'm on my own now and will never use an adviser again.

re: Once the professors controlled for age and wealth…
How does _age_ of an investor have any relevance whatsoever toward portfolio performance? I have found that researchers can 'prove' nearly any point they want to after concocting a number of factors to 'control for'.

As an advisor – I actually agree with this article. A solo investor may outperform an advisor.

But will that solo investor understand taxes on certain investments, be able to identify a shortfall in an aspect of their insurance, understand when their will should be reviewed, understand how to invest an inheritance, fully understand their ESOP, SARS, Phantom stock, and their dual-eligibility to contribute to their 457 and 403(b) in the final years of their employment.

Don't pigeon-hole us advisors just by the returns we create – we're worth a lot more than that. Value is the name of the game, and some of us (pat on the back) are worth a heck of lot more than others.