Should you have an advisor?
Gauge your need for professional advice
It's my experience that most people want or need advice on investment decisions. However, there are questions you can ask yourself to help determine whether or not you are well suited to delegating your investment decisions. While there are some investors who simply love jumping in their portfolio's driver's seat, others couldn't be bothered. Which camp do you fall into?
Desire for control
Do you like total control over your portfolio's destiny? Do you second-guess most of the advice and suggestions of others? Are you suspicious of advisors ' motivations, particularly those compensated via product commissions? If you answer yes to any one of these questions, I'm not sure any advisor would want you as a client.
Trust is at the heart of all relationships and that between advisor and client is no exception. While good advisors love clients who show a desire for involvement and ask good questions, nobody likes their advice to be constantly second-guessed and motivations questioned. A good advisor will be more than happy to incorporate, as much as possible, a client's input into a plan, but s/he will not want to work with a client when a basic trust is absent from the relationship.
There is a middle ground between passive lambs and doubting control freaks. Figuring out where you stand on this continuum will help in better gauging your need and desire for financial advice.
Balance in life
This subheading is meaningful. It's very easy for computer-savvy investing enthusiasts to spend hours upon hours doing investment research on the Internet and participating in discussion forums. However, there is a lifestyle decision to be made here. Many people are capable of making their own financial decisions and keeping up on new developments and product offerings. Many of those same people simply feel that they're too busy to do so, on top of their full time jobs, house chores, and the ever-important quality time with loved ones.
Yes, you can save a bundle by educating yourself, and structuring portfolios on the cheap. But for those who neither have the interest nor the inclination to do so, they're thrilled to find a competent and knowledgeable advisor to take care of these issues, thereby freeing up more of their time.
Instinctively, you know which description fits you best.
Buying and selling patters
Is past performance one of your two most important factors in your investment decision process? Do you hold more than ten mutual funds? If you answer yes to at least one of these questions, you may need the help of an advisor, whether you want it or not.
Study after study has proven that past performance truly gives no indication of what the future holds. In fact, I'd be willing to bet that extreme absolute performance (in either direction) is most likely to reverse itself to some extent the following year. Instead, investors tend to buy based on the dangerous assumption that the recent past continues into the immediate future. That's the recipe for disaster and a clear sign that the help of a qualified advisor is needed.
I can't tell you how many times I've reviewed a mutual fund portfolio, only to find it scattered across 15, 20, or some other excessive number of funds. While behavioural researchers have surmised that investor overconfidence breeds heavy trading, I maintain that a lack of confidence leads investors to buy too many holdings. They like Trimark Canadian fund, but just in case it doesn't do well, they'll also buy (the not-much-different) Mackenzie Ivy Canadian fund and often two or three other funds investing in the small Canadian stock market.
They do so in an effort to "hedge their bets", in case their first pick doesn't do as well as expected. Problem is, this is done at the expense of diversification and superior performance. Pick enough funds and close to half are bound not to do well against other similar funds - thereby dooming the portfolio's chances of outperformance.
Both of these behaviours indicate a need for the help of an advisor.
Research into the behaviour of investors is a growing area. In fact, it's a topic I've been researching for the last few months. Investor behaviour refers to investors' patterns of buying and selling with all investments. The very basic conclusion that has been reached by every study I've read is: Investors make poor timing decisions. Most of the quantitative research on this topic has been in a mutual fund context, since data is more readily available, but that conclusion is also consistent with the behaviour research done on stock investors.
Rather than advice on what and when to buy, investors appear to need the most help on the "how" to buy and sell. In other words, people need help managing their emotions and keeping them from making reactive investment decisions.
It's been my experience that most people both need and want advice. Many investors go it alone because they simply can't find a good advisor. So, out of necessity, they "do their own thing" because they figure they can't do any worse than the two salespeople that burned them in prior years.
This is the first of a three part series on advice.
Next week: Tips on finding qualified advisors.
In two weeks: Tips and online resources for do-it-yourself enthusiasts.
Dan Hallett, CFA, CFP is the President of Dan Hallett & Associates Inc. in Windsor Ontario. DH&A is registered as Investment Counsel in Ontario and provides independent investment research to financial advisors. He can be reached at firstname.lastname@example.org
|Disclaimers: Consult with a qualified investment adviser before trading. Past performance is a poor indicator of future performance. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, financial advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. More...|