I got a couple interesting comments on my post How to Lower Your Investment Returns: Use a Broker that I wanted to comment publicly on. Here's the first:
If you build the same portfolio and transact it the same as you broker would, you will have more money. Personally, as I sit across the table from my broker I know that he and his team are smarter than me, so I have about zero odds of producing the same portfolio. The value proposition works and I know enough to confirm this.
How about a hybrid approach? There is nothing preventing someone from doing business with a broker while directing another investment account.
First of all, this comment is from a reader I know (somewhat) and like -- though he and I disagree on the status of financial advisors. ;-)
Second, I have to take issue with this:
As I sit across the table from my broker I know that he and his team are smarter than me, so I have about zero odds of producing the same portfolio.
That's right, you have about zero odds of producing the same portfolio. The over-whelming odds are that you'll produce one that's much BETTER.
Think of it this way. Let's assume your financial advisor is as good as the average mutual fund manager. After all, the fund managers are supposed to be the cream of the crop, right? Not many individuals can beat them in a one-on-one investment challenge, correct? But from there, you have to deduct your advisor's fees. So once these are subtracted, your advisor is behind even the average mutual fund manager on a total return basis.
So simply selecting the right mutual funds on your own would be better that what your advisor would recommend, wouldn't it? But even better, there's a way to BEAT most mutual funds' returns. How? Invest in index funds. They regularly outperform most other investments.
Here's the next comment:
I have to agree regarding using a 'broker' alone. The entire financial plan is undermined utilizing a 'broker' alone. An advisor should be one that at least advises, but hopefully plans all aspects - even if the planner does not execute everything, it should be planned out and appropriate professionals (estate planning lawyers, CPAs, securities 'broker', insurance providers, etc.) need to be involved in the implementation of a complete financial plan, if your advisor isn't licensed, or expert enough to do any or all the above.
I am all for people taking it upon themselves to do their own financial planning. However, many do not, or procrastinate at the very least - if they ever do anything -- EVER!
Many that do their own investing never consider further education and consequently understand about as much as they already did when they start. Often, they then make poor decisions (i.e. buying high and selling low) due to lack of discipline and knowledge.
Those that do their own work also need to develop the mental fortitude to learn about investing, know themselves, then develop the plan, and stick with that plan, rather than be led by any 'what's hot now' trend.
Poor performance in a relatively similar poor market is OK as long as what has been understood as goals and risk tolerance and then planned for is being done. Better performance will follow with better market performance. People must always keep in mind their journey and where they are along the way. If the end (i.e. retirement) is years away, stick with the plan that has been discussed and agreed upon. If the end is near (i.e. college funding) an appropriate investment plan will have taken that into account. The losses (and gains) will be less dramatic.
In the end, the individual is responsible. If they select a poor advisor, it is up to them to find another advisor that will get the job done. People have to be willing to dedicate more time to selecting an appropriate financial advisor than they do picking a sandwich for lunch at a restaurant, if they have neither the desire nor the willingness to proactively do it themselves, or are unable to mentally deal with day to day market noise - they wind up hurting themselves financially (by making reactionary poor decisions and suffer permanent financial damage).
There's a lot of good stuff in this comment. My thoughts:
1. "Those that do their own work also need to develop the mental fortitude to learn about investing, know themselves, then develop the plan, and stick with that plan, rather than be led by any 'what's hot now' trend." This is the route I advocate -- learn about financial principles yourself so you can manage your own money. However, many people are not willing/able to do this so...
2. For these people, a financial advisor is probably necessary. It's not my preferred way to go, but it's the only choice for people not willing to dedicate more time to managing their finances than they do picking a sandwich for lunch at a restaurant. (I love that phrase -- I just had to use it.) :-)
3. If you do hire a financial advisor, be sure to do your homework first. As I said in Correction (I Think): Financial Alphabet Soup (What's an RIA, CPA, CFP, RFC, PFS, and So On?); And Who Really Cares?:
When selecting a financial advisor, look for experience. Look for helpfulness. Look for references. I especially like the reference part. If I was looking for a financial advisor, I'd ask people I knew for their recommendations, then also ask the planner for extra references if I ever got close to hiring him/her. It's hard to beat a recommendation from someone you know and trust who's had actual experience with a planner.
4. Be careful. Read these posts to know what dangers lurk for you:
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