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?
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.
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.
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, B.Comm., CFP, CFA is Senior
Investment Analyst with Sterling Mutuals Inc. He can be reached at dhallett@sterlingmutuals.com Sterling Mutuals Inc. is registered as a
mutual fund dealer in Ontario, British Columbia, and Manitoba.