Wednesday , 26 October 2016

Self-manage Your Portfolio? Think Again! Here Are 10 Reasons You NEED a Financial Advisor

Advisors routinely tell me that if they used index funds, their clients wouldn’t needinvesting6 their services, consistent with the Dilbert cartoon below.  I disagree vehemently.  Here’s my top 10 list of reasons why [everyone needs a financial advisor].

So writes Robert Seawright ( in edited excerpts from his original article* entitled Financial Advice: A Top 10 List.

[The following article is presented by  Lorimer Wilson, editor of and and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]

Seawright goes on to say in further edited excerpts:

1. Goal Formation

In my experience, individual investors have a great deal of trouble establishing appropriate, realistic and manageable goals. Often they don’t even know what they should be concerned with or what they should include as part of a list outlining what they want or need to accomplish.  A good advisor will.

2. Investment Policy Statement

An IPS should state one’s investment philosophy, goals, guidelines and constraints to be adhered to with respect to money management.  It also instills structure and discipline.  Every investor should have one but only a competent advisor is likely to be able to make sure the IPS created does what it is supposed to do. A (much broader) financial plan also makes great sense.

3. Asset Allocation

The total return of any portfolio has three components, which may be positive or negative:

  1. returns from overall market movement;
  2. incremental returns due to asset allocation; and
  3. returns due to market timing, security selection, and fees.

The best research suggests that, in general, about 75% of a typical portfolio’s variation in returns comes from market movement (1), with the remaining portion split roughly evenly between (2) and (3). To the extent that research differs from that stated above, it concludes that asset allocation is more important and the elements that comprise (3) are less important

The exercise of allocating funds among various investment vehicles and asset classes is at the heart of investment management. Asset classes exhibit different market dynamics, and different interaction effects. Thus the allocation of money among asset classes and among investment vehicles within asset classes will have an enormous effect on the performance of an investment portfolio.  Passive market weighting cannot do anything like that.

4. Persistence-Weighting

Various studies demonstrate that certain investment characteristics can, and do, outperform with persistence over time (even though they can and do underperform for significant periods).  These include:

  • size (the small-cap premium),
  • value,
  • momentum,
  • low beta and
  • concentration.

Passive market weightings cannot take advantage of these opportunities.  By following competent advice, investors can and should.

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5. Risk Management

Passive management (at least as generally construed) looks to “stay the course” through all times and seasons.  Thus it can only manage risk by adjusting one’s asset allocation and, even then, will only do so on account of non-market factors (such as advancing age, a change in goals or a change in circumstances).  Good advice can make such adjustments more effective.  It can also provide other tools for managing risk, including asset/liability matching and tactical adjustments due to long-term factors such as a secular bear market or low expected returns (even though I recognize that the distinction between market-timing and tactical adjustments can seem mighty small indeed).  Good advice can also offer various hedging and insurance strategies.

6. Behavioral Management

We are all prone to behavioral and cognitive biases that impede our progress and inhibit our success.  We are prone to flitting hither and yon chasing after the next new thing, idea, strategy or shiny object and, since we frequently act too fast, a good advisor can also slow us down to allow us to “check our work.”  Losses on account of delay will almost always be out-weighed in the aggregate by more careful and thoughtful analysis keeping us from taking action too hastily and without sufficient reason. A good advisor will help to manage our cognitive and behavioral tendencies.  Doing so is vital, not the least of all because we tend to disbelieve that we are susceptible to them.

7. Productive Simplicity

Simplicity is a good thing, but with a careful qualifier. Per Einstein, the goal is to make things as simple as possible but no simpler. A competent advisor will know the difference.

8. Senior Protection

Research confirms what most of us have seen among our families and friends.  The ability to make effective financial decisions declines with age.  Thus those age 60 and up unnecessarily lose nearly $3 billion to fraud annually.  To put it starkly, research shows that financial literacy declines by about 2% each year after age 60. Despite that decline, our self-confidence in our financial abilities remains undiminished as we age.  That’s a scary combination that a good advisor can guard against.

9. Tax Efficiency

Experienced money managers routinely argue that you shouldn’t “let the tax tail wag the investment dog.” [While] it’s true that a poor investment isn’t often salvaged by good tax treatment, tax efficiency still matters a lot and a good advisor providing the best approaches for dealing with taxes offers tremendous value.

10. Financial Planning

Each item on this list relates to financial planning in one form or another, yet consumers often mistake investment management with financial planning.  Financial planning is much broader, involving far more than the managing of investments.  It involves:

  • budgeting,
  • goals,
  • appropriate insurance,
  • comprehensive planning for lifestyle,
  • retirement,
  • legacy
  • crisis prevention and
  • crisis management.

Great investment management can be undone in a hurry with poor financial planning [but] a good advisor – a good financial planner – can work to help individuals:

  • formulate,
  • monitor,
  • adjust and
  • meet

their personal and financial goals.  Real expertise is required to do so.

In a world where personal financial issues have become increasingly and often unnecessarily complex, a good advisor can and will help you figure out:

  • what is true and
  • what isn’t,
  • what works,
  • what matters,
  • what is useful, and
  • what can go wrong.

There are few enough people with the expertise sufficient to begin to do the above for themselves.  Nobody can do it objectively.  That’s why, irrespective of any active v. passive investing debate, good advisors are an absolute necessity.


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