A special thank you to the Globe and Mail for naming this blog one of the five sensible yet entertaining blogs to help build wealth. The other blogs are thoroughly entertaining reads and readers should take time to explore them. If you are reading this blog for the first time, please browse around and, if entertained, please subscribe to my RSS feed. Thanks.
Everyone is gunning for the investment advisor. There are now articles on whether to sue investment advisors, how to leave them and whether they provide any value. Some investment advisors have even turned on their own. I am not much for overly broad generalization. Like any other industry, there are good, bad and indifferent members and timing makes a real difference. A good investment advisor hired in August 2008 could have only minimized damage but, without the benefit of context, a loss is a loss in the rear view mirror.
Assuming you have an investment advisor, how long should you give them before deciding to dump them for another or to walk down the DIY road? I am not sure there is a definitive answer but let’s assume that a relationship with an investment advisor is like any other relationship.
If communication issues occur immediately- for example, their advice is not geared towards your stated risk tolerance levels-it may be a sign that perhaps, to using the dating analogy, it is not worth getting past the third date. One hopes in this situation, your entire portfolio has not been handed over to them. Just like dating, one should always keep some secrets.
If clearly stated goals and intentions are communicated and a plan put in place, it would be imprudent to pull the plug quickly on the investment advisor (assuming she is following an agreed upon and reasonable strategy). Study after study shows that low investor return is caused by, among other things, switching strategies quickly. As Jason Zweig commented recently, discount brokerage customers with higher trading volume tend to do worse than their low trading counterparts. With the investment advisor, throw in possibly higher transaction costs and a quick trigger finger initiated by the client may actually not be a reason to dump the investment advisor. Perhaps it is the clients own sense of impatience which is to blame.
Assuming a reasonable strategy is put in place and neither party gets impatient, one would have to give at least 3-4 years to assess the true value of an advisor. Three to four years may seem like a long time but remember my assumptions: (i) a reasonable strategy is in place (built into my assumption of what is reasonable is low cost so the advisor is not eating 3-4 of unreasonable fees); and (ii) neither side gets impatient. I would add one more point, the parties have to agree to meet at least once a year to review and adjust, and not gut, a reasonable plan.
Having sat on the other side of the advisory table, it is a little unfair to criticize the advisor if the client never communicates clearly what they want, the client rarely communicates except when things turn badly and the client has unrealistic expectations. Now, if communication is quite clear and the advisor acts in their own self interest to the harm of the client, the advisor should be punished accordingly. But if a plan and communication is clear, one has to give enough time for a strategy to fully mature.
But, to return to the dating analogy, one cannot be passive aggressive about what you want. The other party are not mind readers and, in a vacuum, will act in their own self-interest. If the investor has no idea what they what then perhaps no advisor should be hired at all and time spent on a little soul searching.
Similar Posts:
- Safe Investments: What You Should Know About Risk Free Investing
- How Much Do You Need To Retire? The 10% Rule
- The Wash Sale Rule and Tax Loss Selling of Stocks
- A tenant exclusion endorsement is not enforceable in a Standard Mortgage Clause.
- Roth IRA Advice: Why You Should Choose Roth IRA’s As Your Retirement Account
