In my last blog (Exactly the Right Amount of Harsh) I wrote about several examples of why I am so critical of the very industry in which I work. But I also promised to write about some of the good work that advisors do in my next blog. And no, my recent “sabbatical” is not because it took me two weeks to find these examples. Sheesh, you cynics!
I want to give specific examples without waxing philosophical, but I think the primary advantage to a financial advisor is often not actually the financial advice we provide, it’s our role as “money psychologists”. The best advisors, in addition to technical skills, have the personal skills to help clients keep a steady hand on the rudder of their financial ships. And often, it’s not even the advice that adds the most value. Sometimes it’s the questions we ask that spur the client to think about things from an entirely different perspective. A few examples:
An advisor told me a story about a very wealthy extended family that was the beneficiary of an extremely complex array of trusts, corporations and other financial arrangements. She explained that in a word, the whole thing was a “mess”. Money was moving around apparently sometimes in conflict with the terms of the agreements. Some family members were getting more than they were supposed to and some were getting less. And the taxes, oh the taxes! It took a team of advisors and accountants and lawyers a year to straighten out the “mess”. In the end the family got along better, the administration of the money was much smoother and best of all, they saved the family tens of millions of dollars in taxes. This is a bit of an extreme case, and won’t apply to most of us mere mortals, but the simple act of working with an advisor tends to make you more organized, and that’s always a good thing that can help in ways you don’t expect.
Another advisor told me about a client that had come in and wanted to set up what would have been a complex, expensive and publicly reviewable account to manage his charitable giving and help manage taxes from a large windfall. It was a great idea. For 1995. Since then several companies have offered a better solution for all but the wealthiest clients that is much simpler, much less expensive to administer and completely anonymous. In a matter of minutes, his advisor was able to suggest a better solution that took a couple of days to set up almost for free. True “inventions” in finance are rare, but over time better solutions evolve. Longevity insurance and hybrid life insurance policies are two recent examples that come to mind for the average investor. It would be almost impossible for most people to keep up with these developments. For a good advisor, discovering and analyzing these solutions is a core part of our jobs.
The worst enemy of good investing is emotion. In fact, a study by Vanguard estimates that behavioral coaching by advisors can add as much as 1.5% to the returns on your investments. Since the financial crisis in 2008 I still wake up in the middle of the night and reach for my smartphone to see what the Asian markets are doing and how the US markets are expected to react. No worries. Just checking. The other thing I have to check is my emotions at the door. At the depths of the crisis I had to advise clients. My advice uniformly was, “We have a plan. Stick to it. Our stock allocation is low, so buy stocks. If you can’t do that, at least don’t sell.” Our plans were shot to hell, but because we had done the planning to begin with, it kept everyone’s emotions in check and we’ve been able to climb out of the hole. Now most of my clients are on the other side of that coin and ahead of plan. My advice has generally been, “We have a plan. Stick to it. Good times don’t roll forever and trees don’t grow to the sky. Sell what’s done well and buy what hasn’t.”
The point is, don’t misunderstand my criticisms of the industry. Working with an advisor can almost always be of some help, even if it’s just an emotional nudge to get your act together or stick to your plan when everything hits the fan. And the best advisors can truly help those willing to be counseled, sometimes in ways you never expected.