"A man who is his own
investment advisor has a fool for a client."
—— apologies to Leigh Hunt (1784 - 1859).
Our financial planning
clients often ask us whether they should hire an investment
advisor to manage their investments.
This is a complex question which should be carefully considered before
A good investment advisor will essentially act as your personal CFO (Chief
Financial Officer). Here's (some of) what you can expect them to do for
|Customize an Investment Plan. A good advisor will help you
design a custom investment plan to suit your individual situation. It
should take into account your financial goals, as well as your need,
willingness, and ability to tolerate risk. Your investment plan should
generally be designed to minimize your tax-burden (if possible and prudent
given your circumstances).|
|Ensure Consistent Implementation of your Investment Plan.
We've found that many people make dramatic changes to their investment strategies on a fairly
regular basis. Failure to consistently implement an investment plan is
one of the principal reasons for underperformance.|
Often-neglected parts of a good investment plan include (but are not limited
to): periodic rebalancing and tax-loss harvesting. A good investment
advisor will constantly be alert for opportunities to prudently harvest losses
and for situations which suggest partial (or complete) rebalancing might be
|Act as a Human "Circuit Breaker." A good advisor will try to
"talk you out of" doing things which might be hazardous to your wealth.
People often get urges to act on emotion. These contemplated actions
often have predictably negative financial consequences. A good
financial advisor will help you to understand when acting on some of your
impulses may be imprudent.|
More specifically, investors have a strong tendency to chase hot returns and
attempt market timing. It is quite useful to have a "voice of reason"
available to remind you of the imprudence of such actions. Thus, what an
investment advisor does NOT do (e.g., chase performance and attempt market
timing) may be MUCH more important than what they actually do!
|Keep up on the Latest Greatest Research. A good financial
advisor is constantly updating their theoretical and empirical knowledge of
the science of investing. As the research reveals new truths about
prudent investing, a good financial advisor will adapt your investment plan
accordingly. Most lay people don't have the time or
inclination to read
academic journals to keep up on the latest research. For examples of the
sort of research we are talking about, see the red entries
|Keep up on the Latest Changes in Federal Tax Laws. A good
advisor constantly assesses how emerging changes in tax laws might suggest
improvements in your investment plan.|
|Give you Access to the Best Mutual Funds. A good advisor
helps you select the very best investments for
your portfolio. Many advisors can give you access to some good
institutional class mutual funds which you might not otherwise have access to.
The best example of this may be the mutual funds from
Dimensional Fund Advisors. How much is it worth to get access to
(in its "Example E") suggests that it may be worth at least 1.285% per year.|
Altruist provides fee-only investment advisory services inexpensively in the
form of the ALTRUIST®
Portfolio Management Service.
Here are some excellent articles on the proper roles of good investment
|Michael Lane and Larry Swedroe, "Seeing
the Forest for the Trees: The True Role of the Financial Advisor,"
Journal of Indexes, Third Quarter 2002.|
|Meir Statman, "The
93.6% Question of Financial Advisors," Journal of Investing,
Spring 2000, pp. 16-20 (191kb). "Financial advisors are
investor managers. They examine the financial resources and goals of
investors, diagnose deficiencies, and provide financial education and care."
"[Financial advisors] would do better to explain the importance of their
investor management work and the fairness of their fees."
Good investment advisors are not free. We charge
$20,000 annually for accounts of $8,000,000 (for an effective rate of about
0.25%; lower fees apply to larger accounts). Are we worth it? You will have
to decide that. But keep in mind the following:
|On their own, individual investors tend to significantly underperform the markets
in which they
one study concluded that the average individual investor's annual
risk-adjusted performance was 3.7 percentage points below the market as a
Another study (here's
an article about that study) concluded that the average stock fund
investor's annual performance was about 11 percentage points below the S&P
|On their own, individual investors are limited to "retail" investments.
However, many of the best-in-class investments
are only available to institutional investors and to individuals through
selected investment advisors.
suggested that access to those exclusive institutional investments may be
worth between 1.29% and 1.42% per year in increased risk-adjusted returns,
that a good investment advisor can add an average of about three
percentage points per year in net returns by guiding a client through:|
|Prudent asset allocation, |
|Cost-effective implementation, |
|Behavioral coaching, |
|Asset location, |
|Withdrawal order for client spending from portfolios, and |
|Total return investing (vs. investing for income).|
|Do you worry about your investments? A good investment advisor will
give you additional confidence that you are following a prudent course.
Many individuals feel less stressed after engaging a competent investment advisor.
"Out-sourcing" the responsibility to worry about your investments can be a
very liberating experience.|
|In investing, the old adage "you get what you pay for" generally does not
hold. In general, the more you pay in fees, the lower your overall
performance is likely to be. So fees are an important consideration when
selecting investment advisors. There is no reason to believe that an
expensive investment advisor is any better than an inexpensive investment
advisor. In fact, there is significant reason to believe that the
opposite is true — in general, every additional
dollar you pay in advisory fees will reduce your portfolio's net returns
Here's an excellent article discussing this issue.|
|It may not make sense to put your assets under management if you have less
than about $500k to $1,000,000 or so to invest. This is because the custodian used to
administer your account will generally charge additional transaction fees over
and above the financial advisor's fees — and because the
advisor will either charge a high fee for small accounts or an annual minimum
that makes the effective rate unacceptably high. Transaction fees tend to be
independent of the amount under management, so as a percentage of your assets,
these custodial transaction fees would tend to
further be an unreasonably high financial burden for small accounts.|
Here is an excellent article on the fairness of fees charged by good investment
It is very possible for well-informed individual investors to do quite
well on their own. In particular, if they have a well-thought-out
investment plan and they diligently execute it, they are likely to be well
Our financial planning clients definitely do have detailed
well-thought-out investing plans. If you have read some of the books in
our Reading Room, you may have the tools to
generate such a plan yourself. The problem comes in the ongoing
Sadly, we've found that many individual investors tend to unwittingly sabotage their chances
of meeting their financial goals by violating the terms of prudent investment
plans. As discussed above,
one study concluded that the average individual investor's annual
risk-adjusted performance was 3.7 percentage points below the market as a whole.
The study attributed the poor performance ultimately to people's overconfidence
in their investing abilities. Are you overconfident in your abilities?
Can you follow a prudent plan without deviation? The very best plan in the
world is of little use if it is not followed.
Why don't individual investors follow their plans? There are several
reasons. Here are a few:
|They aren't adequately educated regards the reasons behind their plans.
If you don't understand why your investment plan is set up the way it is, you
may be more likely to violate the plan's terms. This is why we work so hard
to educate our clients regards the rationale behind our
|There is a great deal of uninformed "noise" in the popular press urging
them to do imprudent things. Unfortunately, many people actually believe
what they read in Forbes, Fortune, Investor's Business Daily,
Kiplinger's, Money, etc. The articles in those magazines
are, in general, written with one goal in mind: to get you to buy the
publication. Unfortunately, prudent advice just doesn't sell very well.|
Lots of people will buy a magazine whose cover reads, "The ten hot funds to
buy TODAY!" Few people would buy the same magazine if the cover instead
read, "Don't do anything new this month! Follow the plan you set up
five years ago!".
|Often, they fall prey to various
well-documented psychological/behavioral pitfalls, such as overconfidence
in their investing abilities, as discussed earlier.|
|They are constantly bombarded by "conventional wisdom" from their friends,
colleagues, and family members. Unfortunately, much of conventional
wisdom on investing is provably wrong.|
Here is an excellent article on the likelihood of succeeding when "going it
alone" (the bottom line is that it is possible, but not likely for most people):
If you are intent on managing your investments by yourself, you should first
ensure that you are qualified to do so:
|Do you know and fully understand the following theories? If
you don't understand them well enough to explain them to someone else, you
may not have an adequate understanding of them yourself. If you don't
have an excellent understanding of these important theories, you may be unqualified to competently manage your portfolio.|
|Modern Portfolio Theory.|
|Efficient Market Hypothesis.|
|Capital Asset Pricing Model.|
|Fama/French Three Factor Model.|
|Are you aware of the various well-documented
pitfalls we are all occasionally prone to? If you aren't aware of
these phenomena, you may be more likely to suffer from their adverse consequences.
The most important such pitfall is probably overconfidence. Are you
overconfident of your investing abilities? Many people are.|
|Have you read — and understood
— any of the relevant research in the various areas
of investing which are applicable to your situation? If not, it may be
beneficial to consult with someone who has read it, understands it, and is
able to apply the knowledge gained therefrom. See
here for an idea of what sort of
relevant research we are talking about.|
Most people can probably benefit from the services of a good low cost fee-only
investment advisor. Even after you take into account the advisor's fees
(so long as they are less than about 1% of assets), we believe that most individuals will almost
certainly be better off in the end than if they tried to "go it alone."
However, if you are well informed and are able to consistently follow a
prudent investment strategy (most people appear to be neither), it is possible to do well without using an
This web page contains the current opinions of Eric E. Haas at the time it is
written — and such opinions are subject to change
without notice. This web page is intended to serve two purposes:
|To educate the public; and|
|To provide disclosure of Mr. Haas' opinions to prospective clients.
We believe that prospective clients are well-served by being made aware of
what they are buying — and what they are buying is advice
that is based on these opinions.|
We believe the information provided here to be useful and accurate at the time
it is written.
Information contained herein has been obtained from sources believed to be
reliable, but is not guaranteed.
No investor should invest solely on the basis of information listed here.
Before investing, it is important to consult each prospective investment's
prospectus and consider both its risk/return characteristics and its effect on
your overall portfolio.
This information is not intended to be a
substitute for specific individualized tax, legal, or investment planning
advice. Where specific advice is necessary or appropriate, Altruist
recommends consultation with a qualified tax adviser, CPA, financial planner, or
investment adviser. If you would like to discuss the rationale or support
for any particular idea expressed on this web page, feel free to