WORKING WITH A FINANCIAL ADVISOR

Many companies now make financial advisors available to their employees to assist with 401K investing. Many of you have also sought out the services of financial advisors on your own for investing help. Our best customers have typically hired and fired one or two financial advisors. 

Financial advisors are great at financial planning, tax issues, estate planning, insurance and complex financial transactions.  But they are not highly skilled investors.  They are financial generalists.  Yet, they charge a premium price for mediocre investment advice. 

Why do I say this?

Financial advisors rely on the “plain vanilla” asset allocation investment method.  You can get similar results if you simply put your money in a Target Date fund.

I’ve covered the problems with the asset allocation method in many other posts, but the main problems with this approach are:

1.     You will only earn about 6.5% per year on your investments, and

2.     It doesn’t protect your savings from big losses in market downturns.

Most financial advisors, particularly the ones you access through your employer, provide a “set it and forget it” investment portfolio.  They help you pick the funds and the asset distributions up front.  Yet if you hire one of these advisors on your own, you pay them ongoing fees as a percentage of your account balance forever.  They will tell you that your portfolio is built to weather all market conditions.  Take a look at your results in 2022 to see how that worked out.

Some financial advisors do take a more active approach to managing your portfolio.  They will attempt to make adjustments as market conditions change.  But the kind of adjustments they make are not effective because they attempt to anticipate future market performance.  No one can do this.  No one has a crystal ball to predict which asset classes will perform better in the future.  It sounds good but it doesn’t work. 

They can’t match the performance of a basic S&P 500 index fund.  All of the industry research bears this out.  You’ll earn 9% to 10% per year in an S&P index fund and you’ll only earn 6% to 7% per year with your advisor’s approach.  You don’t pay any management fees when you buy index funds.

Most of this issue has been created by the SEC regulations for investment professionals.  It is not the fault of the advisors.  Strangely, financial advisors are not able to compete based on their investment results – the thing you are paying them for.  The regulations make it difficult for financial advisors to even talk about their results. 

As you know by now, we recommend the index fund approach to investing.  But we do not recommend a “set it and forget it” investing strategy.  Market conditions do change.  We do not recommend that you simply Buy & Hold & Suffer through stock market collapses. 

We do not attempt to predict market dynamics in the future.  But certain market cycles call for different index funds.  And we feel that it is imperative that all investors have a proven system in place to navigate through difficult bear markets where stocks can lose 40% to 50% of their value.

You should definitely seek out professional financial advisors for all of you other financial matters, but you can save yourself a lot of money and get better investment results without their investing advice.

Happy Investing,

Phil

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Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.

Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.