My Take on Investors Going it Alone (Revisited)

Last week, I wrote a two part blog entitled Should Investors Go it Alone and a part II on the subject that argued the better questions were:

Are my costs low?
Am I diversified?
Am I avoiding the herd?

My take was that evidence showed that, as a whole, investors going it alone did better than investors using an adviser. My friend Larry Swedroe, who writes the Wise Investing blog for MoneyWatch.com, argued my take was "misleading and even wrong." To say he objected strongly to my perspective would be the understatement of the year, and he was not the only one who did. One of the best advisers I know, Rick Ferri, agreed with Larry. As the comments came in, what we agreed upon and what we didn't came into focus.

Heated agreement - A good adviser can add value
As an investment adviser myself, I have some bias, but I completely agree that a good adviser can add a lot of value to their client. I use the term investment adviser a bit more broadly to mean financial planner. And I think there is agreement as to the ways a good financial planner can add value:

Investments -- design the portfolio and provide the focus and discipline to rebalance, rather than follow the herd.
Financial Planning -- cash flow analysis and preparing a plan to safely withdraw assets so as not to outlive one's money.
Risk Management -- Determining the insurance needs that can't be self insured.
Taxes -- Designing the portfolio to be tax-efficient such as the proper asset location.
Estate Planning - Working with an attorney to create a proper estate plan.

I suspect we would also all agree that paying an adviser to pick winners and time the market is a waste of money or worse.

Partial agreement - a reasonable fee
What's a reasonable fee to pay your adviser? I tend to agree with Rick Ferri that 0.5% or less is a reasonable fee. Based on my conversations with Larry, I think he would say it should be higher. In full disclosure, I charge by the hour but always keep my fees below that 0.5% bogie that Rick mentioned.

I believe in the following equation -- value = benefits - costs. Thus, Larry may be right as long as those benefits are greater than the costs.

Still disagree - advisers as a whole underperform investors going it alone as a whole
Both Larry and Rick have rejected my argument that the average investor does better than the average adviser. The crux of the disagreement is that they exclude brokers from the category of advisers. Unfortunately, the word is somewhat blurred in that many brokers charge a percentage of assets while many planners, including CFPs, charge based on transactions.

While this is far from a scientific study, I've seen some of the worst stuff sold to clients by CFPs with a fiduciary duty to their client. They can sometimes be freer of a large firm compliance department which allows them to sell this unimaginable garbage. The broker, on the other hand, may have some limits on how badly they can abuse their clients.

Still, I think all three of us would agree that a client shouldn't seek out an average adviser. The problem is that I've never met an adviser who admitted to being below average, and I have no intention of being the first.

Conclusion
So, yes, I do think a good planner can add a ton of value. To find the good ones, you need to ask some tough questions. Then remember you should trust your planner enough to listen, but not so much that you'd follow him off a cliff. You'll know you've found a good planner when you can say "yes" to the three questions at the top of this article.

More on Money Watch
Smarter Retirement
A Year After the Stock Market Plunge
Should Average Investors do it themselves?
Should Average Investors do it themselves (part 2)
Only an Active Portfolio Provides Downside Protection?
The Risk of Taking A Risk Profile Questionnaire

Allan Roth

Allan S. Roth is the founder of Wealth Logic, an hourly based financial planning and investment advisory firm that advises clients with portfolios ranging from $10,000 to over $50 million. The author of How a Second Grader Beats Wall Street, Roth teaches investments and behavioral finance at the University of Denver and is a frequent speaker. He is required by law to note that his columns are not meant as specific investment advice, since any advice of that sort would need to take into account such things as each reader's willingness and need to take risk. His columns will specifically avoid the foolishness of predicting the next hot stock or what the stock market will do next month.

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