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2013 / Behavior

The Value Of A Great Financial Advisor


It was enough to make me choke on my bagel - the headline in the business section of USA Today read recently: Investors Would Rather Pay Commissions Than Pay Fees. This was absolutely stunning to me and likely to other Bay Area financial advisors; after all, high net worth investors have been fleeing the brokerage houses in droves over the last five years, in large part, because they were tired of the conflict-of-interest inherent in the commission sale. The article quoted a survey of 7,800 households in which 47 percent said they preferred paying commissions as compared to 27 percent who preferred paying a fee on assets under management. That couldn’t possibly be right. Could it?

But then, what I saw next not only helped to lower my blood pressure:

• 33% of respondents didn't know how they pay for the investment advice they receive
• 31% thought their advisor or broker provided investment advice for free

Essentially, that means these 64 percent don’t understand how their advisor is compensated. This tells me two things: First, the vast majority of investors don’t realize that the investment advice they are receiving is very likely linked to a product recommendation for which a commission is paid. And, second, many investors might still prefer to receive “free advice” if they think they are saving in investment costs. The advice is only “free” because the investors didn’t know they were paying the broker a commission.

A fee-based financial advisor, should provide their clients with a comprehensive financial plan, and work to develop a long-term investment plan complete with a customized asset allocation strategy and an individually constructed investment portfolio. But, in an advisory relationship, all of that is the easy part. It’s what an advisor does from that point forward where they earn their 1 percent advisory fee.

It begins with an education process to help clients understand that it’s not the advisor’s investment portfolio that matters most in investing success; it’s the investor and his or her behavior that matters. If an investment philosophy calls for patience, discipline and faith in the future, and an investor insists fleeing the market in times of panic, or buying into a hot stock with the rest of the herd –it simply won’t work.

But, human nature being what it is, most people are not genetically coded with the attributes of patience and discipline, and recent events have turned a lot of people into cynics regarding the future. We are emotional creatures, and it is emotion that tends to guide our decisions, especially with regards to investing. This is what leads to underperforming portfolios. As fee-only Bay Area financial advisors, our primary job is to keep our client focused on their target while coaching them to stay the course and avoid the typical behavioral traps that can severely hurt long-term returns.

Investing is no different than exercising. It requires a goal, a plan, a strategy and execution to be successful. There are many good Bay Area financial advisors with the ability to develop sound investment strategies. But the one who usually breaks with the strategy is not the advisor or the personal trainer; it’s the client. That’s why you pay a personal trainer – to keep you focused on your goals, hold you accountable, encourage you and keep you from hurting yourself. Those are the precise reasons why you pay a financial advisor; and any financial advisor, regardless of how they are compensated – who isn’t willing or able to be your investment coach is of no real value to you.


Image made available by Tracy O on Flickr through Creative Common Licenses.

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