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Choosing an Investment Advisor Is a Features vs Benefits Balance

These intangible can mean the difference between profits and losses

I’ve been thinking a lot lately about the investment advisory business.  There are now so many options available to every-day investors that everyone starts to sound alike.  It used to be you were a rebel if you were using ETFs, transparently reporting performance, or compensated on a fee-only basis.  Now, this is the way that everyone sets up their shop. 

Furthermore, competition in the portfolio management world has driven the cost of building a balanced and diversified portfolio closer and closer to zero.  There are still some truly unique brands and asset managers who have been able to stay distinct through this cycle.  However, the trend continues to be one of competitive features and difficulty discerning what advisors are truly offering meaningful benefits.

It’s interesting to see the hullabaloo surrounding the robo-advisory business model as well.  These types of services certainly make access to diversified portfolios very affordable.  However, they lack the significant relationship component and service features that a competent advisor or portfolio manager can provide.

It’s my belief that most people who sign up for these types of accounts think that they are paying for some sort of quasi-active management.  They want to believe that their money is being looked after and the features that are touted on the platform sound great on the front end.

However, in the midst of a 10, 20, or even 30% drop, where are those people going to turn for answers? Additionally, where do they get competent help with individualized service needs?

I imagine there is going to be a few uncomfortable and eye-opening phone calls that go something like this…

ROBO: Thank you for calling your automated investment advisor, please listen to the following menu…

Client: Representative!

ROBO: Press 1 to check the balance of your account.

Client: Uhhh, I want to know why my IRA has gone down.  I’m getting really nervous about stocks and now the Fed is talking about raising interest rates again. 

ROBO:  Press 2 for our address and fax number.

Client: I don’t understand why I can’t speak to someone about the stock market.  I need some advice on whether I’m in the best plan. 

ROBO: Press 3 to make a contribution to your IRA.

Client: Contribution?  I want to get my money the hell out.  I’m down 16% since I started with you.  Where is the “hassle-free” you promised me? 

ROBO:  Press 4 for tax loss harvesting.

Client: Ok, look, whatever.  I’ll sign in online and just change my risk tolerance there, but I need help calculating the required minimum distribution for my mom’s IRA.  My last guy always did this for me.

ROBO:  Did you say IRA?  We can help you with that.  Press 7 to open an IRA.

Client: Oh my god!  Where the hell is everyone?  Representative!

ROBO: Press 9 to repeat this menu.

The other side of the robo-advisory coin that I have mixed emotions about is how it’s now being touted as a service for advisors to use on the back end of their platforms.  Basically it’s a way for them to outsource their portfolio management at a very low cost.

On the surface, this is a great way for outdated advisors to get away from high fee mutual funds, separate accounts, or weak stock picking skills that they would have otherwise used.   Now they have the option of implementing sensible investment management techniques to give you a better chance at a successful outcome.

However, if your advisor needs to use one of these services, doesn’t that mean they are basically ignorant of how to build a portfolio to begin with?  How can you trust someone in this business who doesn’t even know how to construct a basic investment plan?  It scares me to death to think about how someone could call themselves an investment professional and yet have so little knowledge about the tools of their trade.

That’s like going to see a doctor for a procedure and then him immediately telling you that he is going to outsource your heart surgery to a robot.  It’s fully back-tested he assures you.  We have the most efficient surgery robot in the world at our fingertips.

Yeah, but what happens when the surgery goes off script?  What if there are complications or everything isn’t in the exact same place as when the robot was programmed?  Makes you wonder if he is really an MD or a bioengineering PhD.

Everyone has a game plan at the outset of a journey – then life happens.  Call it Murphy’s law or whatever you want.  It’s when you get hit by that unexpected event that you truly need to lean on a system or knowledgeable counselor that knows their craft.

I’m not going to sugar coat it, most investment advisors are far better sales people than they are portfolio managers.  That’s the world we live in.  It’s your job to learn as much as you can about how they are compensated, what their skill set is, and what benefits they can provide you.

Check out some of these articles below if you need help with that process:

You Know You Need A New Advisor When…

5 BIG Mistakes To Avoid When Choosing An Investment Advisor

When You Should And Shouldn’t Use a Robo Advisor

Hiring An Advisor? Don’t Start With Fees and Performance

If you look around, you will see that basically everyone touts the same features.  It’s the benefits that really matter and those are much harder to define.  The comfortability of the relationship, the ability to sleep well at night with their decisions, the honesty of the person you are entrusting with your hard earned wealth.

Those intangible qualities can mean the difference between success and failure because every investment strategy is going to come under fire at some point.  It’s during those times that you have to trust who you hired to get you through the bad stuff and reap the rewards on the other end.  Otherwise, you will find yourself selling near the lows and loaded with regret over your choices months or years later.

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The post Choosing an Advisor: Features vs Benefits appeared first on FMD Capital Management.

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