People used to count on their investment advisors to always do the right thing for their clients.
This was dictated by their fiduciary duty – the responsibility for advisors to work in their clients’ best interests, which continues to guide professionals such as a CFA [Chartered Financial Analyst], CPA [Certified Public Accountant], and CFP [Certified Financial Planner].
It was also dictated by a certain pride the investment industry had when people like Jack Bogle, founder of Vanguard, started in the profession over 50 years ago.
Unfortunately, in the years since, most people have become skeptical of investment advisors and the investment industry in general. The industry has earned this skepticism and professionalism has deteriorated to a point where many of the current “designations” of financial advisors are marketing tactics in disguise.
So it’s little surprise that you’re left to question whether the benefits of working with an investment advisor are worth the headaches of finding the right one.
Industry skepticism
One of the main criticisms of investment advisors is their track record with active management.
Active investment management involves a portfolio manager making specific investments with the goal of outperforming a benchmark index. This strategy relies on the manager’s investment decision expertise. Passive management, unlike active management, aims to replicate the performance of a benchmark index. This strategy involves minimal buying and selling, focusing on long-term investment and lower costs.
Studies have shown that active management often underperforms passive benchmarks over time. And while advisors might occasionally get lucky, they are unlikely to consistently outperform market benchmarks over longer periods.
The problem is that many advisors – especially those in the brokerage industry – don’t benchmark their portfolios at all, so investors are often left without the tools to adequately assess their performance and whether their advisor is adding any value.
To find an investment advisor with the right motives and knowledge, It helps to know what questions to ask them.
Jason Zweig wrote an excellent article about this a few years back. It covers 19 questions you want to ask a potential investment advisor and even suggests which answers to listen for.
One of his questions concerns the advisor’s investment philosophy, which is crucial in determining whether that person is the right advisor for you and how committed they are to acting in your best interests.
(Another good question to note: “Do you believe you can beat the market?” Be wary of anyone who answers yes, no matter how confidently, to this question.)
Advanced portfolio construction
When you’re deciding if working with an investment advisor is worth it, consider how they construct portfolios.
Is it presented as a one-size-fits-all solution? Or does your advisor seem genuinely interested in you, your goals, and your challenges?
Creating a well-diversified portfolio is a matter of craftsmanship – no individual is going to build the same portfolio that the right investment advisor will build for you.
In fact, even among investment advisors, the portfolio can differ greatly depending on the investment philosophy, nuanced details, and things like how closely your advisor monitors fees and taxes.
And you, as an individual, will be much more limited than your advisor.
There may be tools an advisor can use that most individuals cannot, such as institutional-class funds or some alternative investment funds that have restrictions on who can invest.
Beyond portfolio management
Beyond portfolio construction and investment performance, there are several other reasons to consider working with an investment advisor.
Financial Planning
This includes estate planning, tax planning, business transition planning, and any other type of planning that involves how and where you handle your money.
We never sit down with a client and say, “Okay, let’s just invest 60% in stocks and 40% in bonds because that’s the way it’s done.” We ask a lot of questions to figure out who you are, what your goals are, and even try to identify issues you may not be aware of yet.
Then, we consider how we can solve all of it through careful planning
Tax Code Navigation
Speaking of planning, tax efficiency is a critical investment aspect that many individuals fail to explore fully.
The tax code is incredibly complex, and you can make a move that seems entirely reasonable but actually results in significant tax liabilities thanks to an unknown tax law you didn’t even realize you had to factor in.
The right investment advisor will help you reveal those unknowns and structure your investments in the most tax-efficient way possible.
Coaching and Prevention
Believe it or not, one of the most important roles your investment advisor can play is that of a behavioral coach. Investing – and handling finances in general – is an emotional process, especially during periods of market volatility or major personal changes.
Left to your own devices, it’s so easy to make a mistake that can negatively impact everything, particularly during sensitive times like a bear market when emotions can run high.
Let’s say you’ve worked really hard over a lot of years, and you’ve got $2 million invested when the market hits a huge downturn. You turn on CNBC and everyone is saying, “The sky is falling! Get out while you can!”
So what do you do? Of course, you sell out.
But by doing so, you lock in those losses and make them permanent. You can never recover from those losses because when the market eventually recovers, you won’t get to be part of that.
The coaching aspect of working with an investment advisor helps you avoid mistakes that can turn into costly permanent losses.
Worth it or not?
Are the benefits of working with an investment advisor worth it?
The answer to this question has become more complicated in recent years.
Consider what you need beyond the basics of portfolio management – your goals, potential issues or concerns, and the level of planning your finances require. Then factor in how much faith you have that you can do the job well and avoid emotional involvement that could lead to potential losses.
Ultimately, while skepticism is warranted, we certainly believe you can find the right investment advisor.
By equipping yourself with knowledge and questions designed to help you understand the advisor’s investment philosophy and commitment to their fiduciary responsibilities, it’s likely that working with an investment advisor will be much less stressful and complex than figuring it all out alone.
For more real-life financial advice, meet with our team.
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**Notice:
Armbruster Capital Management’s views, as portrayed in this post, are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector. Investing involves risks, and the value of your investment will fluctuate over time, and you may gain or lose money.
Past performance is no guarantee of future results.
Third-party sites and materials are available for access at your own risk.