Surveys by Gallup and The Federal Reserve estimate that between 52-54% of U.S. investors have stock market exposure directly or indirectly. Several other studies point to around the same percentage of investors who, at least by a broad definition, are receiving advice from a financial advisor. So we have about half the population that is being advised, (again with latitude for the meaning of ‘advice’), and half are unadvised. Why does this matter?
Most of us can do routine household projects like painting a small room on our own without any outside assistance. Of course, when we need a root canal or knee surgery, we seek additional expertise. We realize that we simply can’t do these things by ourselves. When it comes to financial planning and investing however, many Americans try to go it alone. Perhaps it’s part of our ‘rugged individualist’ DIY culture.
One of our primary roles in working with successful individuals is to help clients avoid big mistakes. Of course, no one sets out to make these mistakes but our deep experience can often send out early warning signals that danger is looming ahead. Particularly for investors in the run-up to retirement, mistakes can have a long-lasting impact.
Professor Dan Ariely at Duke reminds us that no part of our evolutionary brain is set up to make financial decisions, yet many investors persist in wanting to go it alone. Perhaps the only thing more dangerous than no ongoing financial advice is bad financial advice. Bad advice can come in many different forms but often starts out as ‘advice’ that relates to an ‘advisor’ selling a particular investment product. That really isn’t advice at all. Investors should always be aware of inherent conflicts of interest with the age-old product driven sales/advice system that still controls about half of all investment assets.
Ego and Emotion Matter
Without the focus of an advisor, many investors fall prey to one or more of the 200 or so cognitive biases (or preferences).
While it is impossible to address all of these preferences, most of the problems derive from Ego and Emotion. Ego tells us that we can ‘beat the market’ on a consistent basis and that our view of markets are better than others. Emotions are the core of our human condition and take us from elation to capitulation and back again. Everyone thinks they can control their emotions but very few actually can, particularly in the realm of investing for a future purpose. Helping keep you grounded and providing ‘dispassionate discipline’ is one of the key roles of a real advisor.
A Portfolio is Not a Plan
We often remind clients that an investment portfolio is not a plan; Creating a financial structure that can sustain your lifestyle (with living cost increases) for the remainder of your life requires something more than good investment decisions. You need a planning framework that anticipates twists and turns along the way. Start there. Ready for a real conversation?