Throughout my career in the financial services industry, I have witnessed how working hard, maintaining discipline and finding balance in our lives typically leads to a positive outcome (although one is never promised). Unfortunately, I have also seen how doing the opposite can often lead to negative — or even catastrophic — outcomes.
One memory that will always stick with me involves an individual with a multi-million dollar net worth prior to the global financial crisis of 2007-2009. This individual ended up having to draw on his children’s college funds to pay for necessities, because he didn’t fully understand the power and pitfalls of leverage. While this example is certainly extreme, witnessing situations like this one has made me passionate about properly educating investors whenever possible.
One strong bias I have is that I always worry for investors who choose investments solely based on emotion or the investment’s advertised performance. Fortunately, most people I speak with are not already locked into an investment; they are simply trying to find the right path forward for their family, business, etc.
Typically, there are three paths I see investors choose from when evaluating their investment options in the marketplace (this is not an exhaustive list, but it is reflective of what I see most often). These options include doing it yourself, using a model asset allocation or working with an advisor.
Option #1: Do It Yourself
When you choose this option, you are typically responsible for everything (coordination with specialists when needed, planning, etc.), but you have the lowest immediate out-of-pocket costs.
Pros of this approach include: You have full control and keep your immediate costs as low as possible.
Cons of this approach include: You can miss opportunities due to not having proper support if this is not your field of expertise. To use a medical analogy, it may be fine to treat a cold with over-the-counter medicine; however, you could have a bigger issue you are unaware of.
Option #2: Use a Model Asset Allocation
Also known as “robo advice,” this option is provided by most custodians and can be considered a good path for those who are more hesitant about paying advisor fees.
Pros of this approach include: Portfolios based on academic research are available for a generally lower cost than most brokers, meaning investors without specialized expertise get a basic level of professional advice at a lower cost.
Cons of this approach include: There’s a general lack of customizable strategies due to portfolio construction often being tied to simple matters, like age or risk tolerance. Risk tolerance, in my opinion, is often subjective and can change daily, sometimes leading investors to change strategies at the wrong time.
Option #3: Work With a Competent Advisor
Here you have strategies built for your specific needs. This is the space we sit in at Creative Planning, and I believe it to be the best approach for many when their financial needs become more sophisticated than models can adequately serve. I cannot emphasize enough that I believe you should always work with a fiduciary advisor, meaning your advisor is required to work in your best interests.
Pros of this approach include: You receive customization in terms of investment planning, tax planning, retirement planning, estate planning and more by a family wealth office with specialists in each discipline.
Cons of this approach include: A typically higher cost structure compared to options 1 and 2, though this is not always the case. The expectation is that the added services, which create solutions for your specific need, will more than offset the additional fee.
The rationale for working with a fiduciary advisor who customizes your investment approach is that strategies will be selected with purpose. The selection criteria then become tangible to your actual goals and objectives, rather than being subjective (like when you fill out a basic risk tolerance questionnaire). For example, adding short-term bonds, adding Treasury bills or holding cash may be beneficial for protecting immediate income needs. Having a well-diversified portfolio of stocks, private investments, bonds and real estate may be appropriate for the person who is not just looking for immediate cash flow needs but would like to have a plan to not outlive their money, leave assets for heirs, etc.
When an investor’s specific situation is the catalyst for the decision-making process, one can create a financial strategy based on where the investor is rather than on what the markets are doing at that time. For instance, if someone has set aside five years’ worth of their income reserves in conservative assets, they may be more comfortable when the stock market corrects 10% in a short period of time (which it does almost every year!).
If you have only one takeaway from my thoughts, my hope is that it will be hiring a financial professional should be looked at no differently than going to the doctor. You should select a qualified professional who treats you based on the results of tests and an evaluation of your specific situation (not the lobby questionnaire), involving specialists as needed. Your wealth manager at Creative Planning would do the same, bringing in our in-house specialists in tax, estate and insurance based on your specific needs.
