Why You Might Need A Financial Advisor, Again
The financial crisis left many investors blaming financial advisors for failing to shield them from deep losses or to explain the risks of the exotic yet highly profitable products they were sold.
“I didn’t get a call during the market implosion and received no advice when my retirement funds were shrinking,’’ says Tom Hoebbel, a photographer in upstate New York, who fdropped his Edward Jones advisor in fall 2008.
Hoebbel is not alone. Forty-five percent of investors surveyed last January by ING Direct had reduced or eliminated their relationship with a financial professional. And fifty-seven said they could do just as well making their own investment decisions.
Entering 2011 after two straight years of double-digit gains for stocks, investors who ditched an advisor are feeling pretty confident with their decision.
Yet given stubbornly high volatility, the limitations of a buy-and-hold approach, and longer retirements to plan for, financial planning experts say such confidence may be misplaced.
“It’s possible [to be successful] on your own, but most investors are almost certainly due to fail,’’ says Larry Swedroe, author of ten books geared to individual investors and principal of St. Louis advisory firm BAM. “Most people should have a financial advisor of some kind.’’
More Americans are coming to realize they need help. Financial advice topped the list of professional services consumers would like to use in 2011, according to a survey by Allianz Life Insurance.
Here’s why you should swallow your pride and consider meeting with a financial advisor this year:
The Risks Have Changed
The 2008 meltdown was not limited to stocks, asinvestment-grade corporate bonds and fixed-income instruments deemed safe also suffered steep losses.
The crisis uncovered the dangers in relying on third-party rating agencies to accurately assess bond risks while the shaky finances of state and local governments today have raised the risk profile of previously staid and profitable municipal bonds.
“Markets become more complicated every day,’’ says Charles Massimo, president of CJM Fiscal Management in Melville, N.Y.
When markets were doing well, people thought they were a lot more tolerant of risk but the financial crisis showed how much volatility they could really handle, and it was less than they had assumed, says Frank Braddock of JHS Capital Advisors in Columbia, S.C.
An advisor can help investors better understand the historical risks of different asset classesand determine one's comfort level through good and bad markets.
Set It and Forget It Doesn’t Work
The latest bear market challenged buy-and-hold investing. Heightened volatility and losses across nearly every investment class highlighted the need to shift out of riskier assets to conserve principal and redeploy cash after prices had fallen.
A static portfolio may also not reflect an investor’s changing circumstances. While younger investors can be more aggressive with stocks, older investors may have other priorities.
“Regular rebalancing is critical,’’ Braddock says, because it forces investors to sell some of their winners and plow the profits into undervalued asset classes.
Financial plans constructed by an advisor include a target asset allocation that gets rebalanced regularly to ensure it remains consistent with a client’s investment goals.
Still, nearly two-years after the stock market's bottom, major indices have doubled in value and the hiighs of 2007 no longer seem unattainable.
Too Much Information Can Be Dangerous
Blogs and online trading and research tools have made financial information more accessible than ever. All that data may be valuable for amateur stock pickers but Swedroe says it can also induce harmful knee-jerk reactions to news and cause investors to miss the big picture.
“An advisor helps sift through the good and bad knowledge,’’ he says.
Swedroe argues that most of us don’t have the time, knowledge or analytical horsepower to be successful long term. He suggests investors ask themselves, for example, if they know the difference between geometricandarithmetic returns or can run a Monte Carlo simulation to assess possible investment outcomes.
Advisors with professional designations like certified financial planner, CFP, or chartered financial analyst, CFA, have received rigorous training on markets and investments. They also have access to powerful software that can project future performance, analyze the effects of adding or removing specific investments from a portfolio and other tools not readily available to the general public.
Discipline is Hard to Achieve
Research firm Dalbar puts out an annual survey showing how actual shareholder returns lag market returns. The culprit is market timing as investors buy on the way up and panic sell on the way down. Emotions guide those decisions, according to behavioral economists who have identified the tendencies of investors to act irrationally.
An advisor can act as a circuit breaker by removing emotion from investment decisions. Massimo says investing is like losing weight or stopping smoking—you need discipline and commitment to a long-term process.
Having an advisor doesn’t guarantee success, but investors who acknowledge they’re prone to impulse decisions might benefit from a second opinion before pulling the trigger.
Guidance Applies to More Than Just Investments
Investment advice is just one of the services a financial advisor provides. Many are also trained in financial planning, estate planningand insurance. And if they don’t have expertise in the areas you need, the good ones have access to accountants, attorneys and other experts that do.
“A lot of advisors go from the first client meeting straight to buying investments,’’ says Braddock. “Better advisors tackle education, develop a financial plan and propose an asset allocation before thinking about investments.’’
Advice Can Be Affordable
Investors don’t have to carry six-figure balances to receive professional guidance.
Most advisors charge commissions or a fee based on the assets they manage but some, like the Garrett Financial Planning Network, charge by the hour. For experienced investors, an annual checkup with this type of advisor may be sufficient.
No-load, mutual-fund firms geared to individual investors are also branching into the advice business by offering access to CFPs and customized accounts. Investment minimums start at $50,000 and costs are comparable to those charged by fee-based advisors.
Even if you see nothing but blue skies ahead for the markets, partnering with a financial advisor in 2011 may help you better prepare for the inevitable storm clouds to come.