April 2014: Why Hire an Advisor?

Ahh, spring is here: the trees, the flowers. The barbeque is cleaned and ready to go!  And if you live in the McCann house, diapers, lots of diapers… but at least we can open the windows now.

This spring marks the fourth year that I’ve been working as a financial advisor.  During that time, I’ve stumbled across several conversations that I’ve mentally titled “Why Hire an Advisor?”  

Why Hire an Advisor?
(Or: Why don't you let your friends cut your hair?)

These conversations have run the gamut from respectful inquiry to a drilling suitable for a dentist. Once, I was almost physically accosted in a bar!  Usually the conversations are peaceful, but they all follow a similar tack.  And often end with, “Why shouldn’t I just do that myself? My <uncle, friend, sister, brother, faith healer> knows a lot about investing and they can certainly help me out.”

Now, I want to go on the record to say that I have nothing against do-it-yourself investing or financial planning.  I was a DIY’er for 20 years before I decided to become an advisor.  Developing your own investment strategies and financial plans can be a fun and rewarding experience.  I think you gain valuable insight from the experience.  But it is not a simple or easy process.

When I’m having conversations regarding hiring an advisor, I am struck by the observation that many people seem to feel like they should have the skill to do it themselves. I’m not sure what it is about personal finance that leads people to feel this way.  I mean, we don’t let our friends cut our hair (unless they are a hair stylist or barber).  But for some reason people have this impression that they should have an innate ability to manage their finances.  And this is somewhat more important than our hair (to most of us).

As I thought about this issue, I was reminded of a blog post by William Bernstein.  Dr. Bernstein is the author of The Four Pillars of Investing and The Investors Manifesto.  Bernstein writes as an advocate of the individual investor and he is popular among the advisor community due to his well-researched investment strategies.  Here’s what he has to say about “The Probability of Success” for individual investors:

“A decade ago, I really did believe that the average investor could do it himself. After all, the flesh was willing, the vehicles were available, and the math wasn’t that hard.

I was wrong. Having emailed and spoken to thousands of investors over the years, I’ve come to the sad conclusion that only a tiny minority, at most one percent, are capable of pulling it off. Heck, if Helen Young Hayes, Robert Sanborn, Julian Robertson, and the nation’s largest pension funds can’t get it right, what chance does John Q. Investor have?

Why the sad state of affairs? It’s pretty simple. To invest competently, you need four faculties:

·      An interest in investing. It’s no different from cooking, gardening, or parenting. If you don’t enjoy it, you’ll do a lousy job. Most people enjoy finance about as much as Carmela Soprano enjoys her husband’s concept of marital fidelity.

·      The horsepower to do the math. As Scott Burns explained to me years ago, fractions are a stretch for 90% of the population. The Discounted Dividend Model, or at least the Gordon Equation? Geometric versus arithmetic return? Standard deviation? Correlation, for God’s sake? Fuggedaboudit!

·      The knowledge base—Fama, French, Malkiel, Thaler, Bogle, Shiller—all seven decades of evidence-based finance back to Cowles. Plus, the "database" itself—a working knowledge of financial history, from the South Sea Bubble to Yahoo!

·      The emotional discipline to execute faithfully, come hell, high water, or Bob Prechter. Mr. Bogle makes it sound almost easy: "Stay the course." Alas, it is not.

I expect no more than 10% of the population passes muster on each of the above points. The devastating part is, to succeed you need to string all four together. Thus, in a state of nature, just 0.01% of investors have what it takes. An optimist might guess a 30% success rate on each count, in which case one percent of the population can make all four.”


The Efficient Frontier

And in this passage, Bernstein's just talking about what you need to be successful in investing.  He doesn’t even address the other aspects of financial planning such as risk management, estate planning, or college planning.  Or for that matter, determining how much you need to save and invest in the first place to secure a reasonable retirement.

In my experience, it’s faculties #1 and #4 that really mess people up.  Even a simple strategy takes hours to understand and build, plus hours every year of ongoing maintenance.  If you don’t like finance, well, it’s not likely you’ll leap right in.  As a result, if you haven’t put the time in to really understand what you are doing and why, you won’t have the fortitude to sell assets when they have appreciated or the courage to buy when they have been drastically reduced.

If you have struggled over the issue of whether to hire an advisor, I would be glad to talk with you about the process.  Also, if your friends or family have questions about working with and advisor or any other financial issue, please feel free to make an introduction or forward this letter.  We provide Financial Planning and Investment Management services and we would be happy to talk with your acquaintances.  We will treat them with the same care and diligence that we treat you.

Take care,

Brian McCann, CFP®