AFTER TAKING the Series 65 exam in February, I set a goal for 2019: Help 10 friends and family members with their finances. Instead of giving specific investment advice, I wanted to educate them on money matters. I knew that they would benefit from one-on-one discussions, well-regarded books, educational videos and credible websites. But I also suspected that some might hesitate to talk to me about their finances. Nonetheless, I gave it a try.
Everyone showed interest and made time—except Aisha, a close friend. She hesitated for two reasons. First, she had a financial advisor and saw little value in educating herself. She figured if she was paying top dollar for advice, she was guaranteed top-notch results. Second, she worried about straining her relationship with her advisor by asking questions she’d never asked before. I insisted that, given the stakes, it was better to be informed than nice. Aisha reluctantly requested that her advisor send along cumulative portfolio performance reports.
A little history about Aisha’s investments: Many years ago, she’d received a windfall that she needed to invest. She interviewed a few financial advisors and went with someone who had an impressive job title, a long list of designations and a friendly demeanor. She regularly reviewed her portfolio with the advisor, but never considered there might be performance problems. After all, a paid professional ought to do better than the market, not worse—or so she thought.
As it turned out, her portfolio had more than doubled over 16½ years. Aisha was impressed, until she backtested an identical asset allocation—one with half U.S. stocks and half corporate bonds. A 50-50 allocation consisting of just two broadly diversified index funds would have quadrupled her money over the same holding period. She stared at the results in disbelief. The opportunity cost was huge.
Why such dismal returns? The extent of the underperformance surprised me, too. The account statements included some of the usual suspects—high asset management fees, numerous miscellaneous charges, expensive load funds and so on. Yet it explained only half of the performance drag. We dug further into the account’s trading history to figure out what else had gone wrong.
There was only one possible explanation: wrongheaded stock-picking and market-timing decisions. The advisor’s efforts at active management went on and on, despite persistent underperformance, higher volatility and tax inefficiency. Aisha’s investments made money, thanks to the long-running bull market. But that gain obscured the miserable underperformance relative to a simple portfolio of index funds.
The findings shook Aisha’s belief in professional financial advice. Still, she needed to consider the overall value she was getting from her advisor. Portfolio performance is only one dimension. A good advisor also helps clients with financial planning and provides emotional support, especially during market gyrations. Aisha thought long and hard about what to do—and, a few weeks later, decided there was no reason to continue with her advisor.
It strikes me that Aisha, and perhaps many others who are in the same boat, turn to advisors for the wrong reasons. Here are four of Aisha’s biggest misconceptions:
I lack the expertise. Unless you have a complex financial situation, managing your own money requires commonsense and discipline, not a PhD in economics or finance. There are many books, videos and websites available that can help educate investors.
I don’t know how to turn an investment plan into action. Improved technology, coupled with the proliferation of low-cost index funds, have made investing simple. Many easy-to-use financial tools are available for free.
I don’t have the time. A few hours spent on basic investment education is time well spent. After that, it takes very little effort to put what you learn into practice.
I won’t have guidance if I need it. Competent, fiduciary advisors are available for onetime or occasional guidance. Looking for an advisor who charges by the hour? Two good places to start are the Garrett Planning Network and the National Association of Personal Financial Advisors.
A software engineer by profession, Sanjib Saha is transitioning to early retirement. His previous articles include Blessing in Disguise, Bonding With Bonds and Measuring Up. Self-taught in investments, Sanjib passed the Series 65 licensing exam as a non-industry candidate. He’s passionate about raising financial literacy and enjoys helping others with their finances.