You Want An Advisor Who Keeps You From “The Big Mistake”

In Carl Richards’ new book, The One-Page Financial Plan, I read this section:

Real financial advisors stand between you and the Big Mistake

To a certain extent, the process of finding a real financial advisor is a qualitative experience. It boils down to the question “Can I see this person getting to know me well enough so that I can trust him to help me behave for the next twenty years of my life?” …

Remember, your financial advisor is the only one standing between you and the Big Mistake of buying high and selling low. You’re hiring them to do what you can’t: make unemotional decisions about your portfolio. If they can’t do that, why pay them?

We believe that a competent comprehensive wealth manager earns their fee several times over. Much of their value can and has been computed. One of the most valuable services a wealth manager can do for a client is to say, “No, that is a bad idea.”

Telling a client that they are making a mistake risks the client relationship, but being a fiduciary makes it necessary. The advisor should only proceed if, after having told the client all of the information, the client still wants to make the mistake. You want a financial advisor who cares enough to talk you down off the ledgse of bailing out of the markets or chasing short-term returns.

Richards includes this advice immediately after he poses these questions you should ask any prospective financial advisor:

  1. How much do I pay you?
  2. How are you compensated?
  3. Do you get paid (or win) anything based on the products you recommend to me?
  4. Do you receive compensation for our relationship from anybody other than me?

The reason why these questions precede his advice to seek an advisor who will keep you from The Big Mistake is because an advisor who gets paid primarily for selling product will probably not tell you how wrong chasing returns is. A salesman’s primary incentive is to sell product. Salesmen won’t risk their relationship with you to tell you how wrong you are. And if you chase returns, it is just more opportunity for them to sell you whatever products have performed well recently despite their long-term benefits.

Many investors think that if you invest in three different investments and one does well while one does poorly that investing in the poor performer was a mistake. This is not true.

A mistake is when you should have known better ahead of time. Having a good investing strategy when short-term market movement goes against you is just unfortunate and will probably correct itself. A diverse set of uncorrelated assets will produce a rebalancing bonus over time. Being uncorrelated means, by definition, that those assets won’t always move together in the same direction, but investing this way is not a mistake. Most people only see that something will usually be done but the crucial point is that something should also always be up. Because the stock market trends upward over time, when an asset class performs poorly, that is the perfect time to buy. Even the most brilliant investment strategies need time, usually long periods of time, to prove their brilliance.

We all know that we should buy low and sell high, but emotions tend to confuse the fact that something is down now into the irrational belief that it will go down forever. These emotions cause people to make the Big Mistake of buying high and selling low. You deserve an advisor who will try to keep you from making that mistake.

Photo used here under Flickr Creative Commons.

About the author

David John Marotta, CFP®, AIF®

David John Marotta, CFP®, AIF®, is President of Marotta Wealth Management, Inc. of Charlottesville providing fee-only financial planning and wealth management at www.emarotta.com and blogging at www.marottaonmoney.com.

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