The Informed Investor

Advancements in financial technology, availability of information, and, most recently, zero-commission trading have made it easier to manage your money.

But should you?

Many people give it a shot and may experience initial success. However, many of those same people may give back some of their gains when the market enters a different phase. It is only after the fact that some of them realize it would have been better to use a financial advisor. But of course, everyone’s experience will be different.

What is critical is making the decision thoughtfully since there is a lot at stake when dealing with your life’s savings.  So, if you are trying to decide whether to go alone or enlist a financial advisor, here is some information that may help you make a balanced decision.

Avoid Mistakes That Can Harm Your Future Quality of Life

First of all, having a quality financial advisor on your side helps put a buffer between you and big financial mistakes. Because, after all, your future quality of life could be impacted.

We have all likely met people doing well financially but making a bad investment or financial decision that hurt their future. Because they were not properly prepared to lose a portion of their retirement funds, that one bad decision meant a downgrade in quality of life or a delay in their retirement while they kept working to recover those losses.

Sometimes, those people did not use a financial advisor because they were concerned about fees. Yes, most platforms that let you manage investments directly have lower fees than a financial advisor will charge. A single big mistake, however, could more than wipe out any savings on fees.

If a financial advisor keeps you from making even one major mistake, they will more than cover the cost of their services. More importantly, you will have a better chance of achieving your financial goals and maintaining your desired quality of life with professional investment guidance.

Maintain Objectivity During Market Swings

Second, a financial advisor can help you avoid mistakes when the stock market becomes volatile.

Investing is a deeply emotional activity for most of us, simply because our money is on the line. The elations of gains and despairs of losses can cloud even an experienced investor’s judgment. Having an impartial professional beside you during times of market volatility can help ensure you manage your investments objectively.

We have seen extreme volatility in early 2020, but this is hardly the first year the markets have been rocked with uncertainty. During these tentative times, it is far too common for people to second-guess their long-term investment strategy.  That is when you want someone with skills and training to help you avoid emotional decisions or panic selling.

Mitigate Personal Investment Biases

Third, a financial advisor can also help mitigate your personal investment biases. These are natural tendencies we are all faced with but rarely aware of, which makes them especially dangerous. Here are four common investment biases:[i]

• Overconfidence, which includes overconfidence in both the information you are relying on and your decision-making ability
• Reducing Regret, which is the tendency to naturally take actions aimed at minimizing the amount of regret you will feel, even if it also minimizes the potential for gains
• Limited Attention Span, which refers to everyone’s finite ability to analyze investments and potential strategies
• Chasing Trends is likely the strongest investing bias. Many people go after whatever investment is currently hot, leaving them over-invested in a particular asset class when risk is usually at its highest (or underinvested when opportunities are at their greatest).

Most non-financial people are unaware of these natural tendencies, creating a blind spot that can be hazardous to your wealth. However, an experienced financial advisor knows how difficult it can be to avoid acting impulsively based on your emotions, overconfidence, or the daily news (behavioral finance) and can help you avoid these traps.

Prioritize Tax-Efficient Strategies

Next, a quality financial advisor should have the expertise to help you find tax-efficient investing strategies. From utilizing tax-advantaged accounts to planned trading so your tax burden is minimized, these strategies can significantly impact how much of your investment you ultimately keep.

As wealth grows, tax efficiency becomes even more important. Especially in low-interest-rate environments, this is one of the few ways to generate extra returns with minimum additional risk.

There Is a Catch

All these benefits can be significant, but they hinge on one thing: finding the right financial advisor.

Not all advisors are created equal, and neither are their business models. For example, many national brand name advisors have notoriously consumer-unfriendly business models. That means they may put the interests of their shareholders or company in front of your best interests.

It is important to look for a firm that agrees to act as your fiduciary 100% of the time. (You can read my previous article to learn why you should insist on hiring a fiduciary).

To avoid conflicts of interest, it is usually best to find a fiduciary advisor who is also independent. This means they do not sell specific products. Their compensation comes from a fee on the assets they manage for you. They do not receive additional compensation for selling a specific fund, so their objective is to choose investments best suited to meet your financial goals.

These independent fiduciaries are obligated to act in your best interest. You do not have to worry about conflicts of interest too much because these fiduciary financial advisors do not promote a single company’s products. For added reassurance, these advisors must prioritize your goals first and foremost because they face serious regulatory consequences if they do not.

What Is Best for You?

As you can see, there are many reasons to seek the help of a financial advisor. But if you choose not to, educate yourself to help avoid expensive mistakes that can set you back.

If you are interested in hiring a financial advisor, do your homework. Do not just rely on a friend’s recommendation. Many people do not understand the concept of a fiduciary, so they do not know how to hire the right financial professional.  Additionally, few people know how to screen for the right combination of credentials and experience to serve them best. You can also do your homework on whether the advisor has had any regulatory infractions on brokercheck.finra.org.  BrokerCheck is a trusted tool that allows you to search for an advisor’s employment history, certifications, licenses, and regulatory violations. Most quality advisors will offer a free consultation; take advantage of that so you can shop around, ask important questions, and make the best possible decision.

Getting Started with ICC

If you have $5 million or more of investable assets, please visit our website: www.iccnv.com or call us at 702-871-8510 to learn more about how we can help you achieve all that is important to you and your family.

[i] Parker, Tim. 4 Behavioral Biases and How To Avoid Them. Investopedia, June 2019. https://www.investopedia.com/articles/investing/050813/4-behavioral-biases-and-how-avoid-them.asp

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The Barron’s Top 1200 Financial Advisors by State ranking is based on data provided by over 4,000 of the nation’s most productive advisors. Factors included in the rankings are: assets under management, revenue produced for the firm, regulatory record, quality of practice, and philanthropic work. There is no cost or fee to participate in this survey. The questionnaire is completed and submitted online.

The Barron’s Top 100 Independent Advisors ranking reflects the volume of assets overseen by the advisors and their teams, revenues generated for the firms, and the quality of the advisors’ practices. The scoring system assigns a top score of 100 and rates the rest by comparing them with the top-ranked advisor. There is no cost or fee involved to participate in this survey. The questionnaire is completed and submitted online.

The Forbes “America’s Top Wealth Advisors” ranking was developed by SHOOK Research and is based on in-person interviews and telephone due diligence meetings and a ranking algorithm that includes client retention, industry experience, review of compliance records, firm nominations and quantitative criteria, including assets under management and revenue generated for their firms. Investment performance is not a criterion because client objectives and risk tolerances vary and advisors rarely have audited performance reports.  Rankings are based on the opinions of SHOOK Research, LLC and not indicative of future performance or representative of any one client’s experience. Rankings and recognition from Forbes are no guarantee of future investment success and do not ensure that a current or prospective client will experience a higher level of performance results, and such rankings should not be construed as an endorsement of the advisor.  Neither Forbes nor SHOOK Research receives compensation in exchange for placement on the ranking.

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