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Managing your financial risk: DIY?

Every once in a while, one of our guests gives us a hard time about wearing bowling shoes. They just can't believe there is a need. When that happens, our staff is instructed to first appeal to their competitive side. A good bowling shoe with its leather bottom is going to make that last step before the release more of a slide. And that action allows for better results. If this doesn't convince them, next up is the safety appeal. Street shoes simply have no "give." With your body moving forward on the approach, momentum can become a dangerous thing: knees are twisted; shoulders dislocated. Combined, we know that wearing bowling shoes is in our guest's best interests, and we convince them of that with facts.

Like bowling shoes, many investors don't understand why they should hire an advisor for financial advice. Let's see if I can convince you with a few facts. What is an advisor – or is it adviser?

Skepticism over the need for an advisor isn't helped by the fact that there isn't even an accepted spelling of the word. Both nouns mean one who advises or counsels. Some professionals like to imply the "or" in advisor is a more credentialed spelling. For the purpose of this article, I choose to use the more modern spelling, "advisor." Another interesting fact about advisors: to be considered one, you need very little formal training. The standards to call yourself an advisor couldn't be much lower. You do not need a university degree, and there is no required practical training whatsoever. About all you need to do is pass a straightforward regulatory exam, which doesn't even touch on the topic of advice. No wonder there are horror stories about bands of rogue "advisors" working out of basement boiler rooms, pumping and dumping securities on unsuspecting individuals!

To add an additional layer of confusion, there are advisors who also refer to themselves as brokers. What is the difference between the two, and why should you care? In my September 2017 column, The Fiduciary Rule: A Shifting of the Tide, I described how governmental title reform had recently been written with the hope of creating distinct lines between these two titles. Advisors, it is proposed, would be held to a fiduciary standard whereas brokers will be held to the lesser requirement of suitability. By establishing these unique designations and their formalized obligations, fewer individuals will be able to hold themselves out as adhering to the higher fiduciary standard. (Always ask your advisor which standard they observe.)

Why use an advisor if you can do this yourself?

Skeptical investors wonder why they should spend money on something they can easily do themselves. Let's call them Do-it-Yourself (DIY) investors. Friends of my mom's felt this way, and everything was going just fine until 2008 when the financial crisis broke out. During the first few stomach-churning point declines they held on. Ultimately though, they weren't prepared for days of 700+ point losses. They panicked and sold, just months away from the market bottom. If they had been well-guided, they would have held on, benefiting from an unprecedently long bull market recovery. Instead, they missed out on a spectacular retirement. That moment when they needed a professional coach, they mistakenly thought they could manage on their own.

We don't have to go much further back in history to find other sobering examples of investors doing it on their own and destroying their dreams. In the late 90's it was the tech sector that took unsophisticated retail investors down. Then, it was the financial sector leading up to its 2007 peak. In both instances, the DIY investor sold at the top. Another common mistake we see even knowledgeable DIY investors repeating is over-concentration in a single security, or market sector. Maybe you did your fundamental research; maybe you have a real working knowledge about the company. But, are you adequately trained to measure risk? Do you know how to construct a diversified portfolio with the goal of maximizing your upside potential and minimizing the downside? Are you educated about financial planning? For example, how do you choose between liquidating your taxable brokerage account versus non-taxable Roth IRA; how do you maximize your Social Security distributions; which insurance plans do you keep, and which do you get rid of? These are just a few scenarios where financial advisors add real value before even impacting the dollar value of an investor's portfolio.

There are sound studies quantifying the value an advisor adds by providing financial advice. Perhaps the most famous is Vanguard's Advisor's Alpha (Kinniry Jr., Jaconetti, DiJoseph, Zilbering, & Bennyhoff, 2016). It concludes that financial advisors add significant value over an average investor's results, as much as 3.0% per year. Advisors deliver this value in a variety of ways, and not exclusively through asset allocation.

Of course, there is a segment of the population who are good DIY investors and enjoy doing it themselves. Others should steer clear. Knowing where you fall is an important first step in deciding how to approach investing. The demands and complexities of effective investment management will usually prove too challenging and emotional for even the most diligent individual investors.

Which brings us back to bowling shoes

As proprietors, we don't need to be told by our insurance company that bowlers should wear bowling shoes. From experience, we know that proper shoes lead to higher scores and fewer injuries. It also happens to be convenient that rental shoes are the single highest margin product we offer in the bowling alley. So, it's okay to profit when our clients are being so well-served. Think about that if you are unwilling to approach an advisor because of their fees. So long as they are working in your best interest, including how they structure those fees, and achieving better outcomes than you could on your own, why not lace up a pair of bowling shoes and hire that advisor? You'll be richer and safer for the experience.

While writing this column, the Fifth Circuit Court of Appeals vacated the Labor Department's fiduciary rule in a split decision, overturning a Dallas district court that was just as adamant in upholding the measure. Time will tell how this legislation plays out.

The Fiduciary Standard:

  • An adviser must put their client's interest first.
  • An adviser must operate with full transparency.
  • An adviser must not mislead clients; they are required to provide full and fair disclosure of all important facts.
  • An adviser must avoid conflicts of interest and must fairly disclose any unavoidable conflicts of interest.
The Suitability Standard:
  • An adviser can put their Broker/Dealers interest ahead of their client's.
  • An adviser should generally know their client and should recommend investments that are mostly suitable to their needs.

Under the Suitability Standard, there isn't a requirement to disclose conflicts of interest, or to put the client's interest first.

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There are no warranties implied.
Any opinions expressed on this website are the opinions of WT Wealth Management and its associates only. Material listed on this website is neither an offer to buy or sell securities nor should it be interpreted as personal financial advice. You should always seek out the advice of a qualified investment professional before deciding to invest. Investing in stocks, bonds, mutual funds and ETF’s carry certain specific risks and part or all of your account value can be lost.

At WT Wealth Management we strongly suggest having a personal financial plan in place before making any investment decisions including understanding your personal risk tolerance and having clearly outlined investment objectives.

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