Townhall.com::Advisers make worse choices than independent investors, study says::By Lynn O'Shaughnessy
Rebut this article? Be offended? Me, the Unknown Advisor?
Heck, she's right! In my opinion the study's right!
Fair warning, the writer's opinions are reflected in what follows; I believe them to be reasonable.
The twin focii of her article and arguably the study are higher expenses and inferior returns in association with poor asset allocation. All I will say is that a sales-oriented, higher-fee advisor is likely not worth the money, any more than the kind of broker the study analyzes is worth his load fees, 12b-1 fees, wrap fees, or whatever other pricey ideas he is pushing. She and the study could do a better job of using precise, defined language however.
I will try to. But please bear in mind that the discussion is still on a rather simplified and general basis, and that long chapters of material have been written on these subjects.Brokers,
registered reps, "account executives", "financial consultants/planners/advisors, etc.", holders of series 7 securities licenses,
do not have to learn anything very special at all about asset allocation to pass the test. They learn the basics, the very, very basics about asset allocation. Their advice is considered to be "incidental"
in nature, by the regulators, compared to what you legally are paying them for, the trading, the buying and selling to invest your money. The primary standard they have to meet to be on the right side of the regulatory apparatus is one of "suitability", which has little really to do specifically with whether their stock picks as a whole constitute a portfolio which will achieve your investment objectives. They just have to be "suitable", which is a horse of a different color. What is "suitable"? It is any of the multitudinous things not already ruled "unsuitable" by the NASD. Got it? No? It is often stated as "know your client, know your product". If the client is an elderly widow living off her investments, who has no way to make up large losses and the product gleaming in the broker's eye is some illiquid, non-marketable security with a lovely thirty or forty percent off the top commission/sales charge, it could be unsuitable. (Don't laugh, such things exist, and they're nothing to laugh about.) There are supervisory people who oversee suitability and other compliance issues. Lest I be too hard on the brokers, many of them are good people, and really want to do well for their clients, and struggle to keep their clients' interests and their own, and their employers', in balance. My concern is that I just think their industry's business model is problematical, and rewards the wrong behavior and the wrong people too much of the time. Then those wrong people show up in the newspaper."Investment Advisors",
as in holders of series 65 or 66 securities licenses, must meet what is known as a "fiduciary" standard. That has been defined various ways but is concerned with placing the client's interests first, even when it hurts. It is a higher standard of responsibility, and if you deal with an advisor, find one who is earnestly serious about high fiducuary standards. If he is so, he is trying hard to do his work the right way. It ain't sexy, but a good advisor who is a good fiduciary will quit the business before he will take advantage of a client. How serious a particular advisor is about this varies. There have been advisors out there with language in their advisory agreements which substantially weakens their fiduciary responsibilities. CFPs have high disclosure standards, and advisors who are members of NAPFA have very high ethical codes to work by. Compliance shortcomings of advisors show up in the newspaper too.
My only rebuttal to the article, if it really is such , is that a low-fee advisor with high fiduciary standards and a better-than-average grasp of asset allocation and the things which have really been shown to work in investing offers pretty good value for his or her fee. The clincher is that that advisor will try hard to stop you from making frankly horrible mistakes with your money, like panicking and selling around the bottom, when the chips are really down.
A final thought: If an advisor promises to get you out of the market before it gets bad, I would steer clear. Financial advisors can't foretell the future. If they'll promise the impossible to get your business, that does not 'augur well'!
Labels: asset allocation, fiduciary standards