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Asking (and Answering) Some Tough Questions

Written by Bill Bell

The woman in the ad looks with incredulity at the sheepish advisor and in response to his pathetic attempt to keep her investments asks with a heavy dose of sarcasm, “Not best for who?  For me and my family, or for you?”  Then in heavy silence the message flashes on the screen that it’s time to ask the tough questions about your investments.  Followed by the declaration that you can retire up to 30% richer, supposedly by doing so.  Whenever that ad plays on the TV in my presence, everyone else in the room usually looks at me and cringes as if to say, “Wow, burn man.”  I just smile.  

But, ok.  Let’s ask some tough questions.  

First question:  Why is this woman unhappy with her advisor?  Because mutual fund fees are too high?  I hope not.  Even if that were true, it’s not his fault and I suspect he has other options.  No, the answer is this: clearly, he’s not doing his job. (Frankly, he looks a bit like a loser, which I’m sure is what the director of the ad was going for). Are there advisors like him?  Absolutely.  Are all advisors like him?  Come on, that’s not a tough question – of course not.  But what should this woman do?  That’s easy. Fire the loser advisor.  And find a good advisor.   Wait, that’s not what the ad implies is it?  Clearly, the woman should fire her advisor, and do it herself.  Hmm, let’s come back to that.

Next question: Why pay for investments when one can simply buy an index?  It’s tempting to respond to this question with a 20-page dissertation on the importance of things like volatility, down-side and up-side capture, risk adjusted returns, and returns net of fees and taxes.  I won’t.  I will simply concede and say that in the end, it doesn’t matter nearly as much what you own, as what you do with what you own.  It would appear the combination of low fees and top quartile returns make indices a no brainer.  Here’s what I’ve learned in the past 23 years – everything looks good at times and bad at times.  Everything. If we pile on what’s good and vacate what’s bad, we will without question underperform the markets we are trying to “beat.”  This isn’t me evading this question.  This is me saying emphatically that this is not the most important question you should be asking.  It’s not nearly as important as the constant press and relentless advertising would have you believe. So, let’s move on.  

Last question: Why should I hire an advisor?  Clearly, a self-serving question since I am an advisor.  But let me point you to just a couple of third-party resources that may help you gain a different perspective than the one that the advertiser mentioned at the top of this blog would like you to have.  First, check out Dalbar (specifically you can google “Dalbar Study 2017”).  A key takeaway from their many studies and reports is that investors are terrible at investing, and have a real knack for underperforming the markets by a wide margin. If this is true (and I put considerably more stock in their statements than I do an advertisement that simply says without any justification that you can retire 30% richer), left to their own, the average investor will presumably retire much more than 30% poorer.  

Next, check out Vanguard’s “Advisor Alpha” study.  What I like about this piece is that an ETF company is actually explaining how an advisor might add value.  There are three components to their thesis.  First, they contend that portfolio construction might add between zero and 1.15%.  I like that they started with zero.  I would suggest that’s a good place to start.  In my opinion, the value add here isn’t due to some magical ability that an advisor has to choose the right investments, but rather, their tendency to construct “portfolios” and through strategic diversification, and faithful rebalancing, realize each component’s full potential.  

The next value add is in what they call “wealth management.”  This covers things like tax planning, insurance, cash flow management, and savings strategies.  Generally, making sure that you are doing the right things at the right times over the course of your life. Here they suggest that the advisor might add zero to 1.45%. Again, starting at zero, although on this point I will contend that any advisor who is actually doing some financial planning with their clients will be adding value to some degree.  

And finally, they point to managing behaviour, or coaching and they assign a value add of 1.5%.  No range here – just 1.5%.  Both Dalbar and Vanguard (and others) consistently come to the same conclusion.  The number one predictor of investor success is investor behaviour  Period. 

Add these three things up and you get something between 1.5% on the low side, to 4.45% on the high side. (They state in their paper that these numbers are after fees and taxes.)  When adding up the cumulative benefit of advice, they land on 3%.  That being the case, advisors would in fact add to their client’s wealth somewhere in the range of 30% to 50%.  Maybe more.  

So, back to our woman in the ad.  Can she retire up to 30% richer by asking some tough questions?  Yes.  But only if she gets the right answers.