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Would You Hire Yourself As Your Financial Advisor?

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Editor’s note: This our first guest post from Pam Krueger and we are excited to announce that she will be contributing to ValueWalk on a regular basis. After spending 20 years as a stock broker, Pam took a different course and is now devoting her time to teaching people how to manage their personal finances through her PBS show MoneyTrack.

Looking through the eyes of the typical investor, financial advisors have been vilified since the massive fraud Bernie Madoff pulled off years ago. And then there’s the internet, which has given us all the money management tools we need to make us feel comfortable enough to handle everything from budgeting to investing for retirement ourselves. But is it really smart to become your own financial advisor?

Financial Advisor

Study after study suggests we are our own worst enemies when it comes to investing our own money. That’s because we have to fight two big cross-currents: our emotions and the transaction costs we pay each time we make an investment or change our minds and sell something. Bloomberg pulled a few of these studies together and confirmed how much individual investors underperform the markets when they invest on their own. It’s clear this underperformance is a real trend; it’s only a matter of how much individuals are losing compared to the overall stock market.

So should we hand over all of our most serious investing decisions to a professional wealth manager? After all, fiduciary financial advisors have never been more accessible, and collaboration is much easier thanks to technology. But you have to ask yourself, are you truly a do-it-yourselfer? Or could you benefit from some level of support from someone who has specialized knowledge to verify your own investing decisions?

Where are you on this scale of 1-4?

Investing has everything to do with an investor’s level of comfort because some people are more confident, while others prefer taking a full hands-off approach and letting a qualified advisor take the lead. The reality is that only a tiny percentage of investors are confident enough to want to make every decision without input. Most people want both control and some degree of collaboration. When considering the best kind of advisor, I like to use this scale to figure out how much control an investor really wants because knowing that makes the task of shopping for the right financial advisor much easier.

  1. Let the advisor decide– This group lets their advisor steer the ship but sets a few ground rules like naming investments to avoid or giving a general sense of how they feel about the stock market’s ups and downs, although the restrictions are few.
  2. Best of both worlds – Investors set overall guidelines for their advisor to follow but otherwise gives the freedom to make recommendations and execute on their strategy.
  3. Strict oversight – These investors take a collaborative approach, working side by side with their financial advisors and arriving at decisions together.
  4. Verify my math – These investors rarely or never get any advice from an advisor. They want a broker to execute transactions and demand that every decision be communicated to them.

But what if you are a do-it-yourselfer who prides yourself on making sound investing choices because you’re “in the know”? You may still want to consider at least getting someone to weigh in on your decisions.

The studies conducted by Dalbar, Morningstar and others on the underperformance of individual investors due to their emotions highlight how important it is to have someone check your math and weigh in on your strategy without trying to sell any particular investment products. The key is to find a fee-only financial advisor who won’t try to talk you out of what you’re trying to do but might just offer some suggestions that you are free to take or leave. After all, even the most meticulous individual investor is in danger of leaving returns on the table, whether it’s due to having a knee-jerk reaction to something that’s happened, simple overconfidence, or something else.

How is your personal track record?

One problem is that individual investors don’t realize how much money they’re leaving on the table because while professional money managers have a measurable track record, the individual investor does not. As you may already know, the performances of institutional money managers are tracked by a third-party verification system called the Global International Performance Standard, or GIPS, which highlights the validity of having someone to track your performance. There is no equivalent for individuals, but having a trusted financial advisor to keep track of things and collaborate with could provide some support in terms of figuring out how you’re doing.

Find a fee-only advisor who specializes in the type of investment strategy you employ so that you’re staying true to your financial identity and with what has worked for you in the past. Sit down with them for three to five hours once a quarter or at least on a regular basis. Pick a timeframe you’re comfortable with and work with your advisor to make sure you’re not falling into the emotional trap that drags so many individual investors down. Platforms such as WealthRamp can help you dig through the many advisors to find one who knows your strategy well and won’t overstep.

Pam Krueger is CEO of WealthRamp.com, an online service that matches investors with fiduciary financial advisers. She is a former stockbroker and is executive producer of MoneyTrack, which airs on PBS stations. PamKrueger.com

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