Can Your Financial Adviser Pick The Best Investment For You?

Are you walking into a trap by having someone else pick your investments
for you?

I’d wager that most financial advisers really want to help their clients. I’d also be willing to bet that most clients trust that the person they hire is pretty good at investing and managing money.

Let’s think about this for a moment. If a financial planner was really good at investing, for example, why would he need your money? Why would he share his investment expertise with you and charge you a fraction of what he could earn if he just invested his own money. That’s sort of like finding a winning lottery ticket and selling it to you for a fraction of what that ticket is worth. Maybe he could split it with you, but why bother?

The difference between the lotto and the financial markets, in this example, is that there’s even less motivation to sell you a good-performing stock. He has to set up a business, get licensed, pay fees, buy liability insurance, and go to very boring meetings every three months for the rest of his life. Oh yeah, most brokerage firms won’t let him invest in his own winning recommendations without getting permission from the firm first. What a hassle.

Outside of the possibility of the adviser being dishonest about his abilities or his motives, the only motivation I see for an adviser to sell investment advice is if he’s assuming the role of a true adviser. That is to say, an instructor, coach, or teacher or some kind. And, if he’s doing that, he probably isn’t telling you which stocks to invest in. He’s telling you how to reduce or eliminate your investment risk when picking stocks.

However, I don’t think that most advisers assume a pedagogical role yet. We’re still discussing how deterministic clients are and how they’re ruled by their emotions to worry about pesky little things like reason, purpose, and self esteem in financial planning. If we think that clients are ruled by emotions, then what we’re selling isn’t really investment advice as much as it is the promise of security. It’s paternalism at its finest. That’s why so many financial advisers welcome organizations like the FINRA.

If you want stellar investment gains, your best bet is to hire an adviser willing to teach you how to invest or buy some shares in Berkshire Hathaway and hope that Warren Buffet doesn’t die before his successor is as good as he is. By the way, that last bit isn’t investment advice, just so you know.

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September 25th, 2011 | by David | No Comments

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