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Last week, I took off work to have a staycation. My wife is currently 34 weeks pregnant, so she appreciated having an extra helping hand during the day as we prepare for the arrival of our new bundle of joy.
Honestly, I am not usually a huge fan of staycations. I typically end up doing more work than I like, so it’s not as relaxing as an actual vacation. When I go to the beach, it forces me to unwind and unplug from the rigors of work.
As much as we wanted to go out of town, it didn’t work out that week. The beach house that we wanted to stay at wasn’t available. A couple of unexpected things also popped up with my sister-in-law, and finally, I also caught a summertime cold. Clearly, we weren’t suppose to leave town.
Thankfully, the staycation turned out much better than I anticipated. We treated it like a vacation, which meant we rented movies, went on nightly walks, and tried new restaurants. It was wonderful.
One day during that week, I also had some time to catch up with a good friend from college. He works in the financial industry as an investment manager. I always look forward to hearing his perspective on the market and his insights into the field of finance.
Since we are both finance nerds, we usually skip the small talk on family life and jump right into finances. In anticipation of our lunch outing, I compiled a mental list of questions that I wanted to ask him.
Specifically, I was curious to know what he thought about Robo-advisors, which are continuing to take market share. There seems to be a constant push towards these Robo-advisors. They are targeting millennials directly, trying to convince them that they should fork over their money to these firms instead of a traditional financial advisor.
My friend responded by laughing, and he said that he hoped these Robo-advisors would do well. The look on my face must have been priceless because I was not expecting to hear his huge belly laugh. I had assumed he would feel threatened by them, but he seemed confident that his services couldn’t be duplicated by this type of financial advisor.
Investment & Financial Advice
He said that in his time as an investment manager, most people seeking investment advice are actually looking for financial advice. They want to know if they are financially prepared for their future.
An investment portfolio is only a portion of the total financial picture for the individuals. Most people want help with understanding their healthcare and insurance needs, trusts, tax efficiencies, estate planning, and how much they can withdraw.
But he confessed more than anything, his advice provides psychological benefits.
For example, Warren Buffett has said to “be fearful when others are greedy and greedy when others are fearful.” A good advisor would explain when the market is acting irrationally and would provide sound advice as to why you should or shouldn’t buy something.
I have some friends who think I’m a fool for not buying Bitcoin. They believe it is an outstanding investment that will sky rocket. To me, their sentiment is reminiscent of the confidence many people had right before the dotcom crash and subprime mortgage crisis as well. A great financial advisor would be able to detect a lottery ticket moment and stop you from jumping on the crazy train.
Beyond trying to keep clients informed about their portfolio, a competent advisor sets realistic expectations along the way. He or she should explain the construction of the portfolio and provide honest feedback.
One of my friend’s pet peeves is when his clients ask him if he himself invests the same way as his clients’ portfolios. His answer is always no. Is that a huge red flag? At first, I thought so.
But he then explained. If one of his clients has $50 million in assets but my friend only has $1 million in assets, he doesn’t find it wise to invest both portfolios the same way. On top of that, if his client is 80 years old and he is only 35, of course, they have different financial goals.
It made much more sense once my friend explained those different scenarios. Maybe I should tweak my list of questions to ask a prospective financial advisor…
The Value of Comprehensive Financial Advice
He continued to tell me that investment advice probably isn’t worth 1% to most people. But how much is financial advice worth if you gain more of a total picture? Most of my friend’s clients don’t want to read Boglehead forums for fun to learn the material on their own. Instead, they choose to pay an advisor to do all the research for them and provide sound financial advice accordingly.
Before my conversation, I really didn’t consider how much extra my friend does as an investment manager. I had assumed his role started and ended with investments, but he clearly does much more.