By Scott Reed
When I began in the financial industry 27 years ago, it was easy to make the case for having a financial adviser. You didn’t have much of a choice. In the 1980s, we held the keys to the gate. Back then it was almost impossible to invest on your own. You had to have professional help just to place an order. The reason our fees were so high then was not because our advice was so much better; it was because we were able to have a cover charge at the door.
These days it’s not so simple. With the emergence of Internet access and online trading options, the cover charge doesn’t exist, and anyone can do the same things we do without paying us to get them done.
We are very much like the legal profession in that regard. If you find yourself in the middle of a legal battle, the court does not require you to hire an attorney. You always have the opportunity to represent yourself. With TV shows like “Judge Judy” and “Judge Joe Brown,” as well as segments with legal correspondents on every morning TV show, there must be millions of people out there who feel they know quite a bit about how the law works. You can watch a version of “Law & Order” any night of the week. This is good stuff and it should prepare us well for the rigors of representing ourselves in a court of law, right?
So why don’t more people represent themselves in a court of law? It could be that the penalty for making a mistake is both painful and swift. You lose, you go to jail, or pay money or both. They don’t let you pay your penalty over time. You can’t show up for jail on Wednesday afternoon for the next 20 years. They take you away in handcuffs and let you out when you’re done.
In our business it’s a little different. If you make a big mistake in your retirement plan when you are 40, you can live with the hope that you can overcome that loss for years, until one day in your 70s you realize it’s too late. Immediate loss is much worse to the mind than a loss down the road, so many people are willing to give it a try and see what happens.
There is much evidence that you are more likely to make those mistakes on your own than when you are being led by a professional. Your own emotions kick in and you are much more likely to act like the person you want to be instead of the person you are. Many investors have good programs, but are taking more or less risk than they need to take. Getting that part of the plan right is critical to success, and if you are prone to taking risks in your real job, you tend to do that as well in your investments, even when the risk is unnecessary. That can have a huge effect on your outcome. Taking too little risk can have bad consequences as well.
Aon Hewitt, a benefit consulting group, teamed up with the advice firm Financial Engines to survey more than 425,000 investors between 2006 and 2010. They found the median annual return of those who got professional help was almost three percentage points higher than those who invested on their own. Finding good investments is a small part of what it takes to be a successful investor. Finding the proper balance of asset allocation and staying detached enough from what the portfolio represents to avoid emotional decisions are critical factors and those are best managed using an independent third party expert.
Just because you can get in the door without a cover charge doesn’t guarantee you that the food is going to taste good.
Scott Reed, CIMA, AIFA, is CEO of Hardy Reed Capital Advisors in Tupelo. Contact him at (662) 823-4722 or firstname.lastname@example.org.