I’m currently reading Neal Frankle’s book Why Smart People Lose a Fortune. To say that we disagree on investment philosophies would be an understatement, but the book also contains a lot of ideas I agree with.
For example, regarding the selection of an investment advisor, Neal asks whether you would rather work with an advisor who promises to provide you with:
- A portfolio that is entirely unique, or
- A portfolio made up of the same investments as the portfolios of his other clients (with a unique allocation between those investments)?
It’s counterintuitive, but Neal suggests going with the latter. I agree completely.
Financial advisors aren’t superheroes.
It sure sounds great when a financial advisor promises to make a portfolio built from scratch just for you. But it’s unlikely to turn out so great in terms of results. The reality is that financial advisors simply don’t have the time to research, create, and monitor unique portfolios for each of their clients.
If your advisor is new to the business, he spends a lot of time engaging in marketing activities. There’s no way around it if he wants to make a living. And if your advisor has been in business for several years, can you really expect him to be watching 20 different stocks and 5 different funds for every one of his 200 clients? It’s just not possible.
This preference for what Neal refers to as “assembly line portfolios” should be even more pronounced if you’re dealing with a financial planner rather than just an investment advisor. Because investment advising is only a portion of what a financial planner does, a CFP will usually have her hands full providing the rest of the financial planning process to her clients. Not a chance that she can also monitor a unique portfolio for each client.
100% unique isn’t necessary, anyway.
Also, there’s really no need for such diversity. I can’t, for example, think of a single reason why Short-Term Government Bond Fund A would be best for one investor while Short-Term Government Bond Fund B would be best for another investor. It seems to me that one ETF (or fund) from each asset class should be sufficient to construct portfolios suitable for any investor’s needs.
Want to learn more about investing?
Enter your email address to receive free updates from this blog. (You won't receive any emails other than blog posts, and you can unsubscribe at any time.)Confused About Investing?
| If you're looking for a brief, plain-English introduction to investing, I'd encourage you to pick up a copy of my book: Investing Made Simple: Investing in Index Funds Explained in 100 Pages or Less. |  |
{ 5 comments… read them below or add one }
I have to agree- other than adjusting for the right risk level the portfolios don’t really need to be unique. That’s why target retirement funds can work for pretty much anyone… you can even adjust the risk by picking a later or earlier target date than your actual retirement date.
-Rick Francis
Totally agree with you and Neal on this, Mike. I’ve worked for advisors as a support person, and I can vouch that they often don’t know much about what’s actually going on in a client’s portfolio. Their job is to reassure you that they know what they’re doing and to keep getting more business. They don’t spend much time actually doing research or even taking care of client issues. That’s for the support people.
The other problem I see with the “unique” portfolio idea is that it would require an advisor to find at least 4,000 unique “good” stock buys in total. (20 for each of 200 clients) That would require buying pretty much all of the stocks that trade on the U.S. markets. Now how can each of his “unique” client portfolios actually do well if that’s the case?
Advisors like that are all flash and make their money by fleecing the uneducated. That’s why it’s important for all of us to understand our finances even if we do have an advisor. How else will you know when he’s talking out of his butt?
i also agree with the subtle addition that certain asset classes are preferred in certain saving vehicles depending on:
1. the proportion of taxable investment vs. tax-advantaged investment
2. the marginal tax bracket of the investor
I think you do imply this, but it raises some clear areas where customization is required. However, the major pieces can be pretty much the same as you mentioned.
I certainly agree with the main point being made.
The way I would say it is that there are some areas where customized advice is needed and others where it is not and the good advisor directs his limited customization energies to the areas where they make a big difference.
I believe that it is possible to pick stocks effectively. But I don’t think picking stocks is a good idea for 80 percent of investors. So I don’t think that advisors should be too focused on this (if someone comes in the door who shows an interest and ability to pick stocks, an exception to the general rule applies).
However, getting the asset allocation right is important for everyone. And getting the asset allocation right requires customization. I believe that the advice offered on this point today tends to be very weak (and dangerous). I am not an investment advisor and I have people ask me all the time — What should my stock allocation be? It troubles me that people think that a one-number answer can do the job here. There is more than one factor that needs to be considered. One-number answers are popular but also almost certainly wrong.
Customization is needed. But to make the goal of customized advice practical, advisors need to focus their customization efforts on the areas where they are most likely to bear good fruit.
Rob
Rob Benett tells us: “I believe that it is possible to pick stocks effectively. But I don’t think picking stocks is a good idea for 80 percent of investors.”
Can you share what specific technique(s) for picking individual stocks you think 20% of investors can apply to effectively pick individual stocks? Do you advocate the use of screens? Technical Analysis? A single fixed ratio as an arbiter of supposed value?
Thanks!