If you had a friend who had come out ahead each of the last 5 times he went to Vegas, would you feel comfortable giving him your life savings to use the next time he went? Of course not.
So why do we let financial advisors take our savings to Vegas, so to speak?
Admittedly, there probably are investment managers who have a genuine ability to earn above average returns without incurring above average risk. (Name your favorite: Buffett, Swenson, etc.) But they’re generally going to be very busy doing just that.
They’re not going to be available to take your phone calls. They’re not going to sit down with you to determine your appropriate asset allocation, how much money you’ll need in order to retire, or how much it will cost little Jenny to go to college in 14 years.
Any financial advisor who tells you that he can do both is either misinformed or misleading you. (In most cases, I’d bet on misinformed.)
Ben Graham on Financial Advisors
While reading Bogle’s Enough last week, I came across this delightful explanation by Benjamin Graham as to what a financial advisor’s job should be:
“A well-trained financial analyst can [justify his existence] by adhering to relatively simple principles of sound investment ; e.g., a proper balance between bonds and stocks; proper diversification; selection of a representative list; discouragement of speculative operations…And for this he does not need to be a wizard in picking winners from the stock list or in foretelling market movements.”
So what, according to Graham, should financial advisors be doing?
- Helping clients with asset allocation decisions,
- Selecting a “representative list” (that is, a group of stocks that will mimic the returns of the overall market–now made effortless via index funds), and
- Discouraging speculative operations.
And what should financial advisors not be doing?
- Trying to “pick winners from the stock list,” and
- Trying to “foretell market movements.”
Sounds like a good financial advisor to me.