Know what you're looking for when seeking a personal financial adviser.
Sometimes, people apply mental mathematics in evaluating advisory fees.
"Let's see," they'll muse. "If I can get five percent by myself, and you charge one percent a year, then you'll have to get six percent or more for me to beat the market and come out ahead."
So, mentally charging a professional fee against just one of these variables-performance-is a distortion of what you really want and also of what you should expect from a quality adviser.
Burton Malkiel, Nobel Prize-winning economist and author, once offered this advice: "If you really need professional investment advice, go to a fee-only adviser." Simply, when you separate compensation from the investments themselves, the quality of advice and service increases.
Here's another way to think about it. Looking back, two separate portfolios earned eight percent last year. One was invested completely in the common stock of a single local company, the other in a diverse mix of blue chip stocks. Does it matter which one you own? From a pure performance standpoint alone, the answer probably is no (that year, anyway). But any solid adviser would tell you that the comfort, safety, and reasonable expectations from these two portfolios are dramatically different.
If an adviser makes your situation safer, more reliable, more comfortable, and/or less expensive, then he or she has provided something you didn't have before. He or she has added value, even if he or she didn't add "net" performance. Millions of very smart people understand that's worth paying for.
Sure, it's an added cost, but those are added benefits, too, and the value of each benefit isn't directly tied to performance. So, mentally, it's a terrible mistake to use performance as the only evaluation criterion.
There are other points, too. It's entirely possible that a good adviser will create additional performance, not by being smarter or by "figuring out" the market (a fool's game) but by suggesting newer products, lower fees, or ideas beyond your personal experience. The adviser may broaden your portfolio in ways you've never even considered. There's no guarantee, but most observers believe that, over reasonable time horizons, added expertise adds performance.
Another important factor is not so obvious. Risk is a key component of investing, and many individual investors don't have a clue. An adviser brings experience, knowledge, and risk measurement tools to each situation. This expertise may not seem important, but it's critically important during market turmoil. Again, it's added value apart from performance.
It amuses me when people think they can manage their own portfolios just as well as full-time, properly trained professionals-all in the name of saving money. Millions of smart, successful people gladly pay advisers for assistance. They don't have money to burn; simply, they perceive value that overrides the fees paid.
The author is principal/chief executive officer of Family Investment Center, a commission-free investment firm in St. Joseph, Missouri. The ideas expressed in this column are his alone and do not represent the views of Medical Economics. If you have a comment or a topic you'd like to see covered here, please e-mail firstname.lastname@example.org