As I review posts for our sister website on financial literacy, this seemed to be a great post to repeat:
If you want financial advice, before listening to someone, ask yourself one simple question:
“If I’m not paying this adviser, who IS paying them?”
If you don’t know the answer, you may have a problem.
Think about it ….
Ben Franklin taught us that “time is money”. In addition, we all know that we have limited time, so every instant is important to us. In fact, each minute involves a choice about how you spend that time.
However, the best use is often hard to sort out. Moreover, tracking time minute by minutes can cloud the real issue, which is what the best use of your time may be.
Tracking your time: However, as a starting point, Laura Vanderkam suggests keeping a journal of how you spend each day. This can show you how much time you spend, say, checking your e-mail every 15 minutes. If you can evaluate your habits with some clear-headed objectivity, you may find ways to spend your time better.
What is your time worth? Here is a financial perspective on the use of your time. Ms. Vanderkam “what is your Minimum Wage” as way to have you test your use of time financially. Her example is the difference between buying and making your own tortillas. When she factored in the time spent against any cost savings, she arrived at a wage of $1.40 per hour. So, was that a good decision for the use of your time? Maybe if your tortillas taste so much better… but often, tortillas are tortillas.
Here are two more taken from my experience: driving an extra 25 miles to save ten cents per gallon on gas probably nets out to the same total expenditure, after factoring in the gas used to get there, let alone the time. Replacing the brakes or McPherson struts on your car may seem to save money. However, when you factor in six hours or more spent, and the clean up, you have a fairly low minimum wage calculation. It is often better hire an expert and spend time with family.
Dangers of Technology: Another author suggests three time wasters from new technology: texting, remote access and last minute preparation. Geoffrey James finds that each of these appears to save time, but embodies significant risks. For texting, the response is immediate and you have a full record of the communication. That may not be to your advantage in business or personal relationships. Remote access may mean you are never really on vacation, never really relax and recharge, so return in less than par shape. Easy access to information makes last minute work tempting. So much can be reviewed easily. However, this process is usually rushed, and rarely forms permanent memories like long-term studies. Therefore, technology in general can be good, but there are some technologies, or at least the ways in which we use them, that do not save you time and make you more productive.
Now, some ideas that payoff
One time saving idea that pays is gathering your tax information as it comes, saving you from hunting for it last minute. Also, saving each year’s information in an organized manner will save time if ever questions arise or, worse, you have an audit to counter. Finally, if you let your tax preparer know about any changes during the year, you have a chance to react and adjust your tax planning, rather than being told what you should have done when it is too.
The same holds true for evaluating any other financial change. Address it at the time, and save the documentation. For example, when you get a new document, you can now scan and save files on your computer (but be sure to have backups). This way, your information is more easily retrieved and searchable, so you can find the correct item quickly.
Investing: This is an area where too much attention is not the best use of your time but also risks making investment errors. Please see our comments at Faults of the individual investor…. Too much attention can lead you to override your long-term plan so spend the time on other matters. Your portfolio will be better off.
If you create or update your estate plan, be sure to change your beneficiary designations right away. You may even choose to fund trusts you have created, saving time for your executor (or the attorney she hires). See Estate planning overview…
If you have suggestions, or questions, let us know.
Individual investors historically act as a contrary indicator. That is, looking at recent events, they assume that a market going up will continue to go up, or that a falling market will continue to fall. The individual investor fixates on the past, as if it will continue, rather than gauging the future. With this perspective, the behavior of the individual investor is to buy at the peak and sell at the trough, hence making them a contrary indicator to what will really occur. Countering this behavior takes substantial discipline, experience and information, and usually a good advisor.
A good advisor should add value through asset allocation and fund selection, but foremost by guiding you to counter bad investment behaviors. You need to stay invested when you fear a fall and sell when you are convinced of sure upswings. Advisors need to provide value-added guidance that will:
(1) avoid giving any serious weight to short-term indicators;
(2) avoid trying to pick “winners”;
(3) closely examine expenses, as high costs result in much lower net returns;
(4) investigate riskier classes as a component of a good overall asset allocation (e.g., emerging markets);
(5) look for funds that stick to their own goals, rather than trying to match any index, as such discipline pass off over time;
(6) take a contrarian view at times because too often a fund doing well at a given time will ultimately revert to the mean of all funds; and
(7) be clear with clients on the risks being taken (that is, measure the risks for say a bond differently than stocks).
All these are ways in which advisors increase the chance that you achieve good investment returns over time.
Recent history provides a good example. With the crash in 2008, we spoke to many clients and started a flow of e-mail updates and strategy suggestions. This became our newsletter on our web site. The key advice was that, if you have a good allocation, and good investments, stick to your long-term plan, do not sell. Those of our clients who followed the advice returned to their pre-crash peak values by last year, something none of us thought would be possible so soon. However, those that sold were selling as investments declined in value. Moreover, they had no clear signal in mind as to when to reinvest. That meant that most missed the rise of greater than 11% in the beginning of 2009. That upswing can never be regained. Therefore, they sold at a low point and were forced to buy back in at a higher point.
How could those that stayed invested be back to their peak when most indices have not returned to their all-time highs? A well-managed portfolio, employing good asset allocation, will not drop as much so it will have less to recover to be “whole.” Therefore, it could regain its peak value more easily, and with less risk. Again, this points to all that we have published before on the need for asset allocation analysis and diversification within each investment type as well as among investment types. It also makes clear how important not losing capital is: losing 50% requires a 100% gain to recover, while losing 25% takes only a 33% gain.
Good investing will lead you to avoid the behaviors that constitute what Carl Richards dubbed the “Behavior Gap” (April/May issue of Morningstar Advisor), meaning the gap between investment returns and investor returns. Simply opting for index funds is not a quick fix that works. Instead, individual investors require guidance. They can have the best possible investment approach “only to blow it up completely with one big behavioral mistake at the wrong time.” He goes on to write that all approaches are tested over time, so the advisor’s role is one of helping “rid the world of negative behavioral alpha, to close the Behavior Gap.”
In another article, he writes that “ … if 83% of mutual fund investors are getting advice from advisors and are doing poorly, maybe we advisors are part of the problem. (See First, Do No Harm by Carl Richards 02-10-11) To state the opposite side, “Still the trend seems clear. Investors who were inclined to invest for the long term were likely to have better returns. A look at how the markets have worked during the past 10 years illustrates why that is. We had two bear markets and two dramatic rallies. Those who sold equities in the bear market missed out on the rally and therefore nearly all would have been better off riding out the bear market.” (Inside the Vanguard Science Project Vanguard’s more-patient shareholders outperformed the rest. by Russel Kinnel 05-05-11)
Investors doing all the work with no advisors have access to good tools, such as E-Z Planner for retirement planning, but that can be dangerous. Again, the risk of bad input, generating bad outcomes, comes from the same issues of perspective and bad investment behavior. With an objective source to counter your own bias or “bad investment behavior,” this can be avoided. For example, in addition to the investment issues reviewed above, most individuals understate spending. “Oh, yes, we did buy [something] last year, but that was a one-time event.” Each year will have “one-time” events. Building a good plan takes some means by which tough questions like cash flow and investment risk are addressed. Otherwise, the best software will produce results with erroneous conclusions.
Conclusion
You need terrific discipline or good advice to resist psychology of risk aversion and the urge to use recent events as a gauge for what will occur next. Otherwise, your investor returns will fail to match investment returns over time.
Having said that, what is the Next Step:
First, review how your portfolio performed in recent times, did you react from fear and leave your strategy or hold on?
Second, review your portfolio; does it fit your risk tolerance and financial goals?
Third, take a second look at your portfolio, but from a contrary perspective; did your answer on risks match the actual investments made? (For example, someone claiming worry about the economy should not be 80% in US stocks.)
Finally, check to see if the portfolio, with any on-going savings, will be sufficient to achieve your financial goals. If you are not certain, then advice from an objective source could make a substantial, and very important, difference.
Need help? Contact us!
Articles on line discuss how planners get paid, whether you should trust them or not and what they do.
However, the best point made may be the distinction between “answer person” and “counselor” (or “financial guide”).
You can access so much on line today that some people believe that a financial advisor is only needed when the answer cannot be found. This misses much of what a good financial planner can do for clients.
A good planner applies experience and knowledge to each client’s goals and resources to help guide them in the decisions that they face. This is real value added, but also requires a compensation scheme that allows the planner to ignore commission and other incentives so that the best advice can be given.
Furthermore, this type of guidance can involve encouraging changes in behavior, expectations and overall knowledge of finances. This takes time and cooperation between the financial planner and client. So, again, the incentives have to be correctly set.
This is why our firm charges for time, and dedicates the planning work to the individual goals of each client. There is no confusion from commissions or fees based on assets under management.
If you have comments on this, please let me know.
Thanks,
Steven
Hoping that you agree that my firm qualifies for the term in the article, “Real Financial Planners” as in “the professionals by any title that you would send your mother to see about her money”, I am forwarding the article
As he says, it is hard for the “Secret Society” to get attention. I agree, as my practice is built on refers and no advertising or publicity.
So I ask for comments on the article and my firm
AND if you think of any one that could benefit from, as he says, “REAL professionals giving REAL advice that will make a REAL impact in people’s lives”, please tell me or ask them to call…..
Thank you,
Steven
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Posted: by Carl Richards | Bio
09-11-09 | 2:25pm
Real Financial Advice
Carl Richards: REAL financial planners unite. The people need you.
A few months ago, I started talking about what I call the Secret Society of REAL Financial Planners. These are the professionals by any title that you would send your mother to see about her money.
You know, people you can trust.
It might seem trite or old fashion, but that is what the best in our industry do. They put the interests of their clients first. They care. They are honest. They act as if they are fiduciaries whether they are or not.
The reason that this Society is secret it that we never hear these stories. If all you know of our industry was what you saw on TV, then you would think we are either circus clowns or criminals.
It is time for this to change.
At this point, it will do no good to complain about the “unfair” coverage or argue publicly about terms like “fee-only” or “fiduciary.” What we need is more members of the Secret Society to get out and tell the story, and one by one, let people know that there are indeed REAL professionals giving REAL advice that will make a REAL impact in people’s lives.
Rise up Secret Society: These people need us!
