The Value of a Financial Advisor: It Depends

That may sound like a wishy-washy answer to a common question: Is it worth it to pay a financial advisor to help me with my investments? But it’s true—there is no cut-and-dry answer. It really does depend on a handful of key variables nicely summarized in a recent Morningstar column. Here I’ll present my own summary, along with a few additional thoughts.

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Beware of overconfidence when investing!

Confidence is a double-edged sword, at once an asset and a liability—especially when it comes in that extra-strength version called overconfidence. On the one hand, it appears that overconfidence can at times be our friend, and may even be an evolutionary advantage. Without it, human beings wouldn’t take the risks necessary for great progress. On the other hand, by blinding us to the long odds and high risks of certain activities, it can set us up for disappointment, or even disaster.

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Who can you trust when investing?

When soliciting financial advice from an independent financial advisor, we often trust that we are being told information that is in our best interest. But how do we know this is always the case? We can have confidence knowing that the fiduciary rule exists to protect us from disingenuous activity.

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Juan Carlos HerreraComment
Why should most long-term investors invest in multiple countries?

Today’s investors are wildly enthusiastic about America’s all-conquering technology companies, such as Google, Apple, Facebook, and Amazon. These companies are either shielded from the threat of takeover by special shareholder structures or, in the case of Amazon, have persuaded investors that long-term growth is more important than short-term profits. Other countries only wish they could create technology giants with the same reach as one of America’s titans.

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Juan Carlos HerreraComment
Why are most people bad at investing?

In our previous blogs, we have provided theoretical and empirical evidence that broad-based indices outperform most active managers (see here, here and here). In this blog, we argue that the average investor in the U.S. significantly underperforms broad-based indices. Dalbar’s (2017 QAIB Report) analysis shows that the 30-year annualized S&P 500 return was 10.16% while the 30-year annualized return for the average S&P500 investor was only 3.98% -- a gap of 6.18% annualized.

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Juan Carlos HerreraComment