Advisors Should Help You Reach Investment Goals for Real, Not only in Theory

When investors hire an advisor to help them make money fast, it often turns out that the only person making money is the advisor.

Advisors not held to a fiduciary standard are likely to churn clients’ portfolios, meaning they’ll buy and sell, either chasing performance or generating fees and commissions for themselves by reinvesting the clients’ money too often.

If You’re Serious, Sign Up for My Email. But Only If You’re Serious.

With a new regulation taking effect from the Department of Labor, advisors traditionally held to the low “suitability standard” will be required to adhere to the more stringent “fiduciary standard” in some client retirement portfolios. A fiduciary responsibility requires advisors to make investment decisions in the best interests of the client.

At Richard C. Young & Co., Ltd. we have always been held to the highest fiduciary standard. But putting clients’ interests ahead of our own hasn’t just been the law, it has been our philosophy all along. Jason Zweig reports:

With the Department of Labor’s fiduciary rule going into effect on June 9, investors should recognize what financial advisers can, and can’t, do.

The new regulation requires anyone getting paid to provide investment guidance on a retirement account to act solely in the investor’s best interest.

But what that means and how to measure it are as murky as ever. Do financial advisers improve their clients’ investment returns? If you think so, you may be paying your adviser for the wrong thing.

To be sure, individual investors can be their own worst enemies, flinging money at whichever assets have gone up the most and then bailing out at the bottom, locking in losses.

The performance of a mutual fund, exchange-traded fund or other financial asset is typically calculated as if you put all your money in at the beginning and kept it there, without adding or withdrawing anything, until the end of the measurement period.

But investors add and subtract money at will along the way — often at the worst possible times, when they are in the grip of greed or fear. Such buying high and selling low leads to what is often called the “behavior gap” between the performance of an investment and its investors.

That gap can only be estimated. However, by adjusting a fund’s returns for the amount of money investors put in and took out along the way, researchers can at least approximate a number.

Investors in mutual funds, for example, earn average annual returns roughly 1 to 1.5 percentage points lower than those of their funds. Investors in hedge funds may lag those vehicles by up to 7 percentage points annually.

In theory, that’s what a stockbroker or financial planner should prevent. “Advisers provide a human element that gives clients confidence and comfort in not deviating from a plan,” says Dave Butler, co-chief executive of Dimensional Fund Advisors, a firm in Austin, Texas, whose funds aren’t available to individual investors without an adviser. “The reaction to markets can be completely different when the adviser is in the loop.”

Unfortunately, some advisers might not behave that way in practice.

E.J. Smith - Your Survival Guy

E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zildjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@yoursurvivalguy.com To sign up for my free monthly Survive & Thrive letter, click here.