We all want financial advice.? Good advice.? And we want it for free.? That’s why we come to the Aleph Blog, where advice is regularly dispensed, and at no cost.
But… I can’t be personal, and give you advice that is tailored to your situation.? And in my writing here, much as I try to be highly honest, I am not acting as a fiduciary, even though I still make my writings hold to such a standard.
Ugh.? Here’s the problem.? Good advice costs money.? Really good advice costs a lot of money, and is worth it, if you have enough money to spread the cost over.
But when you have a small account, you have a problem in getting advice.? There is no way for someone who is fiduciary (like me) to make money addressing your concerns.? That is why I have a high minimum for investing: $100,000.? With that, I can spend time on clients, even helping them with assets from which I make no money.
How can you get advice to those who will not actively seek it??? From those who are commissioned to sell to them.? It may not be the best advice, but it *is* advice.? For the lazy, investment advice is sold not bought.
And so, I give you the following articles, most of which disagree with me:
- How Safe are Your Savings?
- Whose side is your financial adviser on, anyway?
- Main Street Investor Protection Shut Down In ‘Retail’ Act
- Lobbyists Rally to Ensure Brokers Can Scam Your 401(k)
- Should Brokers Be Fiduciaries?
First, on financial advice, you should always be skeptical, even with me.? There is no one who is truly disinterested who has smarts, and so “ya pays yer money and ya takes yer chances.”? If you don’t pay money, your odds are worse.? I write this as one who only makes money off of assets under management.? Most people are better off hiring a CFP, and getting tax savings.? They might not be great on investing, but they may make up for it by lowering your tax rate.
I’m a CFA Charterholder, and an old-style? RIA.? I make money by finding undervalued stocks and buying them.? I focus on value.? That is my sole focus.? I am out to beat the? market regularly, and I do it over market cycles.
It is expensive to be? a fiduciary.? It takes time and effort, and there are many who will pay you to push products.? If we require all investment professionals to be fiduciaries, those who are less well off will not be served.
And, as an aside, this is why you should study the economics of any policy question.? It will tell you what will naturally happen.
Much as I want all people to get good investment advice, there are no incentives to make that take place.? If we try to force it by law, then few will get quality advice.? It will go into hiding.
Investing (& financial matters in general) is so complex with so many intelligent, educated people disagreeing with each other, who can I find to teach me? Like your last piece on Alpha vs Noise: which advice-givers are Alpha, and which are Noise?
I am so small; I certainly cannot afford the “really good advice”, so I greatly appreciate your willingness to offer your knowledge and experience here. I refresh the page regularly, wondering, “What idea will Mr. Merkel have for me to chew on?” (& most of my to-buy book list on Amazon is based on your reviews)
Thanks for your writing.
If an individual has a “small account” (by whatever definition) … it may not be worth an advisor’s time (CFA, RIA, CFP, etc).
I would argue it may also not worth the individual’s time either. With a “small account”, if an individual wants to create meaningful alpha, they almost are required to put a huge percentage of their money into one stock (an extremely concentrated portfolio).
If so, it had better be in a company that the individual knows better than anyone else, and it better not be the individual’s employer (because that means one’s income and investments both depend on the same risk — essentially all your eggs are in one basket).
How many hours will it take an individual to properly research a company (lets assume they have the requisite skills)? If they “pay themselves” at minimum wage, does the possible reward justify the cost?
There are some exceptions that prove the rule, but most of the time it will cost an individual more money (in “lost wages” if he/she were paying themselves) than they are likely to gain from the investment…. even assuming the investment is profitable.
Picking a diversified portfolio of stocks means each position is too small to add much alpha.
For a small account, the probable reward does not favor anyone spending time on individual stocks — not advisor and not individual.
Small accounts should buy index mutual funds, focusing on asset allocation (rebalancing at regular intervals). Focus on increasing savings.
This strategy is not likely to finish in the top 10% of investors, but it is even less likely to finish in the bottom 50%. Compounding returns year after year in the top 50% of portfolio strategies will beat most (not all) professional managers.
This makes it far more likely that after a decade or so, the individual will have an account large enough to be worth a financial advisor’s time.
It also means the individual will acquire a lot more financial market savvy during that accumulation decade — so they will be better educated (financially). They will be less likely to succumb to bad brokers, and better able to pick better managers.
Financial advisors win too — we get better clients and we waste less time defending our industry from the shady practices of bad brokers.