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In defense of the financial advisor

from Monica Johnson, International banker

S.e since the global financial crisis (GFC) in 2008, the investment world has changed dramatically. The growing popularity of passive investment strategies, the widespread use of technology and innovation in the investment process through services such as robo-advisory and the general expansion of opportunities for investors of all skill levels to access financial markets through trading apps and digital trading applications all mean brokers that the rigid investment barriers that once existed have practically fallen by the wayside in the past decade.

With investing just gotten much easier for the average retail investor, one might wonder whether it makes sense to hire financial advisors – or even investment professionals whose primary goal is to maximize clients’ investment returns. Indeed, with so many resources online through investor education websites and market data dissemination, it seems like financial advisors are fast becoming an endangered species. And yet, their skills and advice are still in demand – and for good reason.

A paper released in 2019 by Vanguard, one of the largest investment advisors in the world, found that a skilled financial advisor can increase returns by up to 3 percent. “’Evaluating your worth’ is as subjective and unique as any individual investor. For some, the value of working with a counselor is peace of mind. For others, we found that working by following Vanguard Advisor’s alpha framework for wealth management, especially taxable investors, can add about 3 percent to net return, ”the paper noted, although it emphasized that it probably wasn’t annual added value is more of a temporary benefit. “Some of the best opportunities to add value come in times of market pressure or euphoria, when clients are tempted to abandon their thoughtful investment plans.”

Entrusting your financial health to an advisor can understandably be a daunting prospect, especially since it requires putting the trust in someone else’s hands. Still, several reasons remain why financial advice remains popular; Whether you are new to the financial markets or a high net worth investor, the chance of an objective investment partner is not to be underestimated.

Perhaps most importantly, investment professionals are, on average, significantly more experienced than the average retail investor. Not only does this bode well in terms of the ability to more accurately predict future market scenarios – and hence likely future returns – but it also means that the skilled person has the skills and knowledge necessary to keep himself from irrelevant. to be influenced by non-market-related factors towards the less experienced investor. These influences may include recommendations from colleagues, friends and family, or perhaps tips from market analysts and “gurus” who may not necessarily have the same investment goals in making recommendations.

The myriad of cognitive and emotional biases that have long plagued investors and their decision-making processes – including loss aversion biases, confirmation biases, the Dunning-Kruger effect, and many more – can all result in the less experienced investor ultimately achieving sub-optimal returns. And while financial advisors are hardly immune to such prejudices, their experiences – not to mention the formal systems and frameworks they have in place to ensure that every investment decision is made as objectively and methodically as possible – are likely to result in such external influences play a minimal role in the investment process of a professional outfit on a constant basis.

The resources required to make these optimal investment decisions should also not be overlooked. Whether it comes down to the time researching various investment goals, the energy and mental focus required to become familiar with finance, or even the financial cost of gaining investment experience, the overall process is everything other than just building a portfolio of a few companies in an afternoon and then hoping for the best. On the contrary, it is an endeavor that requires rigorous oversight and frequent changes in portfolio allocation.

Not to mention the due diligence in addition to investment research, which is often necessary before investing, especially when it comes to less recognized asset classes. While stocks and bonds have fairly standardized methods of research and due diligence, there are other assets like commodities and alternative investments that are often not as standardized. In fact, such asset classes are becoming increasingly popular because of both the returns and the diversification benefits they can provide to an investment portfolio. However, they often require closer scrutiny, especially when trading is typically over-the-counter or over-the-counter.

In many cases, the necessary due diligence requires expert intervention. Real estate, for example, requires considerable due diligence before investors decide whether to buy or not, including land-related issues such as ownership, ownership, valuation, and taxation. By opting for the financial advisory path, the due diligence process can be simplified considerably. Again, it is the expertise in handling such matters that makes the financial advisor an important part of the holistic investment process.

Investors need to honestly ask themselves whether they can allocate the necessary resources to consistently make the best decisions for their portfolio. If not, a financial advisor can make perfect sense. A professional usually has sufficient analytical infrastructure to continue making informed investment decisions. This infrastructure typically includes sophisticated risk management software and models, powerful information technology (IT) systems for data analysis, access to a wide variety of financial markets and products, and an extensive support network that typically includes some or all of the middle and back -Office, legal and compliance professionals, and established relationships with other financial professionals and services. A financial advisor can use all of these advantages to generate above-average returns over the retail investor.

For high net worth investors like the high net worth and ultra high net worth segments, this matter becomes even more important. If you fall into this category, using an advisory service such as a family office – a private asset management company that offers wealthy investors a comprehensive outsourcing service – can be a great advantage. Since these individuals typically have a number of additional issues to consider when trying to optimize their assets and investments, a family office can often be an efficient one-stop shop that covers most of their needs. In practice, this means having a team of investment professionals on hand to take care of such matters, including tax planning, estate planning, budgeting, educational savings, charitable donations, and insurance.

Such sideline activities also require an abundance of time and energy in order to fully understand them and then regularly make the optimal decision. Typically, a family office offers a service that covers all of the above-mentioned activities as standard and thus offers considerable advantages in terms of experience and efficiency compared to the decision to “buy alone”. From a purely organizational point of view, family offices also have the necessary infrastructure to keep records and to alert customers to necessary changes in good time in order to avoid possible mistakes due to negligence.

Perhaps one of the most important advantages of financial advice is the formalized approach to planning for adverse market conditions. In the event of a stock market crash, for example, it will always be the case that an individual investor has not made enough portfolio allocations to account for such an event. Massive losses are more likely. And while in such market conditions losses can be incurred if the financial advisor option is chosen, it is very likely that these losses can be minimized through careful planning; In addition, the advisor has the necessary experience and the necessary risk management infrastructure to realign the portfolio appropriately in accordance with the pronounced changes in the market environment. Ultimately, this could make the difference between sinking or swimming through sharp market downturns and ensuring long-term financial survival.

Of course, not everyone needs the services of a financial advisor. Those who have the experience, skills, time, and energy to closely observe and analyze financial market movements can feel safe enough to remain self-determined. And they may even have the track record to warrant that decision. But for everyone else, knowing that professional help is available to guide the investor through the more difficult decisions – of which there will be several – should be enough to seek advice if needed.

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