A lot of advertising dollars are being spent to create a narrative that Investment Advisors add little value and that individuals would be better off investing on their own. Both of these insinuations make me cringe and are difficult to support.

 

Lets examine:

1. In every investor is a stock market ninja who can handily outperform professionals.
2. How Investment Advisors can add value for their clients.

 

 

Do DIY (Do It Yourself) investors outperform?

 

The insinuation that investing is easy is likely the most dangerous.  It is also disingenuous. A recent study at the University of Berkley showed that only 5% of day traders made a profit over twelve years. The chart below is taken from DALBAR data that was analysed by the research team at Richard Bernstein Associates. The graphic shows the annualized returns of various asset classes over the past two decades.  The little red bar at the far end of the graph illustrates that the average return for DIY investors was just under 2% per year for the 20-years. These returns are not a disaster, but it is a terrible outcome since inflation (the orange bar) annualized more than 2%.  So the average DIYer lost purchasing power over this period.

 

 

Apart from returns, how can an Investment Advisor add value?

 

I am the first to admit that Investment Advisors have a terrible reputation that has been well earned.  Like every profession, Investment Advisors sit on a spectrum that ranges from awful to world-class.  I am passionate about this business and pride myself on the value that I can deliver for my clients. The list below illustrates some of the ways that Investment Advisors can add value for their clients that are independent of returns:

1. Tax optimization. In its simplest form, tax-optimization uses the tax shelters provided by registered accounts and places securities in the accounts where they will receive the best tax treatment. Surprisingly, I can often save clients the equivalent of my fee by optimizing how securities are held in their accounts.
2. Access to financial services and products.  I am continuously helping dozens of families, and I have relations with dozens of bankers, accountants, estate specialists, and lawyers.  If a client needs access to financial services, I can quickly connect them with a high-caliber professional I trust.  For products like mortgages, I can share the rates that clients have recently secured and provide access to lenders who delivered the target rate.
3. Enhanced savings. It is no secret that an Investment Advisor directly benefits from their clients saving money.  It should be no surprise that Investment Advisors encourage saving, suggest and help implement saving strategies.  Having someone else in your life that benefits from you saving more money is a bit of a life hack. Encouraging investors to save is an area where even a terrible Investment Advisor adds value since they are aligned with their clients.
4. Confident financial decisions. Financial planning is included in my fee.  If you are considering a significant purchase like a new home, cottage, or chalet, or if you want to understand when you can retire or what retirement lifestyle you can afford, I have a team of professionals who can show you exactly how your decisions will impact your finances.  We can also benchmark against your plan so that your returns will be more relevant for you each year.
5. Estate planning. Like other financial services and products, estate planning and life insurance can be complicated. Most investors can use a knowledgeable professional in their corner who can contrast these products with other asset classes and structure solutions that can enhance cash flow, reduce taxes, and meet estate needs.
6. Time and peace of mind. For many clients, reducing the amount of time they must spend on their finances provides additional time to spend working, with their family, or pursuing leisure activities.  Additionally, clients appreciate the peace of mind that comes from having a dashboard where you can review your investments, lifestyle assets, insurance policies, and private investments. 
7. Alternative Investments. An Investment Advisor can also provide clients with access to alternative investments with better liquidity, lower fees, and significantly smaller minimum purchases than most accredited investors can access directly. Alternative investments include multi-strategy funds, global macro funds, credit funds, long/short or market neutral equity strategies, private equity, private debt, and private real estate.  When appropriately used, these strategies can enhance portfolio returns, increase income, and reduce volatility.

 

You need to find the right approach and professional for you.

 

I have a passion for markets, and a DIY investment approach is how I started investing more than two decades ago. I made mistakes. I paid a lot of tuition and spent tens of thousands of hours understanding the investment approaches that work for me, given my temperament and perspective. An investor must understand the scope of a DIY undertaking and what they may be leaving on the table with a DIY approach.  Those free trades and video game-like interface might be quite expensive.

 

Let me know if you would like to have a more detailed discussion.

 

Delli (Delli@cibc.com)

 

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