Why you do not need an advisor?: The word ‘financial advisor’ is one of the most abused terms in the investment world. Most of the so-called advisors are in-actual a ‘salesman’ who want to earn through commissions or advisory fee. Therefore, just by reading the titles on their business card- do not get impressed.
Although, it sounds great to have someone who seems to be ‘professional’ and have more knowledge than you for advising or managing your portfolio. However, its absolutely okay if you do not have an advisor.
Now, first of all, I would like to add that ‘NOT ALL ADVISORS ARE EVIL’ and some does pretty awesome work for their clients. Many advisors give decent pieces of advice to their clients and help them to consistently get amazing returns on their investments. Nevertheless, the proportion of these good advisors to the other ‘useless’ advisors is quite small. It’s really tough to find such advisors who have a good interest for you at heart.
Anyways, if you are a value investor, you’re probably better off without any advisor. Today, most of the information, tools and resources are publicly available enabling an average investor to invest intelligently without consulting an advisor time to time. All you need is to spend some of your time and energy.
Further, there are a number of fundamental drawbacks of having an advisor while investing.
Therefore, in this post, we are going to discuss why it’s better for you to invest your own money instead of asking an advisor to do it for you.
#5 Reasons why you do not need an advisor at all:
1. Structural Conflict of Interests:
There’s a fundamental/structural conflict of interests between you and your advisor. What’s good for your advisor doesn’t necessarily be good for you.
Advisors do not always want you to make money, but instead are more interested in making money for themselves. Most of the advisors earn money as commission or fees. However, these costs are not correctly aligned. Even though if their pieces of advice are not performing well, you still have to pay these charges.
Further, the advisors are more interested in the ‘amount’ that you are investing rather than the ‘returns’ that they will provide. Higher investment amount means high commission and fees for them.
Advisors simply get paid for what they do, not how they do it.
2. Performance pressure:
The advisors have to share their performance regularly with their clients. The frequency can be yearly, quarterly and sometimes even monthly.
Here, even if the advisors are confident of some stocks for long-term, still they have to answer their angry clients if that stock is not performing well in the short run.
The constant performance pressure does not give them many flexibilities to try out new ideas and opportunities. They are compelled to suggest ‘Okaying-but-low-risky’ equities over ‘high-performing-moderate-risk’ equities to their clients.
On the other hand, if you are a retail investor and managing your own money, then you have the complete freedom to follow your research and buy whichever stock you’re optimistic about.
3. Mediocre returns:
To be honest, most of the advisors give only mediocre returns to their clients. Even many a times, the returns are hardly greater than the returns from debt funds.
For example, if you compare the performance of many of the mutual funds with that of the index, over the last couple of years, most of the funds are not even able to beat the index. In such cases, what’s the use of paying high fees and commissions to these advisors, for getting an average ‘mediocre-ish’ return?
4. Short-term Orientation:
Clients want to see profits. If their advisor is not able to give them a profit over few months or year, they are certainly not going to be happy with them.
That’s why these advisors focus more on the short term orientation over a long-term goal.
Short-term performance helps the advisors to retain their clients. Many a time, the advisors have to invest/advise based on the short-term trend, no matter how much it’s misjudged or over-valued.
Nevertheless, if you are a value investor who invests on his own, you do not need to care these short-term trends. If you focus on your long-term goal, then this strategy would definitely turn out to be more fruitful.
5. Relative performance:
Most advisors compare themselves with other advisors; which in return acts counterproductive for them.
However, this cannot be avoided, as the clients themselves compare different advisors before choosing the best one for themselves. Therefore, in order to remain forward and to get the clients, the advisors need to remain updated with what other competitors/advisors are doing and how are they performing.
Nevertheless, this results in most advisors copying the portfolios of the big moves of other advisors so that they do not miss out. If all the funds are buying a specific stock, then they would also have to go for that. Otherwise, customers might be angry that why are they not buying that ‘high-performing stock’ that all other advisors are buying.
Anyways, this hurts the personal decision making power of the advisors. If the advisor wants to try something new or unique that no one else is doing and it didn’t turn out well, then he/she would have to answer his clients that why did he/she take such huge risks with the client’s money. In some cases, the advisor may even lose his/her job.
That’s why the advisors follow the relative approach and invest only where everyone else is investing. Doing so, they are not answerable to their clients even if that stock didn’t perform well. They can easily relate this to the performance of other advisors and say that it simply didn’t work for anyone. Advisors find safety in numbers and hence invests where everyone else in investing.
After discussing all the above-mentioned points, it can be considered that it’s absolutely okay to not have a financial advisor.
For all the value investors, you are better off without an advisor. The structural conflict of interests and other ‘noticeable’ reasons suggests that having an advisor isn’t always the best option for the average investor.
You can consistently earn good profits from the market by investing yourself. But for doing that, you need to put some efforts and stick to a profitable strategy.
By the way, the fact that you are reading this post already proves that you are ready to take your finances in your hand and why you do not need an advisor at all.
I hope this post is useful to the readers. Please comment below your thoughts on this topic. Do you really need an advisor or are you better off without one?
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