There’s Only So Much an Advisor Can Do…

This is the introduction to a Kiplinger article titled, Does Your Advisor Make the Grade?

Until last fall, Pam Nintrup thought the financial adviser she had hired two and a half years before was doing a good job. He’d consolidated her and her husband’s scattered accounts onto one statement and run computer scenarios to determine whether her goal of retirement by age 60 was achievable. It was, he said. He then suggested a stock-heavy mix of investments to help Nintrup, 57, meet that goal.

But with her portfolio down more than 40% since last December, Nintrup’s early-retirement plans are out the window, and doubts about her counselor are mounting. Why wasn’t her money invested more conservatively given her imminent retirement? Is the adviser’s explanation — that bonds didn’t cushion the stock losses as well as anticipated — good enough? Why should she stick with the same plan, as he recommends, when it has done so poorly?

The article doesn’t tell us how this woman’s portfolio was allocated. Regardless, it’s easy to look back and say stuff like, “Why didn’t my advisor see this coming?” What if the money had been invested more conservatively and the market had gone way up and she missed out on the gains? You think she would have been pleased? Hindsight is 20/20.

Think back to the late 90s when some advisors weren’t jumping on the tech bandwagon and their clients were upset with them because their dentist was making money hand-over-fist by daytrading tech stocks. These advisors were losing clients because they weren’t making money fast enough.

Then the tech bubble burst and people were upset because their advisors were investing too heavily in tech stocks.

Bottom line: unless you have a crystal ball or some other magical power, it’s impossible to protect yourself from the market. The only thing you can do is make sure you have a decent asset allocation plan invested in low-cost funds. Stick with your plan but be willing to make changes if necessary. The woman in the example may want to work longer or maybe work part time once she turns 60. Or, she may want to save more towards her retirement now. Or, perhaps a combination of both.

9 thoughts on “There’s Only So Much an Advisor Can Do…”

  1. Great points! Note it also says nothing about what her risk tolerance was or what guidelines she spoke to the advisor about. We can project our risk tolerance on her post hoc, but can't say what, if any, conversations they had before this happened.

  2. It really IS about risk tolerance AND a realistic timeline. But I'm guessing the advisor asked about her risk tolerance, and she gave an answer that assumed it was higher than the reality of her losses proved it to be. I can relate. I was 100% in stocks for the same reason she was–I was coming late to retirement savings and hoping to make up for lost time. I believed then and I believe now that I should have kept that allocation. BUT the truth is, on a day to day basis, the losses were scaring me–so much for my vaunted high risk tolerance. I am moving slowly a greater bond allocation–it's not as good for my longterm retirement plans but it greatly helps my ability to sleep!

  3. no no and no! if i see 40% gains, great. do nothing. if i see 7% losses… DO SOMETHING. you can get 40% losses ALL BY YOURSELF. if you have a financial advisor, you rely on them for financial advice. i lost nothing in this catastrophe (save national pride) and I would expect any professional advisor to have equal performance to my active management! If you take a 7% loss, those are the brakes. 20% loss? 40% loss? HIRE A MONKEY. if you think that's acceptable from a compensated funds manager, then i think you're crazy.

  4. More excuse making for financial advisors. Let's face it. Most advisors are stock crazy. They believe in the put in the market no matter what mantra because even if it goes down, it will always come back. Financial advisors are salesmen. That's how they make their living. They are terrible at actual advice because they really do not know any more than their customers when it comes right down to it which might be a good excuse for "their is only so much an advisor can do…" but it is a poor excuse.

  5. Retired,

    I AM NOT making excuses. I'm only trying to illustrate the complexities involved in advising people on investing.

    Can you refute the points I made in the post?

    People always want the highest return and then they get upset when they find out that the highest-returning asset class is usually the most volatile.

  6. This was not that complex. She was in her 50s and he put her basically 100% in the market as evidenced by her loss of 40%. Just terrible advice for someone so near retirement with valuations that no one could consider a bargain at the time. The guy just didn't know what he was doing.

    Your point about asset allocation was fair. But this woman clearly did not have a proper allocation for someone her age.

  7. Let me begin by stating I am a fee-only planner with a CFP (and soon a masters in personal financial planning). But, even though I am in the industry, I agree with Retiredat40 quite a bit – not entirely. He is right that most brokers don't know much more than their clients. All they have to do is pass a series 7 which teaches how to buy/sell various instruments. It doesn't teach anything about asset correlation, portfolio building, tax planning, or estate planning. Once they past the test, they are pushed to sell whatever the hot product is. It could be a stock or bond where the investment bank is raising cash for a company or a mutual fund/annuity that is offering the brokerage a higher commission that month. People need to look for planners who act as a fiduciary, which you won't find at the big brokerage houses. This isnt' to say all of those folks are competent or well schooled in financial topics, but it does provide some assurance that the planner has a legal obligation to put your interests first. This is very important.

    I also agree with Retiredat40 in that this broker had way too much equities in the account. If she was only a few years from retirement, then there is no reason to have an all equity portfolio even if the person seems to be a risk taker. I abide by two general rules. I never get much more aggressive than the client's risk tolerance. The main reason is the client won't be able to handle a big loss if they have a low tolerance. I will tell them that they need to save more or work longer. Even if the person has a high risk tolerance, I may get substantially more conservative in their portfolio if they don't need to take the risk in their portfolio to meet their goals or if they are close to a goal (retirement or college).

    This woman should fire this guy. While no one can control what the market does, an advisor should be able to build a portfolio to meet her needs. And someone looking to retire early should not have an aggressive portfolio.

  8. JLP, sorry you're getting some (currently abundant) populist anger from this posting.

    I agree with you. However, people have lost a lot of money and will largely look at things from their own perspective in a state of fear and anger. Maybe she had a bad advisor who led her to believe (or let her believe) that he could control returns, or maybe she didn't listen if he told her he can't…

    We don't know the full story, and Kiplinger's gets paid to sell advertisements, not help people reach their goals as best they can.

  9. I am still looking for a financial adviser that would not put a 20 year old into 100% (or even 80%) stocks.

    Please tell me why someone who has 45+ years of savings ahead of them needs to take on ANY risks at all (above an inflation hedge)?

    Yet 99% of FAs would not blink an eye to put a 20 year old into an 80-100% stock allocation.

    This reminds me of a little saying a friend of mine came up with: "make sure you have the potatoes before you start looking for the gravy". Sounds like this woman was looking for gravy and she doesn't have (any more at least) the potatoes…

Comments are closed.