Take commissions away, and false expertise disappears, too.
Don't let clients or journalists discount the value of your professional expertise. In a world where fans think nothing of a $10 million bonus for their favorite football player, it's ridiculous to suggest that investment experts offer little value.
In fact, this variation of the old do-it-yourself argument just doesn't hold water anymore. Journalists who say consumers should avoid advisors and select and manage their own investments are full of fear--fear that a consumer is easy prey for a trained salesperson. Unfortunately, this has real consequences for those of us who work as independent, fiduciary advisors. Our expertise has been devalued because so much of what consumers have received has been false expertise. For much of the financial services industry, expertise is just a ruse to sell products.
Think how commissions distort expertise: What if your medical doctor earned commissions from the medicines prescribed? What if doctors gave away free office calls, but kept half of the cost of each prescription? What if one antibiotic paid a higher commission than another? What if one hospital paid your doctor $1,000 cash for each admission, while a different one paid $500?
Investing doesn't have to be this way, either. Take the commissions away and the false expertise disappears, too. The professional now lives or dies by what he or she knows. False expertise won't survive in a competitive marketplace. Like an accountant or lawyer, bad reputations kill bad professionals.
Expertise is an overused word that almost lacks meaning today. Still, it's a very real concept, and necessary for investment success.
You'd not know it from the consumer press, but investing is extremely complex. There are thousands of choices, with variations of each. No one person can know everything that's necessary. So all of us, even professionals, rely on people with specialized knowledge.
Just think about some of the cross-discipline areas with impact on personal finance--accounting, tax, law, insurance, home and automobile loans, and banking, just to name a few. To be successful, we need more than just a smattering of knowledge in each of these areas. When a critical situation occurs, we may require substantial knowledge in one or more of these areas.
Consider the geometric progressions in personal finance. Take the subject of retirement planning, and consider some variables. A person's age, income, health, spouse's health, genetics, children, geographic location, and lifestyle are important. Add in the level of investment sophistication and risk tolerance and you've created a very complicated matrix for decision-making.
Education expenses? How old are the children or grandchildren? How are their grades? What field(s) are they likely to study? Public or private college? In state or away? Any other sources of college funding?
Ponder the complicated matrix for each of these goals. Clearly, no one can really do-it-themselves. Everyone needs additional help.
Another point is the depth and breadth of personal knowledge. In legal circles, a last will and testament provides a great example. In the course of our lives, most of us will encounter very few wills. A parent, maybe, or another older relative. We may eventually ask our family attorney to help us create one of our own. All told, our experience with these important legal instruments is a few brief encounters over the course of our entire life.
An attorney with any kind of estate planning practice has seen hundreds of wills, including ushering them through the complete probate process. They've witnessed family feuds, estate tax debacles and contested provisions. They have practical experience way beyond anything we've personally encountered.
That attorney brings those professional experiences to our legal documents. That's why expertise is important. Could we buy a "fill in the blank" last will and testament from the office supply store? Of course we could. Would it do what we want with the least amount of hassle and expense? That's a different story.
I remember a magazine article where the author bragged of having written his own will. He ranted against the high cost of lawyers (for clarification, I'm not an attorney), and professed that he'd saved hundreds of dollars. And the whole process worked just fine, according to him.
What he didn't say was that we'd not really know how well it works until after his death. For his family's sake, I hope he's right. I hope it flows effortlessly through the probate court and that no one contests the provisions. I hope they avoid estate tax snags and that everyone is comforted by the results. And, again for his family's sake, I hope they don't find out for a good long time.
Similar issues apply to investing. Even if a client knows a lot about investing, that knowledge is limited to one situation, or perhaps a few others. Essentially, it's one family during one timeframe with a single set of investment objectives.
I see this most often during bad markets. New clients visit our offices and recount their struggles. In most cases, earlier investment cycles have been very good to them. They learned (the hard way) that lessons taught during the good times aren't much help during bad.
A good advisor knows when to request outside advice or service. In any field, there are dozens of professionals to choose from. But that doesn't mean they have equal talent, capability or effort. A good advisor knows the strengths and weaknesses of each, and operates as a filter mechanism for clients. One sign of expertise is a willingness to bring outsiders to the team when necessary to accomplish objectives.
This willingness may include recommending local professionals such as attorneys, accountants or specialized insurance brokers. But it may also include institutional custodians (Schwab, TD Ameritrade, Fidelity) or specialized investment managers. It might include real estate managers, art specialists, appraisers or antique dealers. As we've already discussed, there are hundreds of variables for each client situation.
Good investment advisors see hundreds of family situations over several market cycles. They are involved in all aspects of client finances--retirement decisions, mortgage issues, portfolio allocations, cash flow challenges, kid's or grandkid's educational needs and more.
Don't let the naysayers--be they clients or journalists--discount the value of your professional expertise.
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