Money cash Shekels currency 521.
(photo credit: Reuters)
Imagine the following situation: I recently met with a couple who wanted to know
if they had enough money for both of them to retire within the next 10 years, as
well as marry off their three daughters and provide them with considerable
wedding gifts. This couple is already financially well off, and they are
expecting to receive a very large inheritance within the next 15 years. Their
daughters are approaching marriageable age, and they would prefer to rely on
their current assets, rather than basing plans on a potential
The couple also said they do not like dealing with numbers
and that they have handled their investments themselves without impressive
When asked how much they are spending on a
monthly basis, the couple gave a total of about $6,000 (NIS 23,000). Eventually,
it emerged that they were actually spending much more than that. They explained
that they did not really keep track, but on further examination it turned out to
be double their original estimate.
The reason why they were able to spend
so much money even though they were not earning such a high sum was that they
were using income generated from their investments, as well as an annual gift
from their parents to supplement their earnings.Investments
couple owned funds in about seven or eight different investment accounts, they
didn’t really understand what they possessed. As “do-it-yourself” investors,
they had invested some of their money properly, but there was no diversification
and no attention had been paid to making the portfolio more tax efficient. When
I started to review their holdings and I told them where improvements could be
made, the couple then asked what the next step should be.Consolidation
My suggestion was to consolidate all of these different accounts into one place.
Consolidation makes it easier for the investor to understand what he owns and
gives him a much better overall picture of how to allocate his investments. In
addition, when working with a financial adviser, it is much more efficient if
the adviser can see all of his client’s holdings, as opposed to paying him for a
little basic advice but keeping the other accounts spread out all over the
The couple did not like this piece of advice. They said they felt
that they were doing well enough by managing their affairs themselves, even
though they had earlier said they hadn’t done too well from their investments.
They didn’t think it made financial sense to pay an adviser on an ongoing basis,
and they preferred to take a one-time consultation before continuing to manage
their own accounts.Performance cost
What this couple failed to grasp was
that while working with a financial adviser meant they would have to spend some
money on paying him, they would solve all of the problems they had outlined at
the beginning. It was very clear they were unable to manage their own finances
efficiently and that an adviser would help them get organized and meet their
Statistically, “do-it-yourself” investors tend to underperform the
market by about 4 percent a year, and they end up paying out high sums in
unnecessary taxes. Therefore, although it may seem cheaper for an investor to
handle his investments himself, he may find that over the long term he will cost
himself hundreds of thousands of dollars.A word to the wise
With all the
free financial advice and information readily available, it becomes very easy
for individuals to think they can create their own portfolios and manage them on
an ongoing basis. And for those who are truly able to do so, it may make sense.
However, we should ask ourselves whether we really think our understanding of
profitable portfolio allocation at a lower risk is equal to that of a
If the answer is no, find yourself an adviser as
soon as possible.
Don’t think you will be making money by saving a few
dollars in commission. For most investors, that particular saving is only
short-lived. The cost that you may pay in under-performance and tax inefficiency
could be far more.
firstname.lastname@example.org Aaron Katsman is a
licensed financial adviser in Israel and the United States who helps people with
US investment accounts.
Join Jerusalem Post Premium Plus now for just $5 and upgrade your experience with an ads-free website and exclusive content. Click here>>