Investors: Don’t cut off your nose to spite your face

Your Investments: Find yourself an adviser as soon as possible; don’t think you will be making money by saving a few dollars in commission.

By AARON KATSMAN
February 9, 2012 00:00
3 minute read.
Isreli currency.

Money cash Shekels currency 521. (photo credit: Reuters)

 
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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 inheritance.

The couple also said they do not like dealing with numbers and that they have handled their investments themselves without impressive results.

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Investigate expenses

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

Although the 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 place.


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 goals.

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 professional adviser.

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.

aaron@lighthousecapital.co.il


Aaron Katsman is a licensed financial adviser in Israel and the United States who helps people with US investment accounts.

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