Your investments: The cost of doing nothing

When working with a financial adviser, it is much more efficient if the adviser can see all of his client’s holdings.

By AARON KATSMAN
New shekel notes 370 (photo credit: Courtesy Bank of Israel)
New shekel notes 370
(photo credit: Courtesy Bank of Israel)
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 doesn’t earn a lot but are financially well off from investments, 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 they have handled their investments themselves without impressive results.Investigate expenses
When asked how much they are spending on a monthly basis, the couple gave a total of around NIS 20,000. Based on experience, unless a couple actually keeps track of expenses, I have learned not to trust what they estimate. Lo and behold, after further investigation, it turned out to be double their original estimation! 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 they 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 they had no diversification and they had paid little attention to making their investments more tax efficient. After reviewing their situation, I made some general recommendations. Then they asked what the next step should be.Consolidation
My suggestion was to consolidate all of the 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 general advice but keeping the other accounts spread out all over the place.
They disagreed. They said they felt they were doing fine managing their own money, 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 preferred to take a one-time consultation before continuing to manage their own accounts.
Performance cost
This was a classic case of cutting off your nose to spite your face. They failed to grasp that while working with a financial adviser meant that they would have to spend some money, they would be able to achieve the goals they had outlined. It was very clear they were unable to manage their own finances efficiently, and an adviser would help them get organized and allow them to meet their goals.
Statistically, “do-it-yourself” investors tend to underperform the market, 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, the longterm cost could be substantial.A word to the wise
With all the free financial advice and information readily available, it becomes 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, more power to you.
However, ask yourself whether you really think your 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 fees. For most investors, that particular saving is only short-lived. The cost you may pay in underperformance and tax inefficiency could be far more.
The information contained in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.
aaron@lighthousecapital.co.il Aaron Katsman is a licensed financial adviser in Israel and the United States who helps people with US investment accounts. He is the author of the book Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.