A little knowledge goes a long way - opinion

Suddenly there is room to sit on the couch, and the TV is off as we have two children sitting and diligently studying for hours a day. 

A few days ago, while our 11th grade daughter was sitting at the dining room table studying maths, I made a comment about how happy I was to see her putting in so much effort. In response, I received what I think would qualify as a grunt. I then asked if she feels that she has gained knowledge from all her studying and she answered, “I’m tired!” 

While high-schoolers may not appreciate it, knowledge is power. As I mentioned a few months ago, multiple US brokerage firms sent out “we don’t want your business letters,” to clients living in Israel and other non-US domiciles. As such we have been very busy opening up new accounts. 

When I Zoom with a prospective client I ask a lot of questions so that their financial profile is clear in my mind, and then we can start speaking about short and long term goals and needs. More often than not an investor will tell me that they are very conservative in nature. 

After I examine their portfolios, they actually have growth-oriented portfolios, much to their surprise. I am not shaming all of their advisers. There is a group in Chicago that I have been working with, and kudos to them as their clients had portfolios spot on to their risk levels and the clients also understood exactly what they were investing in. 

Survey after survey reveals that most investors have no clue what they are investing in, how much risk they want to take, and what they are paying in fees. In addition, investors typically have no idea how aggressively or conservatively their money is being invested. I can attest to this lack of knowledge. 

I can’t tell you how often I sit with prospective clients who think they really understand what they own and how conservative their investments are. But on reviewing their statements, just like the above case, we often find a vast difference between what they think they have and the facts on the ground. 

For example, someone may say she is “a risk-free investor with a conservative portfolio,” and we find that her portfolio is solely invested in stocks, and during the course of the year this portfolio has moved up and down by over 25%.

I think both financial advisers and clients share the blame. Financial advisers have an obligation to explain investments to their clients and need to take the time necessary so that the client understands what they are investing in. 

Pathfinderplanning writes, “Our industry loves fancy words and jargon. We toss around investment terms like risk tolerance, asset allocation, beta, passive investing and other phrases because we think we sound smart. Maybe we are smart, but if clients don’t understand these things, then it makes us incomprehensible.”

On the other hand ultimate responsibility lies with the client. It is always worthwhile taking the time to understand where your money is being invested, and you should always ask questions until you are totally clear about what you are investing in.

When it comes to making investment decisions, don’t be blinded by the hopes of a high return. Rather, focus on the whole range of the investment’s characteristics. 

It is necessary to understand the cost, degree and nature of the risks, investment goals, performance history and any special fees associated with an investment before you decide to purchase it.

Never assume that an investment is governmentally insured, low risk, or guaranteed to deliver a certain return. Find out all the necessary information – and then make sure that you understand it properly. Then you can check it against your own goals and risk profile to see if the recommended type of investment is a good fit.

Remember: ignorance isn’t bliss. Know what investments you have and why you have them.