Will You Walk Away From A Fool His Money?

August 21, 2011 9:35 AM

Is it self serving for investment companies and fee based advisors to advocate for not selling during a financial crisis?

The current financial debacle is the fourth one in my 12 years of trying to build a retirement fund. I sold some stuff during the .com crisis and was just coming back when 9/11 hit. Each time I appear to be getting back to even, along comes another crisis and my equity drops 25 or 30%. I am now with a fee based advisor whom I trust, who has totally balanced my portfolio which I interpret as "I won't lose as much this time." Do advisors make more money when you don't sell off in a crisis? Is there real data to back their assertions that selling or changing asset categories in a crisis makes things worse?

posted by Xurando to Work & Money (16 answers total)

Yes there's real data to back their assertions. (It doesn't mean they're right about anything else, as fee-based investing is usually a losing game, but that's a story for another day.) Go read just about any collection of data on the Internet. Start at The Motley Fool or some place similar. Stop trying to time the market; it's a losing game.
posted by introp at 9:39 AM on August 21, 2011 [1 favorite]

Since the point of investing is "buy low, sell high" selling during a downturn is, you know, counter to the investment strategy. Sit. Wait. It will come back. It always has.
posted by DarlingBri at 9:43 AM on August 21, 2011 [3 favorites]

Investment companies and advisors earn money when you execute transactions (buying or selling shares). If they're telling you not to sell shares during market dips they're not acting in their interest.
posted by dfriedman at 9:43 AM on August 21, 2011 [2 favorites]

It makes sense that you would want to cut your losses, but there's a reason that "buy low, sell high" is an adage. This is a terrible time for the market, but if handled properly, it could be a great opportunity to buy when stocks are at their cheapest.
posted by Gilbert at 9:43 AM on August 21, 2011 [2 favorites]

If your advisor charges a wrap fee (1% of your portfolio etc.), he does not make money from switching you into different investments, and his incentive is purely to keep your portfolio worth as much as possible so he makes as much as possible. 1% of 1,000,000 = $10k per year, but if your investments drop 20% he makes only $8k year year.

If he charges an hourly fee to work on your portfolio as some do, then he has no financial interest in the success or failure of your portfolio and only stands or gain or lose his reputation as an advisor. Almost every advisor who charges hourly fees is principled and practically an altruist compared to what he could be making, so I wouldn't worry if that's the nature of your relationship with your advisor.
posted by michaelh at 9:44 AM on August 21, 2011

Response by poster: I have a 1% advisor, whom I trust. But, in the back of my mind is a little voice that says "they are still making money while I suffer. Am I better off suffering alone and not paying 1% to suffer?"
posted by Xurando at 10:20 AM on August 21, 2011

Well, that is a separate question. An advisor essentially provides two services: superior returns and peace of mind. Superior return is easy to measure since the excess performance on the portfolio simply needs to exceed the 1% fee to make the fee worthwhile. Peace of mind is much more subjective and is simultaneously why *good* financial advisors are worth every penny and also how they scare you into never leaving them...

Based on what you've said I think you are better off financially listening to this guy than doing it yourself, but there may be another advisor or perhaps a friend/relative who might be a better fit for you.
posted by michaelh at 10:27 AM on August 21, 2011 [1 favorite]

If your natural instinct is to sell in a downturn, they're probably saving you lots of money. You can probably to do better than 1% for a generic retirement portfolio. A balanced portfolio does not guarantee that you won't "lose" much face-value, since component A can skyrocket during a bubble and component B is not assured of making that up for any combination of A and B. Balanced portfolios allow you to extract money without losing a ton should you need it; they are unlikely to all be substantially down when you need to cash out a bit.
posted by a robot made out of meat at 10:41 AM on August 21, 2011

Yours is the usual reaction: stocks are falling, so sell. The smart investor: stocks are falling, I'm buying.
posted by megatherium at 11:04 AM on August 21, 2011 [2 favorites]

If your portfolio is mostly mutual funds, then you should absolutely buy and hold. The managers of the mutual funds are, for the most part, doing all the sweating about buying low and selling high. That's what a mutual fund is: a way to let someone else do the trading for you.

If you have raw stocks and bonds, you'll have to do more trading. But even then, you have to balance the panic with reality. Do you own good companies that you have confidence will continue to perform well? Keep them. Buy more when the stock is low.

Like for instance, right now people are pulling money out of the stock market and putting it into gold and treasuries. This is probably a good time for the prudent investor with a balanced portfolio to be selling gold and treasuries, and buying stocks that are currently cheap. (Cheap meaning their price is low compared to what you expect it should be.)
posted by gjc at 11:10 AM on August 21, 2011

Response by poster: I guess my question has morphed into "How do you evaluate the performance of a 1% advisor in a losing market?"
posted by Xurando at 11:42 AM on August 21, 2011

Whether you're getting 1% worth or not depends on a lot of factors. How much is 1% vs some other fee structure (per-hour, %growth vs index)? What is the goal of your portfolio? Do you have the nerves to do it yourself? Most people can get away with one of the pre-made portfolios at a large firm like fidelity or vanguard, but they don't know exactly what your goals and time horizons are.
posted by a robot made out of meat at 12:11 PM on August 21, 2011

You should ask your advisor.

I'm not kidding. You are paying him to give you advice. Approach him with a sense of humor about your question but then really listen. Ultimately, you are asking him to help you understand the nature of your investment risk and this may lead to a productive conversation about your goals and needs and longterm planning.

I recently engaged the services of an accountant for the first time. At the tail end of a long meeting, I asked him, what questions am I not asking that need to be answered. We all laughed and then he pointed out a few things that were outside of our main discussion but really valuable.
posted by amanda at 12:13 PM on August 21, 2011

Advisors are almost never ever worth it. Go look at aggregate data and compare, over the span of many years:
1. their returns minus fees
2. broad market indices
If you find one that can regularly beat the market I'd be very surprised. Why? Because if they could regularly beat the market they'd be incredibly rich from investing and not working away as a little old investment advisor.

If you can act rationally and follow instructions you'll nearly always get a better return on average than an advisor. The times you won't are random (or you happened to hire Warren Buffet). If you can't act rationally, and you've admitted already that perhaps you can't, well then an investment advisor might save you from yourself and earn his/her keep.
posted by introp at 3:46 PM on August 21, 2011

How do you evaluate the performance of a 1% advisor in a losing market?

You said you got a more balanced portfolio from them, so compare your portfolio to an index like the S&P 500. Did you do better or worse? Did you do 1% better?
posted by smackfu at 6:08 AM on August 23, 2011

I am usually against paying for financial managers unless you have a ton of cash and need to worry about complicated estate planning for tax purposes, or other complex things like that. (Instead I think almost everyone would do better to split their money between 3 or 4 low fee index tracking ETFS: bonds, us large cap, us small cap, international equity)


That said for you it sounds like you advisor is giving you good advice and stopping you from making bad decisions. Withdrawing your money now (or after the last crash) would have hurt you more than the 1% fee. Not having a balanced portfolio would hurt you more than the 1% fee.

Now if you think you can convince yourself to make consistent contributions to low fee index tracking funds, and never ever try to time the market, and you are willing to put in the effort to rebalance your portfolio to your target allocation each year (and not ever try to rebalance to try to pick "winners" between those funds), THEN I'd recommend savings yourself the 1%.
posted by vegetableagony at 9:17 PM on August 31, 2011