Fiduciary: An individual in whom another has placed the utmost trust and confidence to manage and protect property or money. The relationship wherein one person has an obligation to act for another’s benefit.– thefreedictionary
I am a fiduciary. As are my colleagues at Exchange Capital Management. What does that mean? It means a lot of things, but mostly it requires that I place the needs of clients ahead of myself. Shocking isn’t it? That in a business designed to serve the financial planning needs of others we somehow need to be reminded that our clients come first. While proud to say that the fiduciary commitment at Exchange Capital Management is imbedded in the DNA of our firm, this isn’t always the case elsewhere. But I’ll save that conversation for another day. Today I’d like to show you how you can save money by not hiring an investment advisor…an exercise that’s clearly not in my best interest.
What professional investment advisors are trained to do isn’t magic. Nor is it terribly complex. But it does take skill, time, experience, and an even-keeled constitution to be successful. So, if through honest self-assessment you can reply affirmatively to the 4 requirements outlined below, then you’re in a good position to self-manage your investment portfolio. (Caution: There is far too much at stake to accept mediocrity in any of these 4 categories.)
Requirement 1: Knowledge/Experience
The question isn’t can you do it yourself. The real question is can you do it well? Real-world education is hard, often achieved at great expense. There is little substitute for the knowledge an independent advisor earns over the course of multiple market cycles, with different types of clients, each with their own unique needs and circumstances. Beyond the number of years as a practitioner in the industry, and the inevitable battle scars collected along the way, designations such as Certified Financial Planner (CFP) or Chartered Financial Analyst (CFA) further indicate levels of knowledge and experience that provide significant value.
Requirement 2: Desire/Time
If you don’t enjoy gardening, you’re probably not interested in becoming a master gardener. But even if you did earn that designation, most of your plants would perish if your heart wasn’t all-in on gardening. The same holds true with your financial affairs. Does the on-going management of your investment portfolio genuinely interest you? If it does, do the tactical metrics you’re measuring each day tie back appropriately to your household strategic financial plan? Alternately, would hiring a competent professional allow you to spend your time—the most precious asset in your portfolio--doing what you love, or at least what you’re really good at?
Requirement 3: Discipline/Fortitude
This one is tough. Really tough. The question you must answer affirmatively is: Do I have the discipline to make long-term investment decisions when the anxiety associated with short-term stock market chaos is triggering the wealth-destroying fear/greed emotion? Hubris says yes. But the empirical evidence says no.
In its 2018 annual report on investor behavior, research firm Dalbar examined the behaviors (timing of purchases and sales) and outcomes of the average equity mutual fund investor. The findings are astounding. Specifically, for the 10 years ending December 31, 2017, the annualized return for the S&P 500 stock index was 8.50 percent while the average equity mutual fund investor earned only 4.88 percent, a gap of 3.62 percentage points. Yup, that’s right, more than 40 percent of what the stock market had to offer was frittered away by the typical stock market investor.
While it is easy to understand at an abstract level why most investors tend to fail (gleefully buy high, sell low in a panic), the powerful factors that produce failure are less obvious. Although manifold, lack of discipline and fortitude in the presence of chaos can put any of us at a significant disadvantage against that mysterious, irrational thing called the ‘stock market'.
Requirement 4: Backup Plan
So far so good? You’ve got hard-won knowledge and a few market cycles under your belt. You truly enjoy the portfolio management and financial planning process and can commit the time required to stay current. You’ve tested yourself honestly and found that you’re squarely in the small minority who aren’t considered victims in the Dalbar study. Congratulations! You don’t need to hire an investment advisor! Or do you?
This final hurdle isn’t about you or your skill set. In fact, it’s not about you at all. It’s about what happens if there is no you. And if there is no you, then who? Confidence in all of the above isn’t enough to ensure a favorable outcome for your spouse, your children or your heirs. Many overlook, and overestimate, the financial aptitude of whomever is “next up” in the event they’re no longer at the helm. Death, disability, or incapacity comes for all of us eventually. Prudence dictates an honest analysis of capable contingencies.
Fiduciary Commitment Begins with You
Money is hard-earned. Very often we work an entire lifetime to earn and save in order to provide for a secure retirement for ourselves and our family. And as we build real wealth during the final “wheels down” years of our working career, fiscal responsibility demands that we challenge ourselves around the value proposition offered by an investment professional. The rationale for seeking (or not seeking) financial advice is best accomplished not by beginning with an evaluation of the skills and experience of a prospective financial advisor but instead, investors should first strive for an honest understanding of themselves, their strengths, weaknesses, interests and surrounding support system.
After all, that’s what being a fiduciary is all about.
Kevin McVeigh, CFA is a Managing Director and Partner at Exchange Capital Management, a fee-only, fiduciary financial planning firm. The opinions expressed in this article are his own.