There are few people, whether individual investors or professionals in the field, who make investment decisions entirely on their own.
Those working in the investment business have a wide variety of resources that they can tap. In today’s world of ubiquitous information, the same can be true for individual investors, although many rely heavily on one source of information, their personal investment adviser. No matter what type of investor you are, understanding the nature of the person giving you advice is very important.
First off, is someone an adviser or an advisor? That’s an easy one: There’s no difference. Regulators tend to use the former spelling, and asset managers most often use the latter, but it’s a matter of personal preference. (In fact, when I submit articles to this website, the word is spelled advisor because that’s what I use. The copy editors change it to adviser because that’s what they use.)
Although that distinction doesn’t matter, whether the person providing advice is subject to a fiduciary standard of care does. A battle continues over whether there will be a consistent standard for all those who provide advice. In the meantime, you should know the difference between the fiduciary standard and the suitability standard (an article by Carl Richards provides the basics) and understand whether your adviser is governed by one or the other. The kind of advice the person gives will depend upon the rules under which he or she operates.
That issue has been discussed widely. Less well examined are other characteristics of an adviser that are important.
I often describe those who provide advice as being on a spectrum, with “relationship person” on one end and “investment person” on the other. While no one can be fully described by a position on that spectrum, it is a remarkably good place to start in assessing an adviser. There is no right answer as to where advisers ought to be on the spectrum, but their position will affect the nature of the advice you receive. So, your goal should be to find an adviser (or advisers) with the right mix of attributes to help you.
On the relationship end of the spectrum are those whose greatest skill is personal interaction. As with many other qualities, it can be used for good or for bad. Empathy is one thing, but the false empathy of salesmanship when someone’s financial future is on the line is quite another.
There are many outstanding financial professionals who are “relationship managers” (to use an industry term). But they are primarily communicators of information rather than investment experts themselves. Therefore, they rely on others for that expertise. So, when that type of financial adviser recommends something, it often means that he or she has packaged someone else’s idea in a way that is easy for you to understand.
A good relationship manager is really more of a behavior manager than anything else, helping you to make sound decisions and keeping you away from destructive behavior. Too often, though, that help can amount to nothing more than a simple urging that you “stay the course,” which is not always the best advice. And it is worth remembering that a relationship manager is probably less likely to have insight into how the investment world is evolving.
On the other end of the spectrum are those immersed in the investments themselves. Not surprisingly, most people who fall into that category are introverts. You shouldn’t look to them for empathy. They are focused on the investment side of the question, thinking that if they find answers there, you will benefit.
Therefore, it might seem like they are in their own world sometimes, and they are most effective when there is an intermediary who can communicate their ideas effectively.
Wouldn’t it be nice if an adviser had the best of both sides, landing somewhere in the middle of that spectrum and avoiding the negative aspects of either end? Yes, of course, that would be great. It’s just that those people are very hard to find.
Another dimension that should be considered is how tethered an adviser is to the current investment orthodoxy—a very hard thing to judge. It is important because modern finance continues to evolve, and you don’t want to be looking at today’s world (to say nothing of tomorrow’s) through yesterday’s glasses. One way to explore this issue is to have a discussion with your adviser about your respective investment beliefs.
Lost in many interactions with advisers is the fact that saving is the key to financial security. Therefore, individuals should be focused more on what they can control—spending and saving—than on what they can’t, such as investment returns. Yet advisers often base their recommendations on specious concepts, for example, long-term historical returns, that can result in misplaced expectations.
The truth is that the markets will play out over your lifetime in a unique pattern that can’t be foretold. Advisers, whether at the relationship end or the investment end of the spectrum, have a vested interest in conveying their enthusiasm about the power of markets. You should value more highly those who eschew the pretty charts in favor of some tough talk about the fact that the heavy lifting needs to come from your own willingness to save. If the investment returns show up, great, but don’t rely on them.
One last question: How many advisers should you have? The answer depends on your situation, but one is too few. You should at least get periodic second opinions from someone else (and not someone who is just out to grab your business). We all have strengths and weaknesses, brilliant moments, and blind spots. Your adviser does too. Understanding what your adviser’s strengths and weaknesses are will give you the best chance of navigating the confusing world of investment advice.
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Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.