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Confessions of a Fiduciary: Case Studies of Real Investors

Updated: Jul 13, 2023



Transcript below:


I've been an ongoing contributor to various news outlets for some time now and that's given me the opportunity to comment on a variety of different reader questions, concerns and complaints.


In this video, I'm going to share three different case studies of real investors with real problems and elaborate further on my thoughts as a fiduciary for each. Let's get into it.


Case #1


"I lost over 21% in 2022.’ I’m 72, retired, and have worked with my financial adviser for six years. I know markets are down, but this massive loss is worrying. Shouldn’t my adviser have had a plan to manage risk at my age?"


The simple answer, yes! And it's likely they did have a plan but failed to communicate it to this client effectively.


They also failed to communicate the fact bonds lost nearly as much as stocks in 2022, nor did they explain the reasons why. So even a moderately conservative portfolio could have seen significant losses in last year.


This all leads me to believe that the advisor isn't meeting or communicating with this investor on an ongoing basis.


An annual touch-base check-in phone call may have eased their concerns, assuming of course there was a "plan" in place and the investment strategy appropriately matched the risk tolerance.


A big part of our job as advisors is to communicate.

It's not enough to just help our clients achieve their financial goals or manage their investments. A successful advisor/client relationship is built on the foundation of trust and open communication.


When communication breaks down, so does trust. And once trust is gone, so is the client.


Case #2


"It has been a nearly continuous plunge. My accounts are down 13% this year, but my financial adviser hasn’t made a single adjustment — and is still taking his 1%. Do I even need him anymore?"


Sometimes, there is no adjustment needed.


It's natural for people to want to take action when there's a perceived problem. If we hear our car rattling, we take it to the shop to get fixed. When our drain is clogged, we go to the store and buy Drano. But if our investment accounts are down, the solution doesn't always involve an "adjustment" to the portfolio.


Unless you're looking to tax-loss harvest, or your investment weightings are outside an established level requiring you to rebalance back to your objective, it may not make sense to adjust your portfolio simply out of fear. This can lead to bad financial habits down the road like market-timing that will most certainly hinder your long-term performance.


Instead, the adjustment in this case could have been in the form of curbing the emotions of a worried client, or reiterating the objective of a long-term investment.


What is sounds like to me is that this client is looking for their advisor to make some kind of change to the investment strategy to prevent further losses. This is a prime example of loss aversion which states that investors gain more satisfaction from avoiding losses than they do realizing gains.


If that's true, there are a few problems I see.


For one, there doesn't appear to be any communication, similar to the issue addressed in the first case. If maintaining the status quo is indeed the optimal course of action, the advisor should have reached out and addressed this with their client.


The second problem seems to be a lack of service. If advisors are charging 1% of a client's investments, they better be doing a lot more than just managing their portfolio.


The market for financial advice has changed drastically over the years. Fees have been compressed and services enhanced. Now, a 1% fee isn't unreasonable, but better include additional, value-added services such as financial/retirement planning, tax prep & planning, estate planning, social security maximization, etc.


Case #3


‘I finally woke up to reality.’ I’ve been paying a percentage of my investments to a financial adviser for years now, but I don’t think it’s worth it. Is a 1% fee really fair?


This sort of plays into what I commented on in the previous case.


The real question should be" "What am I getting for paying a 1% fee to my advisor?"


I'd wager this client is only getting investment management services which would make my answer simple: "No, the 1% fee isn't really fair."


Roboadvisors entered the market several years ago as an algorithm-based portfolio management service for cost-conscious clients looking to have their investments managed.


The average fee for a roboadvisor ranges between .28% and .89% of assets under management. Let's split the difference, round down and say the going rate for investment management only services is .50%.


If you assume a human advisor will, over time, generate similar returns as a roboadvisor, then a 1% fee for only managing investments is double the cost of a comparable service! Now, there is a benefit to having someone you can call or meet with, especially during tough markets like in 2022.


In defense of the advisor, he or she could very well be offering additional financial services to this client, though no real or perceived value is being delivered. It could simply be a mismatch between what the client wants/expects and what the advisor is offering. It's like shopping for a weedwacker and having the salesperson sell you on a high-powered lawnmower.


Some investors just want peace of mind and confidence that their money will last in retirement. Some need help with every aspect of their financial lives and want to have a human advisor or team of advisors to meet with or be able to call when a problem arises. Others feel comfortable going it alone and wouldn't be a good fit for the advisor in this case, or any advisor for that matter.


Thanks as always for watching our videos. If you're interested in staying up to date with our market and financial commentary, please hit that subscribe button, check out our blog at oneupfinancial.com/blog, or follow us on LinkedIn and Facebook.

Thanks again, and we'll see ya in the next one.


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