When our great country was taking the shape of what it has become today, we had the Hatfield’s and the McCoy’s. In the investment world we have the stock-pickers and the disciplined passive investors. For transparency’s sake, I will disclose now that I fall into the latter group, aligned with the disciplined strategy. In my mind, deciding on an asset allocation (the mix of equities you have in your portfolio in relation to the fixed income you have) and sticking to that plan is going to get you to the long-term goals you have set for yourself sooner than constantly trying to guess the inefficiencies in the stock market and picking the next hot stock. We never hear about a stock picker that consistently out-performs the market over the length of their career, because quite frankly, I don’t think that person exists. Sure we have active mutual fund managers that outperform the market in certain years and maybe even for a couple of years, but to me that person just guessed right for a couple years in a row. If I flip a coin, I have an equal chance of the outcome being heads or tails. If I flip that coin three times and come up with heads all three times, how can that be explained? Am I an expert at flipping a coin and getting the outcome I want? Obviously not, I have just experienced a statistical anomaly using a very small sample size. If I flipped that same coin one thousand times, I’m going to guess I am going to get a pretty even balance of heads and tails outcomes. This is no different than the stock-picker that guesses right for a three-year period.
If there was someone out there that could accurately predict what the stock market was going to do, wouldn’t everyone have their money with that person? To take it a step further wouldn’t that expert stock picker just keep that knowledge to him or herself and profit immensely? Or be hired on by the US government to further our financial standing in the world by outperforming all other participants in the stock market? I just don’t think that person exists. A lot of times people fall victim to mistaking activity in an account for knowledge of the stock markets. And quite frankly, stock brokers love this mindset. Stock brokers are paid on a commission basis, therefore the more activity in your account, the more commissions they receive. With the way our media works today, access to information is basically instantaneous, and therefore any insight you could get into a stock has already been priced into the stock before you would even have time to act on it.
When it comes to fees, we are very open about how much we charge and disclose that information to you in a number of ways. This is another area where we differ from stock brokers, whose commissions are hidden in the purchase price of a security or mutual fund. When I hear from people that their stock broker is not making any money off of them, I question how that stock broker keeps the lights on and makes a living for themselves. If you had to go get your car fixed would you rather have the mechanic give you a bill for his services that you could review and then pay, or just give the mechanic access to your bank account and tell him to take out whatever he needs to finish the job? There are probably a few mechanics out there that might add a few services you really don’t need, if they had unlimited access to your account. It’s no different in the investment world, where a large faction of investors has no idea how much they are paying the person in charge of their money.
This brings me to how my advisory relationship works with investors. My first meeting with an investor is the most important, because at this point we come up with a plan to work toward your ultimate goals. Taking into account things such as, your age, your risk tolerance, how many years you have until you need to spend down your assets, what you plan on doing with the money, etc., we develop an asset allocation that is most likely to help you meet your goals, but also sleep at night. After this initial meeting, we start looking for ways to minimize expenses in your account, like managing trading costs, and looking for ways to improve asset allocation and diversification. We don’t work for commissions, so when our fee structure is given to the client, they know exactly what it is they will be paying for our services. Today, more than ever, transparency is the key to a good relationship between advisor and investor.