Passive investing and the ease in which people can now find unbiased financial information has, in the eyes of some, made the investment advisor/investment planner unnecessary. This school of thought, of which Canadian Capitalist and Michael James are large supporters, argues that most people are better off planning their own portfolio by buying exchange-traded funds which track broad based indexes and ignoring the chattering of the financial industry. On a rational level, there is considerable merit in this belief. On an emotional level, I always believe that this school of thought is driven by a back-lash against the worse excesses of the financial industry. But I always make this observation- every financially successful person I know has a lot of advisors around them (financial, legal, accounting) so perhaps going it alone isn’t the best thing to do.

Having been a legal advisor for many years, and sat on both sides of the table as advisor and advisee, I am not sure the solution is to forgo an advisor but to find the right one and I believe that under-performance is not so much a result of the wrong product but the wrong advisor. I will try to give some insight having sat on the other side of the table as an advisor.

1. Find the advisor by framing the referral in its context. This is the process of how I found my advisor; I asked a close friend who I trusted and who is good with money who he used. Got an introduction. Found out whether his life goals were consistent with mine (he is a saver, takes care of his parents, is a good community guy). Hired him. Here’s the kicker- I do not think if I met him in another context, my advisor and I would be chums. Friends certainly. But I did not hire him for his company. But the key was that the referral source was from an existing client who is good with money (i.e. it wasn’t just a “call my buddy Gus” throw-away referral) and I hired him more on competence and his financial goals aligning with mine than pure compatibility (I am not dating the guy so it is not Investment Advisor eHarmony at work). My best clients were mostly people with similar life goals and not so much people I got along with best.
2. Don’t abdicate your authority to your advisor. I believe this is the root cause of most unhappiness with advisors. I had clients who would come in to see me and say “I have XYZ problem, please fix it!” with no accompanying instruction on what the client wanted as an ideal outcome. To a good advisor, this is an exercise in frustration. We have no idea what the client wants. To a bad advisor, this is an invitation to juice up their commissions with high-commission products. The best instructions for advisors are typically- here is what I want as an end goal, please map out how we get there and let me approve before we proceed knowing what the costs will be. What you want doesn’t have to be extremely specific; it can be as diverse as: I want good performance but don’t want to watch my portfolio every single day (passive investing) to I love playing the market (active investing) to I am nearing retirement and want to protect my savings (conservative). A good advisor can take those emotional responses and translate them to desired outcomes and put nuts and bolts to how you get there.
3. Remember why an advisor is there: to give you another perspective and to act as a stupidity brake. I often scratched my head when my clients would get mad at me for not agreeing with them. An advisor’s job is to give differing opinions so that the client can make a fully informed decision; a good advisor is not a yes man. A bad advisor will want to do things their way no matter what (see point #2 on abdicating your authority). An advisor also acts as your stupidity brake- she will talk you out of your flights of fancy or other strange ideas that do not align with your goals. I often find there is an unrealistic expectation that the advisor has some magic solution to all your life’s problems if you retain them. No one does. Avoid the one’s that sell you that. Hire an advisor for differing opinions and as your source of sober second thought.

I have an obvious and acknowledged bias that I believe everyone needs an advisor. The key is not to hire any old advisor but to hire  a good one and use them properly once you hired them. I have mentioned before my advisor gets a memo from me every year setting out my expectations (my long term goals are on the top and then my short-term goals on how we get there are on the bottom) and we work from there. The “what” are my thoughts. The “how” is his to figure out. It is certainly how I wanted to be treated when I gave advice.

As a completely unsolicited endorsement, Preet’s from Where Does All My Money Go  would be a good example of a solid advisor; he’s very passionate about what he does and he’s not pushing product in your face but ideas and thoughts to consider and, given our exchanges on the markets, he knows not one size fits all for everyone.

I am realistic enough to understand that not everyone needs an advisor. However, even if you are a ragging DIY investor, it may be helpful to hire an advisor on an annual basis and pay them an hourly fee to review your goals and portfolio.

As a programming note, tomorrow begins my mini entrepreneurship and personal finance series.