Jake's View

It's a bit rich to expect too much of an adviser

PUBLISHED : Thursday, 22 August, 2013, 12:00am
UPDATED : Thursday, 22 August, 2013, 2:59am

A recent survey conducted by the CFA Institute and Edelman Investor Trust Study confirms that investors in a number of countries have lost trust in advisers.

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And water is wet and the Pope is Catholic and bears do it in the woods. Was I meant to be surprised by this news? The bigger question is why investors ever trusted advisers at all.

Here is a very simple question, the first you should ask when you are sitting across from an investment adviser: If this fellow is so smart, how comes he's not rich?

You can safely assume he is not rich.

If he were rich, he would probably be on a big yacht, somewhere off the coast of Tahiti perhaps, with the fishing lines out and a crew to satisfy all his wants.

We are not looking at a saintly priest here. This fellow is interested in money. That is why he has taken the job he holds.

But instead of being on that boat he sits in a windowless office at a time suited to your convenience, not his, trying to sell you, a total stranger, on his ability to make more money for you than you can make for yourself.

What the adviser cannot sell you is the future. It is as opaque to him as it is to you

He has clearly been through this pitch before and it must be growing a little tedious by now. Why should he want to do it if he were rich?

Scratch your head about this question as much as you care and you will inevitably come to the same conclusion: He cannot be rich.

And if he is not rich then he cannot really know much more about making money on financial markets than anyone else knows. Otherwise he would be rich, gone to Tahiti, and you would be meeting someone else.

The logic is inescapable and yet it entirely escapes almost everyone who ever consults an investment adviser.

The fact is that the expertise of an investment adviser lies with the nuts and bolts of the business.

He knows how to open an account for you, how to buy and sell securities, lodge them in your account, collect dividends and interest payments and maintain the books so that everything balances out as it should for your regular statement of account.

It is no mean service. Try do it yourself if you have had no training or experience.

But what he cannot sell you is the future.

It is as opaque to him as it is to you unless he has that best of all crystal balls, inside information, and is not observed using it.

He does not know where the share price of the stock he recommends will be next year. If he did know, thousands of others like him would also know and that share price would already be there today.

In fact, he probably pays the share price less attention than he should.

He is more concerned with selling you a "good" stock as this is also how you probably look at investments.

The difficulty, however, is that "good" stocks can be very bad indeed if they are overpriced, no matter how good the company or its prospects, while "bad" stocks can be very good indeed if underpriced.

On balance, therefore, any given investment adviser's advice may not be as good as just picking stocks at random. It gets worse if he is under pressure from his boss to sell you deals that the boss has done and wants to get off his books, worse yet by the time he has deducted the fee for his services.

Investment advisers thus generally want you to buy investments that you cannot easily measure against any benchmarks but theirs and that they find easy to administer, which tends to mean funds and funds of funds rather than individual stocks and bonds.

But why blame them when it is you who have asked them to do what they cannot do?

If there is any loss of trust here then blame the person in whom you first lost trust, yourself. You wouldn't have gone to an investment adviser otherwise.

There is no escaping risk and uncertainty in investment. Ignorant as you may think yourself, the best person to decide where to put your money is still always you yourself.