Overcoming the desire to make decisions based on fear and greed is the most difficult aspect of investing. What looks like a blip on a long-term chart is only too real when investors are faced with declining markets day after day. 

An advisor can play an important role in helping investors stay the course. Transforming that hodge-podge of market lore and old wives’ tales into a program that ties investing to investment planning that links security selection to a portfolio mandate. 

Providing second opinions during rough seas, helping investors steer away from the myths, fallacies, and errors that have become part of the folklore of investing. All of which were neatly summed up by the American Humorist Will Rogers, whose advice on investing was simplicity itself: “Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don't go up, don’t buy it.”

That investments are made to earn a profit is reasonable. But making an investment with little of no thought as to how it fits within your personal financial circumstances is akin to investing in a vacuum. And “vacuum block” can lead individuals down a road to speculative excesses and fear mongering. 

To avoid vacuum block, investors should establish reasonable long-term performance objectives within the context of their ability to tolerate risk. Quantifying risk is the most difficult decision investors make, much like the decision high school graduates have to make about which university to attend and what courses to take. Most investors simply avoid it, looking instead at the return potential of an investment rather than the risk adjusted return potential. Advisors can play a significant role in framing the role of risk and then quantifying your risk tolerance levels, before making investment decisions. All developed within the framework of risk adjusted returns within a portfolio. 

If investors can address these issues, they are more likely to have regular financial check-ups. And I don’t mean making small changes to the portfolio on a daily basis, or scanning the newspapers for the most recent stock and mutual fund quotes. I mean engaging in a serious evaluation at set intervals, say annually, semi-annually or quarterly, and most importantly if personal circumstances change. In other words, often enough to keep your fingers on the pulse of the portfolio to maintain a level of comfort that over the long term, the plan is moving in the right direction, achieving for the investor what it was designed to achieve.

The Role of the Advisor

If we accept the notion that investors need to plan, then we also have to accept the position that the role of the advisor must be clearly defined. Make no mistake, in the relationship business, problem number one is in how advisors define their role. And that role might vary depending on where you sit in the financial services industry. 

Investment counselors and portfolio managers (ICPM), for example, make discretionary decisions on behalf of clients. And while those decisions are not always right, there is no baggage accompanying the decisions. The only remuneration the ICPM receives comes from the client, and it usually is based on a percentage of assets under management. 

What we find when reading interviews in the print media or listening to commentary in the broadcast media is that ICPMs tend to focus on the merits of individual stocks. In some cases, they position their views on a macro basis, by providing overviews of the economy and what impact that will have on specific sectors or individual stocks. Nothing wrong with this, but what the ICPMs are really doing is promoting a philosophy. The problem is that most investors don’t understand the concept of investment philosophy, and end up where they started -- in fruitless discussions about the merits of specific securities. 

Similarly, stockbrokers (also known as Registered Representatives, Investment Executives) tend to focus on the investment merits of particular stocks or bonds. They will tell you why this stock or that bond is a good investment, but don’t always shed light on how it fits with an investor’s long term financial objectives and risk tolerances. 

Interestingly, there has been a push in the brokerage industry for brokers to focus on the collection of assets. That has lead many to promote in-house wrap program, where all of the management expertise and costs are wrapped into a single product. Wrap programs can be expensive, but they are at least moving in the right direction by getting the investor to look at a portfolio approach. 

Financial Planners usually provide tax advice and financial blueprints. However, most lack any real investment expertise. They understand the role of an investment plan but have very little experience in building a portfolio to meet that plan or, more specifically, in reporting results to clients in a meaningful way -- reports that help clients understand where they are, where they are going, and how the portfolio is helping them achieve that goal. Some Financial Planners add investment expertise to their practice by partnering with an investment specialist, either an ICPM or a broker. 

Visit your local bank and you can expect to find advice on Guaranteed Investment Certificates, Registered Retirement Savings Plans, or how to get a loan at three points above prime. But you are not likely to find a branch manager who is up to speed on all types of investments. They tend to move you to another section that deals with the issues you raise. The advantage with having everything in one place is compelling. The drawback, is that advisors inside the banks tend to operate inside a revolving door. Visit the same bank branch six months later, and you are likely to find another advisor in charge. Hardly how one would define a long term relationship.

Having said that, I am not suggesting that financial planners are better than stockbrokers or that banks cannot provide useful advice. In fact there probably is a role for all three, in the sense that they provide conduits to specific investment opportunities. But longer term, I think the advisors’ real value is helping investors understand what role specific investments play within the broader portfolio, and more importantly, what role the portfolio plays in a long-term investment plan. Advisors who fulfill that role will, in my opinion, end up with the most successful practices.