Why professional advisers best online trading and robo-advisers.

This post (it’s more like a rant) has been a long time coming.  The idea was inspired by the ridiculous (and expensive) ads you see bitching about the ‘high fees’ associated with investment advisers and mutual funds etc.


After spending big bucks on a difficult education plus certifications, joining a bank or investment firm with a costly infrastructure (check out what simply subscribing to Bloomberg – yes, founded by the democratic leadership contender – would cost you at home), the adviser (or portfolio manager) should manage your money as a volunteer? Tell me, have you considered telling your boss that you’re not worth the salary you’re earning and will do the work for free?  I don’t think so.

stampede over cliff bisonThe old adage ‘you get what you pay for’ applies just as certainly to your savings. I can’t count how many articles I’ve published, interviews I’ve done on radio and television, confirming what we know (and is largely ignored) about individual investor behavior – they will buy when they shouldn’t and sell when they shouldn’t.  There are literally thousands upon thousands of unfortunate folks buying into the stock market right now at all-time highs – doomed to be sorely grieved in a few months when the market tanks. It’s like our natural inclination is to follow everyone else even if it is over a cliff.

So if you can’t do it yourself, doesn’t that mean a computer could do it better?  This is where it gets tricky.  Take artificial intelligence which has been a ‘field’ since around the time I was born (look up the famous Dartmouth conference in Summer 1956).  We just don’t trust the machine.  Robots have crushed (i.e. killed) people in factories.  Machines are just not that ‘intelligent.’  I don’t know about you, but although I think it’s a marvel that Amazon (or Facebook or Netflix) has the ability to send me more ads about products I’ve already looked at, it is hardly what I’d call intelligent.  Imagine giving them blanket permission to buy on your behalf (using your credit card or PayPal) whatever products their computers think you should buy.  You just wouldn’t!

Many robo-advisers are founded and programmed by young people with no experience managing other people’s money at all.  Trust me, it takes a number of very harsh lessons to develop the skills and experience necessary to look after your best interests.

Past performance is no indication of future performance.  But we’re human and curious.  No matter the past performance, we’re comforted by the fact there is actually is past performance to see.  The robo-adviser platform pretty much guarantees (privacy issues, customized individual mixes of ETF’s or mutual funds) that you won’t see any past performance that you’d consider remotely relevant.

The reality is that wealth is not simple. A capable investment adviser/portfolio manager is worth every basis point (1/100th of a percent) in fees that you pay.  He or she (or ‘other’) will help make sure you or a computer don’t make the really BIG mistakes with your hard-earned money.  And yes, the quantum of information the adviser has access to is expensive and critical to making sound investment judgments.

Below is a chapter (not too long) from the book I published in 2011, A Maverick Investor’s Guidebook.

Wealth Management: Hunting for a Maverick

If you’d rather leave the job of managing money to professionals, honing your maverick skills will better equip you to find a suitable portfolio manager, whether they work in the wealth management division of a larger financial services company or is employed at or owns a boutique wealth management firm.

QuestionsAnswers          Larger firms are especially good at marketing their wares, and I would recommend once again that it is better to find the right portfolio manager than to just agree to hire the first one you see. Many portfolio managers are not good with people, so usually there will be a “client representative” that you will have to contend with first. Insist on meeting with at least one of the people that will actually be making investment decisions on your behalf. Ask questions in the same manner you would if you were interviewing a new investment adviser. For example, ask exactly how they handled themselves in a financial crisis.

The following is an excerpt from a note I sent out to clients. It might serve as a good example of what to look for:

Even though it is extremely difficult (perhaps impossible) to consistently predict market declines, there’s plenty of evidence to suggest you can do something about your circumstances once the proverbial poop hits the fan. Fund managers often respond differently depending upon depth of experience or temperament:
  • Some are no more experienced (or no smarter) than retail clients—they panic and sell at the bottom of markets.
  • Some proclaim a new respect for caution and hold more cash and bonds…after selling at the bottom.
  • Some say they’re cautious and secretly buy stuff, expecting a rebound (only a “little” dishonest, but this is not a business suited for even “a little” dishonesty).
  • Some boldly acknowledge they didn’t see the bear coming, apologize, and admit that they are buying cheap assets aggressively “near” the bottom (mavericks).

Asking tough questions will enable you to determine whether you’re talking to a fellow maverick or not. Don’t be afraid to sound stupid—it’s your money we’re talking about here and not your ego.

You may want to stay with the big firm you’re banking with for convenience or choose to find a smaller firm more specialized in managing money for individuals. It is much easier to learn about what motivates the professionals in a smaller wealth management boutique and discover whether or not their investment style is consistent with your own beliefs, and you will receive a far more customized level of service.

Heads up! When a firm’s performance presented to you seems too good to be true, it probably is. A prime example that received considerable attention was the case of Bernie Madoff.

In March 2009, Madoff pleaded guilty to eleven federal crimes and admitted to turning his wealth management business into a massive Ponzi scheme that defrauded thousands of investors out of billions of dollars. Madoff said he began the Ponzi scheme in the early ‘90s. However, federal investigators believe the fraud began as early as the ‘80s and that the investment operation may have never been legitimate.

Even small wealth management companies ordinarily have their performance numbers calculated and audited by third-party services. Make sure an independent third party is vetting any performance data you see. Although instances of fraud get volumes of press coverage, they are one in millions. It’s sort of like the criminal bikers, or one per-centers as they’re often called. In actuality, the percentage of criminal bikers to ordinary bike enthusiasts is far less than 1%.

Most boutique investment firms aren’t gifted marketers, and they rely heavily on word of mouth to get new clients. Ask friends, your accountant, or lawyer for referrals. There’s no harm calling and arranging to visit a few firms listed in the phone directory or on the Internet. You will know when you’ve found the right one—it will feel just like one biker meeting another biker. The following are some useful tips:

  • Never hire a wealth management firm based only on past performance.
  • Don’t complain about investment results; ask for an explanation.
  • Never second-guess a portfolio manager.
  • Pay the fees—sure hey hurt when performance is poor, but you won’t care at all when performance is good.
  • Be patient; good things don’t happen overnight or every day.
  • Most important, don’t pretend to be smarter than your portfolio manager(s); you’re not!

Consider an Investment Buffet

You may want to hire a capable wealth management company to look after the bulk of your savings, while choosing to dabble in mutual funds and/or the stock market with the rest. Provided you stick to your maverick investor principles, you will be successful.


About Mal Spooner

Malvin Spooner is a veteran money manager, former CEO of award-winning investment fund management boutique he founded. He authored A Maverick Investor's Guidebook which blends his experience touring across the heartland in the United States with valuable investing tips and stories. He has been quoted and published for many years in business journals, newspapers and has been featured on many television programs over his career. An avid motorcycle enthusiast, and known across Canada as a part-time musician performing rock ‘n’ roll for charity, Mal is known for his candour and non-traditional (‘maverick’) thinking when discussing financial markets. His previous book published by Insomniac Press — Resources Rock: How to Invest in the Next Global Boom in Natural Resources which he authored with Pamela Clark — predicted the resources boom back in early 2004.
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