As a company, we avoid actively managed funds in favor of passive investing. We also discourage clients from chasing returns, timing the market and other “active” strategies. We feel that these strategies are more akin to gambling than investing. Yet, this begs the question: If we encourage a passive investment strategy, what exactly do we do and why are we worth it?
Interestingly enough, Vanguard published a study that quantified how, specifically an advisor like us may bring value to the table.
I think, and the Vanguard study agrees, that the most important thing we do is help keep our clients focused. We live in a loud world and talking heads can be hard to ignore. These pundits usually get even louder during extreme market crashes or bull runs, which is even more problematic. After all, just one bad decision during a market crash or rally could be catastrophic. While it is easy to assume emotions will not influence your investment decisions during a relatively steady time in the markets, a crash like the one that occurred in 2008-2009 can rattle anyone.
Furthermore, while we discourage active investing, we encourage active planning. We add value by helping people plan to reach their goals. This can take many forms. However, some of the more common strategies we help people with during the financial planning process include the following:
• Ensuring their investments are tax-efficient
• Helping plan to maximize Social Security benefits
• Helping plan legacies, through wills and trusts
• Investing to take advantage of tax-credits and deductions
• Decisions on debt, including mortgages
• Checking to make sure our clients are properly insured (note: we do not sell insurance but we consider it when helping our clients plan their futures)
So, in large, we disagree with the notion that it is only worth paying an advisor if he or she is actively trying to beat the market. The evidence proves the vast majority of active managers underperform the market. So, if you are paying your advisor for investment managely solely, he or she is most likely harming your investment returns. However, active planning brings value to the table.