FMD Capital Management

Investment Advisors Aren’t Worth The Money

Written by David Fabian, April 19th, 2017

I had a conversation with a prospective client the other day who called me inquiring as to what we do.  I gave him the typical run down that we are a fee-only investment advisor specializing in ETF portfolios.  In other words, we provide discretionary management of client accounts using low-cost investment tools.

His response {paraphrasing}: “Mr. Fabian, I know a CFO of a big publicly traded company.  He told me they did a big study about the use of investment advisors and that they aren’t worth the 1% fee.  That all you need to do is buy ETFs to reduce the drag of expenses on your portfolio.  What do you have to say to that?”

I immediately agreed with him that many investors are quite successful managing their own portfolios using ETFs.  However, some can benefit from expertise in security selection, positioning, and behavioral choices that an experienced advisor can provide.

I then went on to ask him what ETFs he would buy if he was building his own portfolio right now.  He didn’t know a single ticker symbol.

I then asked hypothetically, if he were to buy today, would he have the fortitude to hold those funds through every market cycle.  He admitted that he would probably end up selling if the market fell to a certain point.

So, let’s recap:

  • You know you should own ETFs, but you don’t know which ones.
  • You want to go from 100% cash to 100% invested very near a market high.
  • You are likely going to sell those positions much lower than where you bought them.
  • And you don’t need an investment advisor….

The flaws in this strategy seem obvious.  However, it’s not all that uncommon for me to have this kind of conversation with investors.  They grasp at morsels like “ETFs are good” and “fees are bad”, which automatically equates investment advisors as an unneeded expense.  They may even be under the misguided notion that just buying any ETF is a coherent strategy all to itself.

There are many variables for unseasoned investors to overcome in selecting good funds, determining position sizes, deploying capital, and making reasonable changes over time.  That’s what you should be paying a management fee for.  Someone to help you make rational decisions in a sensible asset allocation that you can easily understand.

Suddenly that expense won’t seem so egregious.  It may even make you some money in the long run.

I hear back-stories all the time from people that buy a bunch of random ETFs near a market peak where everything seems easy.  Then ride them down 10% or 20% and sell them.  Then buy them back 20% or 30% higher.  They can’t figure out why they aren’t making any positive headway.  Furthermore, they tend to blame the tools (ETFs) rather than their own mistimed decisions.

Investment advisors ARE an unneeded expense if you know how to construct a cogent portfolio and can stick with it through thick and thin.  But the truth is that many people can’t.

The hardest part isn’t even the portfolio construction.  You can learn that easily through the abundance of free resources and education online.  The actual challenge is watching your real money fluctuate through every bull and bear market.

It’s avoiding the urge to get sucked in deeper near the highs.  It’s evading the temptation to sell everything near the lows.  It’s about sticking with a strategy that you are comfortable with even when it’s not working at that moment.

Finding an advisor that can make better, or less emotionally-driven decisions than you, is one of the most important aspects of how they earn their fee.  Having the discipline to approach the market through a calm and calculated lens can pay off abundantly over time.

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Like this article?  Read: 5 BIG Mistakes To Avoid When Choosing An Investment Advisor