Do-It-Yourself Investing Vs Using A Financial Advisor

May 07
DIY Investing Vs Good Financial Advice

My rant about 'The Investment Guru from Canada'

This article is going to generate a lot of 'controversy', so here I go...

Just the other day, a long-time client of mine and a good friend called me up and said 'He wanted to meet me, and discuss a few things'.

I thought this was a normal request, so we met and started talking. He had just been to a 'Free Investment Seminar' organised by a "well-known investment guru" from Canada, who's apparently a big promoter of 'DIY (Do -it-yourself) Investing'.

There were three other speakers in this seminar, including one from a robo-advisory investment firm. Robo advisors are the new craze globally, where artificial intelligence and machine learning  "supposedly negate the need for a financial advisor".

This Canadian "investment guru" then started bashing all the 'expensive savings and investment options in Dubai', and started talking about the benefits and virtues of 'DIY investing', and 'ETFs (Exchanged traded funds that track global indices').

He also showed the effect of the costs involved when a financial advisor is used, and the savings when 'You do it yourself'.

The client was ready to stop / surrender all his existing savings plans, investments (at a loss), and put all his money into low-cost ETFs after listening to this investment guru, and I said (in my mind of course) - 'Here we go again'...

I had heard this same thing many times from various people I met, including clients who had attended his seminars, or visited his website.

Don't get me wrong. There is nothing wrong in using low-cost ETFs, index funds and what have you. In fact I promote the same in many of my website articles, my meetings with clients, and my email newsletters as well.

What pissed me off was, this 'Canadian Investment guru', was against employing the services of a financial advisor'. I honestly consider this investment guru to be a well-meaning idiot, because he cannot differentiate between DIY investing and 'What a financial advisor does for his clients'.

Six Reasons To Have A Financial Advisor Manage Your Investment For You

Some people are confident that they can manage their investments themselves, DIY (Do-it-Yourself) platforms are for these people. But if you need help in making the right investment decisions, a 'Managed investment platform' managed by a qualified financial advisor (who represents you), is right for you.

While, the right charging structure and investing without lock-in structures are important, a good financial advisor provides you the following services:

  1. Getting you started on the path to achieving your goals, by developing a proper financial plan of action for you. I cannot stress this enough. Statistically it has been proven that most people left to their own devices, will never 'Invest money' or 'Invest money consistently' unless pushed by a financial advisor, who makes them understand the importance of 'Starting to invest, early enough in life'.
  2. Making sure, with regular reviews that you continue on the path, till you achieve your goals. (This has very little to do with investment returns). Starting an investment is easy. You don't need a financial advisor for this. However, the difficulty lies in 'staying invested', and 'not exiting at the wrong time', for various reasons.
  3. Optimizes The Returns Of An Investment - Now any adviser who sells himself, that he can get a better return is a cheat, because nobody can guarantee better returns, but a good financial advisor can:
    1. Reduce the risk in your investment portfolio, by only suggesting you investments that you understand and you are comfortable with.
    2. Reduce the volatility in the overall portfolio, giving you a slightly easy ride along the way, making things more predictable. Not all types of investments are fit for the average investor, even if they take the shape of an ETF. ETFs can be based on many different types of investments.
    3. Match investment risk and returns to your risk tolerance - how you feel about your investment value going up or down. Each investor has a different attitude towards investment risk. This is very personality driven. Your financial adviser has to choose an investment that suits your investment personality.
    4. Match investment risk and returns to your time scale - The volatility (risk of investment value going up or down) should be the lowest when you need your money back for your important life goal. You cannot take risks with your money, when you need it the most.
  4. Reduce Costs, including tax - They can help you with kinds of investments that you may not normally think about, which give you tax relief or other kinds of tax benefits.
  5. Save you time - They can save you a lot of time, in which you can spend doing the things you like to do, instead of learning how to invest, and manage your money yourself.
  6. Control your investment behaviour - If you are on your own accountable only to yourself, it can be very tempting, and very easy to make bad decisions on your money, in the heat of the moment. When markets are not performing well, you may make a decision without fully thinking it through, and you would have been better off, not doing that. A good advisor can act as a check and a balance against that kind of stuff, and save you a lot of money through costly mistakes ...because no one can control the markets, but what can be controlled is the choice of investment and the level of risk you are exposed to.

I could go on and on, but a good financial advisor who represents you will also give you advice on 'other investments', that you may do outside of his services, e.g. real estate investments, etc...

His main gripe was on charges

I agree with him on the point of avoiding expensive savings plans (especially ones with longer terms), and heavy surrender penalties, but most investors don't have 50 to 75 thousand US Dollars to start a lump sum investment, which is required on good investment platforms as a minimum starting amount.

Currently the cheapest way to accumulate that initial USD 50 - 70 thousand dollars is to start a 5-year savings plan with Investors Trust - Evolution. Read my review of this savings plan here.

Short of asking you for an explicit fee for the above-mentioned services, the financial advisor can only charge you the assets under management fee of 1% per annum or take a commission on the savings plan. What's wrong with that?

This fee has got very little to do just with investment advice (especially in Dubai, where no expat want's to pay an explicit fee to financial advisors for their financial planning advice). 

Good financial advisors will generally charge you 1% per annum of the amount they manage for you in an investment, ideally with no lock-in structure or surrender penalties, as long as they manage the portfolio for you. ...and this portfolio can still be in low-cost ETFs.

The alternative he preached was to buy low-cost ETFs on DIY platforms, and pay very low transaction fees or annual charges (typically upto 0.35% p.a.) only to the platform, not the advisor.

This is the dumbest thing I have heard. It's like saying to a patient that he can google his medical condition, symptoms, and treatment, and get the medicine from the pharmacy himself. This is why I call these kind of investment gurus well-meaning idiots.

To apply an analogy, why does anyone need a doctor at all? Just eat Vegan food, exercise 2 hours a day, quit smoking, drinking, and you will live till a 100 years of age. Right?.

How many people actually do that to stay healthy? They still need the advice and consultation of a doctor to get well. Why don't they just google the symptoms and go to the pharmacy to solve their medical problems themselves?

Summary

All I have to say is 'Quality of Advice' counts as well. Choose your financial advisor carefully. Go through referrals from your friends, colleagues and relatives.

If all else fails, research your choice of financial advisor, see what he/she has to say on their website. Look for client testimonials, reviews from existing / past clients, Linkedin profile, experience, qualifications, etc...

But for your own sake, don't listen to 'Investment Gurus' and make decisions that affect your money in the heat of the moment'.

The guy is obviously there to get paid for his talk, not for charity.

Rant over - LOL !!!

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About the Author

Amit is an Independent Financial Advisor, based in Dubai since 1997. He is part of the prestigious ‘Million Dollar Round Table’ (MDRT), which is an elite club of the best financial advisors worldwide.

He has authored the ‘6-Step Financial Success Guide’, and the book ‘Creating, Preserving, Distributing Wealth’.

He helps business owners and professionals ‘Create A Second Income’ through investments.

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