The Value of Financial Advice

Last month, Dilbert creator Scott Adams made headlines by posting a rant about the harm financial advisors allegedly cause clients by providing them with their expertise. In Mr. Adams’s view, investors would achieve investment nirvana by putting their investment dollars in passive index funds and then proceeding not to pay attention to the short-term vicissitudes of the market. Predictably, he wants the government, – that great steward of our tax dollars and paragon of financial virtue, – to spread the financial gospel of passive investing.

The sad truth is that individuals are generally poor investors. The data are quite staggering:

  1. Over the past 20 years, “equity fund” investors achieved an average 5.02% annualized return, which is 4.2% less than the 9.22% that he/she could have achieved by simply investing funds in an S&P500 index-tracking fund. This gap expanded in 2013, for only the third time in ten years.
  2. Over the bull market of the past three years, “equity fund” investors achieved only an average 10.87% annual return, lagging the average annual S&P500 return (16.18%) by 5.31%.
  3. Investors in “asset allocation funds” did even more poorly. Their 20-year average annual return was only 2.53%, lagging the S&P500 index (9.22% per annum) by 6.69% per annum.
  4. Investors in “fixed income funds” did more poorly still. Their 20-year average annual return was an abysmal 0.71%, fully 8.51% less than the S&P500 index, and 5.03% per annum less than the Barclay’s Aggregate Bond Index (5.74% per annum) over this time.
  5. Not surprisingly, investors show little evidence of skill in “market timing.” The DALBAR report notes that in the six best months of 2013, when the market was up sharply, there was no evidence that individual investors moved more than average amounts into equity funds.


What is also telling is that investors seem to have been shunning stocks even as they have been hitting all-time highs. The Federal Reserve recently released data showing that ownership of stocks is at an eighteen-year low! I don’t think even Mr. Adams would be able to ascribe that to the financial industry’s machinations.

Let me be clear: There are many reasons for these lackluster results, but I believe chief among them is investor behavior. Many investors think they can “time” the market, and they tend to make emotional decisions at the wrong times. As Raymond James’s Jeffrey Saut observed this week:

“Question ‘What do you have to do to be one of the investment winners?’… [M]ost individual investors do not have the time, or are unwilling, to do the due diligence to be big investment winners.

So what, in his Mr. Saut’s opinion, is the average person supposed to do?

“Therefore, it is paramount to have a good financial advisor. Ever since the turn of the century I have opined that the 1970s was the decade of the product. My generation graduated from college and bought the first car, the first house, etc. The 1980s was the decade of the image. We bought the house on the golf course in a gated community and a Mercedes Benz. The 1990s were experiential. We went to Europe and brought back experiences, not things. The new millennium is all about the relationship. When our cars break we don’t need the cheapest price to fix them. What we want is someone we trust to do the job right and charge us a fair price. And, we want the same relationship with a doctor, a lawyer, and especially a financial advisor.”