We often hear the following two seemingly contradictory claims:
1. Most investors need financial advice.
2. Most investors should get rid of their financial advisors.
How could these both be true? The answer boils down to what we mean by advice. If you imagine the advice coming from a savvy investor who has your best interests at heart, then you would do well to listen. In this case, even experienced do-it-yourself investors could benefit.
Investors need good advice, not just any advice, a point also made by Jonathan Chevreau recently. If someone suggests that you borrow $100,000 and bet on red at the roulette table $1000 at a time until the money doubles or is gone, this qualifies as advice, but not good advice. (By the way, your chances of doubling your money this way are less than 1 in 30,000!)
Unfortunately, in the mutual fund world, “advice” means whatever tactics a mutual fund salesperson uses to get your money into a set of funds. Typically, the clients pay about 1% of their assets each year for this so-called advice.
So, if you’re in a debate about the value of financial advisors, you should happily concede that most investors need advice. Just be clear that this doesn’t mean that most investors need to pay 1% of their assets each year to a salesperson. There are cheaper ways to get advice of higher quality, such as paying a competent expert for a couple of hours of his or her time.