Investment Advisors Are Worthless, The End

33.49K

Hamilton Nolan

09/23/13 03:58PM

Filed to: money matters

Here is a fact: paying people money to give you investment advice is a waste of your money. It will not make you money. DO NOT HIRE INVESTMENT ADVISORS, STOP NOW.

This is not a new insight; John Bogle of Vanguard, for example, has been yapping about this fact for decades. Yet—here's the funny thing—people and institutions around the world (including your very own retirement fund, in all likelihood!) still pay billions and billions of dollars to investment advisors each year. It's truly amazing. Despite having been mathematically proven to be completely without value, the industry persists, due to quirks of human psychology. These advisors take your money, and then charge you a percentage of that money in order to tell you where to invest the rest of your money. And what do you get, for the money you pay them? In aggregate, absolutely nothing.

Here is the very latest research that proves that, out of Oxford, via the FT:

On an equal-weighted basis, US equity funds recommended by consultants underperformed other funds by 1.1 per cent a year between 1999 and 2011, according to analysis of 29 consultancies accounting for more than 90 per cent of the market by a team from Oxford university’s Saïd Business School...
The paper speculated institutional investors continued to rely on recommendations either because they want a “hand-holding service”, a “shield” to defend their decisions, or are “simply unaware how accurate or inaccurate” consultants’ calls are.

Are some advisors able to beat the market? Yes. Are you, or your pension fund, able to know which advisors will beat the market? No. In total, the entire industry is not worth a nickel to you, the investor. The great insight of John Bogle was: the only thing you can really predict about investing is how high the fees you'll be paying are. So if you pay lower fees, you will do better. So instead of paying high fees to some "investment professionals" in return for no benefit, just pay low fees for some index funds, the end.

I encourage you to print out this article and give a copy to whoever is responsible for choosing the investment advisors for your retirement money. And when you give it to them, ask them whether they are looking for a hand-holding service, a shield for their own mistakes, or are they just stupid?

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Readabook7 Hamilton Nolan 09/23/13 04:38PM

This requires that the average person can make consistently intelligent investment decisions, adequately diversify their portfolio etc.

Additionally, it would require pension funds to have inhouse investment advisor/trading divisions and in some cases greater reporting obligations (assuming that one of the benefits of an investment advisor is access to pooled funds).

Finally, you can't really invest in private companies as a joe schmo or even a pension fund without working through an investment advisor. The volatility of the public markets is something some investors want to avoid.

As usual, I'd encourage you to learn a little bit more about the topics you are writing about.

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Hamilton Nolan Readabook7 09/23/13 04:51PM

So what would you say an appropriate fee would be to take someone's money and put it directly into, say, a Vanguard target date retirement fund, and leave it there? I would argue the appropriate fee would be: less than an investment advisor will probably charge you.

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Readabook7 Hamilton Nolan 09/23/13 05:21PM

I think you are mixing up a few different things. When we think of investment advisers (as defined under the Advisers Acts) there are a few different things that fall under that category. The first would be something like a "financial consultant" who only tells you where to investment your money and maybe helps facilitate the investment and then charges you $$. Most of the time that means for Joe Human, that he's going to tell you to invest in public equities or exchange traded funds (like Vanguard funds). Admittedly, that service may not be worth much. Unless you are an accredited investor, you won't have access to private company investments, PE funds etc. anyway. Assuming you have some common sense and don't just dump all of your money into one stock, you can probably do ok with an exchange traded fund.

But don't forget that Vanguard is also an "investment advisor" to their exchange traded fund, and you are paying advisory fees to Vanguard as part of the cost of that investment. There, the fees offer you the benefit of being able to invest in a "slice" of the US economy, without having to pony up $500 for one share of Apple. In that case, the fees make sense as long as the index you are tracking, or the sector you have selected is doing better than your fees - you are paying for access to a wide range of securities without high capital requirements.

My third observation would be that it makes sense for pension funds to have investment advisors (or else to hire large, knowledgable investment staff). You are dealing with big chunks of money and the object is to achieve sustainable growth with extremely minimal risk of loss. The key then is to diversify your portfolio across public equities, private equity, hedge funds, insurance companies etc. This way you are accessing growth across a wide range of sectors and not loading the cart too full on one investment. If a pension fund just stuck all of its money in a Vanguard exchange fund, it would experience volatile gains and losses. Private Equity and Hedge Funds offer longer term 'lock-ups' for investment capital and valuations are marked at (usually) quarterly intervals and are often not fully reflected until realization, meaning, frankly, that your assets are less subject to market volatility. Selecting a PE or HF manager (also almost always called an "investment adviser") requires some diligence as well.

I'm not saying that you don't raise good questions, I just think you tend to paint the industry with really broad strokes and I sometimes wonder how much you really understand about the logistics of pension fund investing, that's all

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Mak attack Hamilton Nolan 09/23/13 04:23PM

Fascinating. I view my job not to beat the market, but to make sure my client's don't do stupid shit in an attempt to get rich quick. Why? because PEOPLE DO STUPID SHIT WITH THEIR MONEY.

I can assure you that this is a very important quality in an advisor, and well worth the money spent in retaining one.

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Hamilton Nolan Mak attack 09/23/13 04:25PM

"Investment Advisors: Hire Us ONLY If You Are a Moron." I would support this slogan.

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lostwallet Hamilton Nolan 09/23/13 04:05PM

This. Just watch this. http://www.pbs.org/wgbh/pages/fro…

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SuperHybridSystem3 Hamilton Nolan 09/23/13 04:06PM

My company's investment adviser came in and gave an awful talk where he broadly recommend that people be stashing away a certain amount each year. As it happened, his number was higher than most people's in the meeting's actual salary. He said we should make a list of things we want — a boat, a second home? — and try to remember to set aside money for retirement before we lay out the cash for those purchases.

We're in the process of getting a new one, but most people would prefer not to have one.