Tuesday, 28 August 2012

Why All Investors Need an Advisor

Why All Investors Need an Advisor

Everyone should have a financial advisor – a good one, with a clean background.

Would you remove your own gall bladder? Would you argue your own case in court? Even skilled surgeons don’t operate on themselves. And lawyers handle their own cases, as the saying goes, have a fool for a client.

When I was a kid, my grandmother freaked me out with the Aesop’s fable about the grasshopper and the ant. In a way, the ant was the financial advisor of the insect world, warning the grasshopper to stop making merry all summer long and save up for the winter. Guess who ended up starving and frozen in this story.

Some people spend more time planning their vacations than they do their finances. Yet your assets determine whether you can retire comfortably (or be able to retire at all), send your kids to college, buy a house, protect your family from an unexpected mishap or your own death.

Hiring an experienced, capable advisor gives you the services of someone who knows the landscape of investing and other necessary financial matters, such as the amount and type of insurance you should have, and how you should set up your estate.

Here’s what a good advisor provides:

Expertise. The best have amassed an enormous body of knowledge. To earn the coveted designation of Financial Planner, an advisor must pass a grueling series of tests and has demanding ongoing training requirements.

Many people don’t have the first idea how to gain and manage the assets needed to stand up to the market’s unpredictable gyrations. A solid advisor assesses your situation and your goals, then figures out what you should own. And shouldn’t own.

Say you are 60 and looking at retirement. How much should your portfolio hold in bonds (which are safer yet get killed if inflation kicks up) and in stocks (which are riskier but offer the best chance of beating inflation and growing in value)? The answer takes a lot of high-end number crunching and hard-won wisdom.

Objective View. The best type of advisor looks at your financial situation with no sentiment. That money pit of a second home that has been in your family since the Ice Age? Perhaps you should sell it. Scrap that hare-brained plan about buying yet another SUV and feed your retirement kitty first. How do you expect to pay for Junior’s college education?

Discipline. You and your advisor should conduct periodic reviews of your finances. Things change. If you are intent on a 60/40 equities/fixed-income mix, but the stock market has advanced to make it 80/20, a rebalancing is in order. Your advisor will tell you how to accomplish that.

Investing is an ongoing pursuit, lasting a lifetime. Things shouldn’t be allowed to slide. A good advisor keeps you constantly in the game with no let-up. Many advisors tell stories about clients who wanted to bail out of the stock market in March 2009, when it appeared to some that everything was going to collapse. That was the absolute worst time to cut and run. The sound advice was to take advantage of the bargain stock prices and buy more. Smart advisors gave clients the courage to do that.

Time Saved. Figuring out which choices to make takes oceans of time. So does knowing where to look for the right choices to begin with, without getting bamboozled by the sheer complexity of the task.

A typical dilemma: You are a 45-year-old with a large mortgage, a non-working spouse and two pre-teen children. Your forebears have a history of early heart-attack deaths. The only investments you own are from an inheritance, but it is such a tangled web that you get a headache just thinking about the mess.

You’re working like a galley slave to make ends meet. Do you have the breathing room to research what alternatives are available and then to build a better financial structure to take care of your family?

Likely not. That’s where an advisor comes in.

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