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Tuesday, April 12, 2011

What 's My Job?

Client: Where's gold headed?
Financial Advisor: I have no idea.
Client: But that's your job.

Alternative scenario: Stocks have dropped 10%. Client is bummed out (70s expression)

Client: Why didn't we sell? Couldn't you tell that stocks were going to drop?
Financial Advisor: I don't have a crystal ball. I can't forecast stock prices. Forecasting stock prices is not my job.

Every advisor is familiar with this scenario. 

I don't speak for all advisors here. Some, in fact, see themselves as gurus. They see themselves as prophets. Hey, if it works for you, then go for it (referring to clients here). I belong to the "there is more than one way to skin a cat" club.  DIY Investor would, however,  like to offer the following quote from Benjamin Graham:

If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what’s going to happen to the stock market.

Graham is one of the legends of Wall Street and Buffet's mentor, no less. Again, if you believe your advisor, your newsletter writer, or a talking head on CNBC over Benjamin Graham, then go for it. It's a free country, as they say.

So, if my advisory practice isn't about predicting markets, what is it about? What do I do to earn my fee? I go over this very carefully with potential clients but some don't really hear, although they nod throughout the explanation. So it's worth going over again.

I set up clients with a well-diversified portfolio that will capture close to the market return over the long term. I explain that the portfolio will at times experience choppy waters where markets will get scary, but that it will be able to withstand the down periods and will be positioned to participate in ensuing recoveries. I explain the desirability of down markets for those building up their nest egg and how the process of dollar-cost averaging works. For those in retirement and drawing down their nest egg, I explain the need for a plan - some type of "bucket" approach where a sufficient reserve is kept to ensure that they don't need to liquidate stock holdings at extremely adverse prices.

So when your friend introduces me as his/her advisor, don't be surprised at my response when you ask "so where's the market headed?" It's not my job!


  1. Great explanation Robert! It is good to set the expectations right at the beginning. Most can't tell how the markets are different from Las Vegas!

    Of course I knew of one guy who could 'guarantee' you high returns. Unfortunately Bernie is out of commission at the moment and languishing in a federal prison.

  2. @MoneyCone Good point on Bernie! I think he's out of commission for good. Of course, there are a lot of small time "Bernies" out there who we'll never hear about ripping people off.

  3. Excellent post- it definitely promotes trust when one is up front and honest about the expectations... only if all financial advisors were like you!

  4. You've seen tons of clients, haven't you gotten used to that yet? :)

    The bad news is, you will always get asked what's the market doing next just like a real estate agent getting asked where property prices are heading. human nature i guess...

  5. @youngand thrifty Thanks for the compliment and thanks for stopping by.
    @Beating The Index Oh,I'm used to it but you nake a good point. The thing is that people think an advisor can time the market and pick stocks. They seem to know that the real estate agent's prediction is a guess. Also, when stocks go up a lot or drop a lot it seems pretty obvious in hindsight.