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The Real Cost of Being Your Own Financial Advisor (It May Be Higher Than You Realize)

Posted by Gary Wagner on Jun 25, 2019 9:29:45 AM

The Real Cost of Being Your Own Financial Advisor, DIY Investments

Some DIY investors may feel like they are saving money by managing their own investments. But just like with your car, is it smart to be your own mechanic? A lot can go wrong. What might that cost you? And if you found a great mechanic who you trusted, would you ever want to fix your own car again?


From our years of experience, we find many investors who feel they are managing their own portfolios well. But across the board, when we review their portfolios, we find they are missing out for multiple reasons. Here are a few examples:

Watch the Video: The Real Cost of Being Your Own Financial Advisor (It May Be Higher Than You Realize)

 
Emotional Buying or Selling 

Taking the emotion out of investing is extremely difficult, after all, it is your money. Inevitably, the number one mistake we see is people "selling off" during a recession or market pullback. These knee-jerk reactions are often made when people are selling based on fear. Often, they compound that mistake by buying during the euphoria when prices are rising. Their FOMO (fear of missing out) may be costing them more than they realize. 

 

Tax Inefficient Investing and Incorrect Asset Location

Other simple mistakes self-managers often make can have negative tax implications. For example, investments that are eligible for potentially lower capital gains rates might be incorrectly placed in an IRA where they are ultimately taxed at higher ordinary income tax rates.


Instead, it is essential to consider "asset location" to structure a tax-efficient portfolio. The conventional wisdom, for example, is as follows:

  • It may be beneficial for Personal Brokerage Accounts to hold your tax-efficient investments, such as municipal bond funds, tax-efficient index funds, and individual stocks.
  • IRAs and 401k plans typically should hold your longer-term investments or tax-inefficient or "income generating" investments. These include fixed-income type investments such as bonds, and preferred stocks as well as certain types of stock investments, including dividend-payer stocks, for example.
     

Diversification or Di(worse)ification?

Oftentimes, individuals show up at our office with a “diversified” portfolio of many mutual funds or ETFs. Upon closer inspection, these funds may hold the same or very similar investments. While on the surface the person may think he or she is diversified, but they really aren't. Additionally, there are often layers of high fees eating away at performance. 

 

Not Matching Risks with Goals

Investing involves risk and matching that risk with goals is very important. Taking too little risk may leave you short of your long-term goals, such as retirement. Having excessive risk relative to your goals is just as detrimental, if not worse. We often see portfolios that are mismatched risk-wise with the clients’ goals.

If you need funds for a house in a year or two, for example, it usually means you should have those funds invested so that there is a minimal principal risk. Betting that more volatile investments, such as stocks, will be trading at an attractive level when you need to liquidate may leave you short of your goal.   

 

Unintended Cost of Stress on a Partner

Another scenario we see with self-managers is the lack of a contingency plan. If one partner was solely in control of the finances and investing. If that person is incapacitated or dies, the surviving spouse may be left picking up the pieces.

Every self-manager with a partner should have a back-up plan should something unfortunate happen. Eventually, there will be a need to delegate investment decisions. We are often brought in early as a back-up and part of the long-term contingency plan. 

 

Investing Based on Headlines

Many times investment decisions are made on news or information that is already "baked into" the price of a stock or bond. Basing selections on “hot tips” or news from financial TV shows is usually a losing proposition. However, applying discipline and thoughtful research to identify companies with great long-term growth potential can be productive.

 

Owning Too Few Stocks Leaves You Exposed

Bad things can happen to great companies. Frequently self-managers have a collection of stocks that they love and feel good about. But if this collection has too few stocks or is over concentrated in a sector or individual company, the portfolio may suffer. The potential to “hit it big” is fraught with risks that could derail retirement and other long-term goals.

 

Holding Stocks for the Wrong Reason

In some cases, inherited stocks, which a parent or family member gifted to the next generation, are seen as an heirloom. That parent or grandparent may have worked at the company for many years and accumulated significant value in the company’s stock. To make matters worse, they may even have shared advice such as "never sell the stock." But bad things can happen to great companies, and hanging on to top stocks of yesteryear is not a way to honor a legacy. Unfortunately, this reluctance to sell sometimes results in significant financial losses or missed opportunities.

 

Opportunity Cost of Your Time and Fretting 

Time is scarce. When you manage your own portfolio, do you really have the time to invest successfully and is that time that would serve you better doing something else? When you have a trusted advisor, you can pick up the phone and talk about your concerns. You can relax knowing that he or she has a team of experts to relieve you of the burden of making sound investment decisions and free you up to do more of what you enjoy in life: activities, traveling, volunteering or spending time with those you love.

 

At Carnegie, our job is to apply discipline, research and years of experience to help you avoid these mistakes. Being accessible so you understand the investment strategy and how it can work for you is our focus. Personal relationships and trust are built over time. We hope to gain yours. 

 

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Topics: Investment Management

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