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  • Eric Burkholder

Is Your Advisor “Swimming Naked”?

Warren Buffett famously said, “It’s only when the tide goes out that you know who’s been swimming naked.” He was referring to investing during the 2008 financial crisis, but it still rings true today. And the same principle applies to your advisor and your financial plan.

The market goes up 75% of the time. That is an amazing fact, but it can also make investing incredibly dangerous. It leads to overconfidence and extreme risk-taking. It also makes it hard to distinguish luck from skill. This type of cause and effect is not isolated to finance. When we get sick, most of the time we will get better on our own. Hence, the snake oil salesman. Prescribing snake oil is fine until you need real medicine. Thankfully, we have made it very difficult to become a practicing doctor, which weeds out a lot (but not all) of people giving bad medical advice.


On the other hand, there is a very low bar to become a financial advisor. The terms “financial advisor” or “financial planner” or “wealth planner” are not regulated at all. So, anyone that can pass a couple of basic exams can get licensed to give financial advice. The combination of markets going up most of the time and low barriers to entry creates a minefield in the financial advising industry. It is often very difficult to distinguish between a great advisor and a great salesman. It is also hard to tell if you have a real financial plan in place.


Eventually, the tide goes out. We get a global pandemic or an economic recession, and then people find out if they have a real advisor and real financial plan. Even during times of market stress, it can be hard to tell if your advisor really does know what they are doing. Below are several questions you can ask to fairly determine if your advisor is worth their fees during volatile markets.


1) Did they do what they said they would do?


There are many different theories on the right way to invest. But this is not an article to discuss those theories. Regardless of the method, did your advisor do what they said they would do when the market went down? If they said they would maneuver in and out of the market during downturns, did they do this? Did they successfully get out before the collapse and get back in at the market bottom back in March?


If they said they would rebalance during downturns, did they? Do you see trades in March or April in your accounts? If they told you they implement tax-loss harvesting, has this happened in 2020? I can speak firsthand of advisors who talk a big game about rebalancing but often do nothing when the time comes. A major value proposition of any advisor is their ability to keep you disciplined in times of panic. But if they cannot follow through on this proposition, then their value is deeply diminished.


2) Do they invest in technology, people, and processes?


Technology is always changing. There are more tools than ever available to financial advisors. If your advisor is not utilizing financial planning software or rebalancing software, that may be the reason they are having trouble following through on point number one. I know of firms that manage over a billion dollars in assets that do not utilize rebalancing software. It is easy to manage portfolios when markets are relatively calm, but when times like March of this year hit, there is no way a firm can trade all their clients’ accounts without software.


People are a firm’s most valuable asset. Financial advisors often tout how lean and efficient their operations are. But this may mean they are more interested in their bottom line than the future growth of the firm and the level of care their clients receive. If your advisor or support staff were difficult to get ahold of when things were scary, they might not be adequately staffed. Are you getting great service?


3) Do you have an actual plan?


As I mentioned before, anyone can call themselves a financial planner. That does not mean they actually do any real planning. When the market turns as quickly as it did in March, the only way you can confidently make decisions is if you have a plan in advance. If you are prepared for a market downturn in advance, you will be able to navigate these difficult times successfully. If you do not have a plan, then decisions are often made out of fear and often lead to disastrous results. Having a solid financial plan is sometimes like wearing a seat belt. 90% of the time you can get by without a plan, but the 10% of the time you do need it, it will save your retirement.


While the current coronavirus pandemic and market volatility can be very stressful, it is also a great time to evaluate your financial advisor and financial plan. Ask yourself the three questions above and decide for yourself if your advisor is really bringing value or just skating by. No advisor is perfect, but it is fair to ask them tough questions. It is only when it really matters that you will discover if your advisor is “swimming naked.”

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