If you ask a random person on the street if today’s investor needs a financial advisor, they would probably say no. Today, people can trade almost for free, buy ETFs and index funds or outsource portfolio management to robo-advisors. They might mention the market has been rising for about nine years. “No, I don’t need an advisor,” they’d say.
10 Reasons. Really?
Yes, they do. Some of these reasons can be explained to a prospect. Other reasons remind you how you help people and add value.
1. Investing is complicated. It’s more than buying and selling stocks and ETFs. There are insurance products indexed to the market. Hedge funds. REITs. Mutual funds. Managed money. Preferred stock. Convertible bonds. Treasuries. Different products serve different purposes. Someone needs to help investors make sense of it all.
2. It’s a big world out there. The US represents about 40% of world stock market capitalization. The Japanese, Chinese, Hong Kong and the U.K. stock markets round out the top five (out of 35 major countries) with an additional 26%. These markets trade in different time zones. Their performance isn’t necessarily correlated. If the U.S. market is declining, there could be a rally going on somewhere else. But how do you buy into that market?
3. International doesn’t mean what you think it does. Investors might think U.S. companies make their money in the U.S. and overseas companies make their money in other places. Some U.S. companies are highly reliant on overseas earnings. Recently, about 61% of Apple’s revenue came from outside the US. (2) According to Mercedes-Benz maker Daimler’s 2017 annual report, about 25% of the German company’s revenue come from the U.S.
4. Time. Does the average investor have the time to do research, stay on top of breaking news and market action across multiple time zones? This is an area where an advisor can help. They aren’t staying awake 24 hours watching the markets, but many have a huge firm behind them with research departments and analysts on the ground in local markets.
5. TV and cable news doesn’t help. Television programming is funded by advertising. Advertisers want viewership. One of the best ways TV news programs can keep people watching is to make everything a crisis. The market doesn’t rise and fall anymore. It soars and plunges. You’ve seen the statistics comparing the return on the average growth mutual fund compared to the average fund investor. They tend to buy high and sell low. Hand holding and putting things into perspective has a value.
6. Knowing when to sell. The average investor may hear about a good stock and buy it, but it’s rare they get advice when to sell it from the same source. Take this concept to the next level, sector rotation. Even when the market is flat, some S&P sectors perform better than others. Advisors can often show some parts of the market doing better or suffering less when the overall picture is grim.
7. Credit management. Revolving credit cards get many people into trouble. The average American carried $6,375 in credit card debt as of January 2018, according to a CNBC report. Forty-three percent of Americans have been carrying a credit card balance for two years or longer. According to USA Today, as of March 2018, the average credit card interest rate was 16.71%. Financial advisors can also advise clients on how to reduce this number through alternatives like asset-based lending.
8. Insurance is complicated. If you want something that fails the “apples to apples” comparison test, look at insurance. Ever read your homeowner’s policy? You would be surprised what’s not covered! Imagine paying your premiums for years, then discovering you weren’t covered when disaster strikes. It helps to have an insurance professional who can compare policies and help determine the coverage you need.
9. Financial planning. The average salaried person, working at a large company or for local government, probably has money in lots of places. They might have a 401(k) at work. A deferred bonus paid in company stock, orphaned IRAs, life insurance policies with cash value, college savings accounts and traditional investment accounts. Who pulls this all together to provide the complete picture? Are they confident they can retire comfortably? How confident? 100%? 80%? 50%? How do they know?
10. Someone to blame. OK, an advisor would never lead with this reason. When something bad happens, we want to find fault with someone else. James Bond doesn’t fight organizations, he fights villains. The U.S. military takes action against al-Qaeda, but Osama bin Laden was the guy we wanted to get. Now, think about investing. Few people want to say: “I invested on my own. I lost 70% of my money. It’s my own fault. I have no one else to blame.” The market is unpredictable, but when investors lose money, many blame their advisor, who “should have seen this coming.” Firms lessen this risk with suitability, risk tolerance and reporting. But having no advisor means no one to blame.
These points make the case advisors add value. First you must convince yourself. Then you must convince others.
Bryce Sanders is president of Perceptive Business Solutions Inc. He provides HNW client acquisition training for the financial services industry. His book, “Captivating the Wealthy Investor,” can be found on Amazon.