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Industry Spotlight > Advisors

When DIY Investing Goes Wrong

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What You Need to Know

  • Only about a third of Americans seek guidance from a financial advisor.
  • But even some people who ask for professional advice will ignore it.
  • In many cases, there’s not much an advisor can do after the fact.

Financial advisors can do their best to guide clients to sound decisions but sometimes face a mess after a do-it-yourselfer makes a rash move on their own. It should come as little surprise that such scenarios arise, given that most Americans handle their own money matters without professional help.

Only 35% of Americans seek guidance from a financial advisor, although the pandemic prompted many to turn to advisors, a Northwestern Mutual study found last year.

Even those who do pursue financial advice don’t necessarily follow it.

We asked advisors to describe the worst move a client made on their own with their investments and what the advisors did about it. (Note: There wasn’t always much the advisor could do after the fact.) 

The responses shed light on just a few costly mistakes that investors can make when they don’t seek, or when they ignore, professional advice.

Richard Bergen, RLB Wealth Planning founder and president, recalled a client who withdrew $150,000 from her 401(k) to pay off a mortgage and had no taxes withheld. The client had a big surprise later when Bergen prepared her tax return and she discovered she owed “many thousands” in taxes.

“There was nothing I could do,” he said via email. “She didn’t understand the ramifications of such a transaction.”

Mike Tyler, financial advisor and assistant vice president at Wealthspire Advisors, described a client error that could significantly curtail retirement income.

Taking Social Security early — not even at full retirement age — thinking they could invest it and earn more than the increased amount they’d receive if they waited until FRA or beyond,” Tyler said via email. “Social Security goes up 8% per year after FRA, capped at 3 years. Guaranteed 8% annualized returns are tough to beat, emphasis on the guarantee — a forbidden word in our industry.

“You may be able to withdraw your Social Security claim if it has been less than 12 months since you were first entitled to benefits. In this case it had been more than 12 months and the client made this decision before we began working with them.”

Kevin Brady, Wealthspire vice president and advisor, worked with a client who panicked about his investments early in the COVID-19 pandemic.

“The worst move a client has made occurred during the extreme market volatility at the start of COVID, during March 2020,” Brady said via email. “He was understandably worried about the entire economy shutting down at the time and the big downward move within stocks. He insisted that ‘this time feels very different’ and instructed us to sell all his stock holdings.

“In the end, we were able to convince him to only sell stocks within taxable accounts — still a significant amount — while keeping the stocks in his retirement accounts, since those are truly longer-term in nature. He now regrets making the decision, which is easier to do in hindsight. At the time, I and my team stressed that every event causing significant market volatility ‘feels different’ because it is by definition! But unless the dynamics of companies providing services and products that consumers want to purchase changes, betting against stock markets in the long term will not be a winning proposition.”

Brandon Opre, financial planner and founder of TrustTree Financial, recalled a client who wanted to concentrate heavily on a particular industry.

“Years ago I had a new client who asked me to manage his account, and he was very bullish on pot stocks. He wanted his entire IRA to be in marijuana companies,” Opre said via email. “I begrudgingly took him on as a client, but insisted we limit his exposure to said companies to 30%, no more.

“Out of the gate I looked like a fool, as his stocks leaped higher. After two years of major pullbacks though, they dropped [over 90%]. Good thing I limited his exposure as I prevented him from much more devastating losses. But he soon thereafter discovered some other ‘quick money-making strategy’ and transferred his account in search of the new/shiny thing. Some people never learn.”

(Image: Shutterstock)