Why You Should Want Your Advisor to Do Nearly Nothing

OK, your financial advisor should definitely do more than nearly nothing when servicing you. They should make sure you are invested using a strategy that is grounded in the fundamentals of proper asset allocation. They should help you accurately assess your ability to tolerate risk. They should educate you so you understand why you have made the decisions you have made. They should help you devise a written plan for saving during the accumulation period and managed withdrawals during retirement. They should hold your hand during periods when the market is volatile, guiding you away from making poor investment decisions driven by fear. Essentially, they should serve as the calm, confident, objective and impartial financial expert, making sure you have the best odds of achieving your retirement income dreams.

But when it comes to making buy and sell decisions for your investments, you want your financial advisor to largely leave it alone and only make adjustments when necessary. I'll use an analogy to explain why....

Your retirement portfolio is essentially the vehicle that will carry you through your retirement and provide your legacy to children or favorite cause, so let's compare it to a car. Let's say that you start with an extremely efficient well-oiled car that actually appreciates in value over time....basically this is where you would begin with a retirement portfolio invested using Modern Portfolio Theory. Imagine every time you visited a mechanic he had the next hot component or a major 'fix' for you to consider. Every change costs money and over time made your car less efficient, but there was a small outside chance these changes and 'fixes' would help the car appreciate faster than if the mechanic had just left it alone.

Your best chance of having the well appreciated car at the lowest cost is to have a mechanic that recommends only the periodic servicing and maintenance necessary to restore the car to it's original efficient well-oiled condition. Of course, the mechanic in this scenario represents the type of financial advisor you should be seeking.

There are two major reasons why advisors might not want to go down the road of minimizing adjustments to a portfolio. One, they may be compensated by the stocks or funds you buy in the form of a commission. So, they are paid to sell you something they deem suitable. If you make no changes, they get less pay. Two, they want to appear busy, appear to be 'earning' your money. Their afraid you might be thinking: "My portfolio hasn't changed in a while and I'm down 5% in the last six months. Shouldn't my advisor be doing something about that? What am I paying him for anyway?" The answer to that second question should be, you are paying them to prevent you from making a bad investment decision. It's easier for the advisor to say, "ok, you're down right now and this is what I'm going to do about it.", than it is for the advisor to say "ok, you're down right now and this is what you're not going to do about it."

To go back to the car analogy, imagine your efficient well-oiled car goes a little slower up large hills than other cars. You go to the mechanic to ask what you should do about it. The mechanic suggests you can change the fuel injection and add turbo boosters to increase the power....it will only cost you $2,000. You decide to do it and you are happy to climb hills with much more power than before, but you soon realize that you went from 45 miles per gallon to 15. Now you've added a continuous additional cost for the marginal benefit of climbing hills with greater power.

You call your mechanic to ask why he didn't stress the decrease in efficiency, but he's out of the shop enjoying a nice lunch on you.