Advisers take bad rap in batch of investment books
Globe and Mail, May 29, 2007
Rob Carrick
It’s hard being an investment adviser these days.
Regulators are on always your case with new rules to follow, clients are being spoiled rotten by a never-ending bull market for stocks and now you’re the bad guy in a new crop of personal finance books.
Some of the books are overtly anti-adviser, such as The Big Investment Lie: What Your Financial Adviser Doesn’t Want You To Know, by Michael Edesess. “The investment advice and management industry is built on fraud: the idea that professional advisers can predictably and consistently help you get a better rate of return on your investment,” the book jacket says in one of its more even-handed lines.
There’s also a bunch of new books that don’t come right out and slag advisers, but instead suggest subtly that incompetence is a serious risk when you deal with one. The subtext of Robert Goldin’s Insure Your Investments Against Losses: Strategies For Investors Who Can’t Stomach Losing Their Hard-Earned Cash is that advisers don’t do enough to protect clients in down markets. Warren MacKenzie’s The Unbiased Advisor maps out everything your adviser should be doing to help you invest effectively, but may not be.
And then there’s Daniel Solin’s The Smartest Investment Book You’ll Ever Read: The Simple, Stress-Free Way To Reach Your Investment Goals. This book is all about ditching your adviser and investing on your own through low-cost exchange-traded funds, which allow you to make pretty much whatever the market makes, minus a tiny bit for fees.
All of these books have some worthwhile things to say, and their skepticism toward advisers isn’t unwarranted. But let’s get something straight here: Advisers are not, as a rule, predators. Most are committed business people - yes, providing financial advice is a business - who earn a living by helping clients achieve their financial goals.
The problem facing both clients and advisers is that there’s no clear set of rules about how to advise, or even what this advice should be. This is what leads to much of the friction that develops from time to time between advisers and their clients.
Mr. MacKenzie, head of Second Opinion Investor Services in Toronto, takes as good a stab as you’ll find at explaining what advisers do and, just as importantly, how these services should be delivered. The book is almost like a crash course in investing that will enable you to better assess the work done by your adviser.
Mr. Goldin, a onetime securities lawyer who now helps investors resolve disputes with their advisory firms, has focused his book on strategies that investors can use to protect their portfolios from losing money. The highlight is a summary of the pros and cons of all the ways of managing risk in a portfolio, including options, principal-protected notes, segregated funds and hedge funds.
His book champions the concept of efficient portfolio theory, which rejects the widely followed concept of risk reduction through diversification. Instead, you take each component of your portfolio and “insure” it through the use of options, futures, strip bonds and exchange-traded funds. Mr. Goldin makes a good case in theory, but it’s too complex and radical to imagine any sort of wide adoption.
The Big Investment Lie describes the investment industry as selling so-called expertise that is designed to generate fees more than achieve good results for clients. The author, an economist and mathematician, offers a thorough, readable and relentlessly negative take on how the investment industry works.
This books problem, and the financial industry itself is guilty of the same thing, is that it acts as if financial advice is just about investing. On the contrary, all the best advisers provide actual financial planning - covering retirement, estate and tax issues - as well as investment advice. In fact, you can argue that the big lie Mr. Edesess describes is all the more toxic if a client is paying fees and getting nothing more than recommendations about what funds or stocks to buy.
So what are investors supposed to do if advisers are, supposedly, such a bad lot? Mr. Edesess’ book recommends the do-it-yourself approach using ETFs or low-cost index funds, which is also what Mr. Solin suggests in The Smartest Investment Book You’ll Ever Read. This Canadianized version of a successful U.S. book spends half its time telling you what’s wrong with conventional investing as practiced by most advisers and the other half offering practical advice on how to set up your own portfolio of ETFs.
It’s sound advice, but it’s not for everyone. If you want broad financial planning, if you don’t understand a thing about the market and don’t want to learn, or if you’re too pressed for time to look after your investments, get an adviser.
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