A competent investment advisor can help you make the most of your portfolio and avoid costly mistakes. However, investment advice comes at a cost, so it’s important to understand the services performed and their value. This series will help you do just that. This first post looks at why it’s so hard to put a value on financial advice.
Evaluating what investment advice is worth is difficult. First, investors’ needs vary widely depending on the complexity of their financial life. Owning a successful business, properties outside Canada or a major position in your employer’s stock options can make your financial life more complicated and potentially increase your need for advice. Since those needs differ so much from one investor to the next, no single number can nail down what advice is worth in general.
Services also vary greatly from one advisor to another. Some offer basic services such as recommending investment vehicles. At the other end of the spectrum, the most sophisticated investment advisors offer discretionary portfolio management and team up with financial planners and tax accountants to meet more sophisticated needs. This is why comparisons are difficult to make.
And last but not least, the value of some services is hard to quantify. Left to their own devices, most investors will not write a formal long-term investment strategy, execute regular portfolio rebalancing or systematically review their portfolio’s performance. Then, portfolio decisions are based on “gut feelings” rather than financial knowledge, and this can lead to serious capital losses. A competent investment advisor will implement a rigorous process to help you achieve your financial goals—but it’s still difficult to pin down the exact value of that process.
Managing your investments should be viewed like running a company. Operating a business involves costs, but the benefits obtained in return for those expenses must be well understood for the company to remain viable.
The benefits of investment advice are sometimes difficult to valuate, but they can be explained. Before we get into the details of specific services, the next post in this series will look at who needs an advisor, discuss the different types of investment professionals and offer useful indicators to identify a competent advisor.