We live in an incredible age, with vast global knowledge available at the click of a button. As we continue to automate our lives through technology, who needs a financial advisor?
Historically, the most common reason people have chosen to work with an advisor is that they don’t have the time or expertise to monitor their own investments. With the wealth of information now available through the internet, many are now choosing to take the time to research and manage their finances for themselves.
While this is certainly possible, having access to WebMD doesn’t make you a doctor, nor does access to Investopedia make you a financial advisor. Even assuming one had all the information and knowledge of an experienced advisor, there are many factors that self-directed investors don’t consider, perhaps the most important being their own emotions.
Emotions are what make us human, but they are hazardous to our wealth. Money is tied to our emotions as much as any other possession, which often clouds our decision-making and prevents us from acting in a rational manner.
The money your financial advisor manages is not his own, which allows him to separate emotions from logic in order to provide the proper guidance. Working with a financial advisor can help you overcome emotions by building an investment strategy that keeps you focused on long-term goals rather than short-term returns.
In a 2005 Stanford University study, researchers found that individuals that had suffered damage to the areas of the brain that affected emotions fared better as investors than those with normal brain activity. The average self-directed investor significantly underperforms the market due to emotional reactions, as demonstrated in the chart below. If your advisor can help you stay the course through difficult times (without incurring any brain damage) he has more than made up for the cost of his advice.
A common tendency for self-directed investors is to attempt to time the market through buying and selling investments at opportune times to generate higher returns. While this works well in theory, there is no method to consistently predict market performance, and most investors will at some point find themselves sitting on the sideline missing out on a consistently rising market due to an emotional reaction along the way. Simply missing the best 10 days in the market in any given year would be detrimental to your returns. Time, not timing, is the key to maximizing long-term investment gains.
So, who needs an advisor?
Everyone needs an advisor, unless you are a robot or have conveniently located brain damage. I would argue that even a financial advisor needs a third party to assist in managing his own finances. Unless there is a cure for the human condition, financial advisors will always be valuable.