DISCLAIMER: This is taken from the book “A wealth of common sense : why simplicity trumps complexity in any investment plan” by Ben Carlson. I did not have any input on this book nor have anything to gain by sharing it. This is for informational and educational purposes only.

This book tackles the basics about investing, although it doesn’t show you the step-by-step process how to open an investment account and what to invest in, but it discusses the important basic parts of it. For most of the time, what we need is just simplicity in our investment process.

This book is great for beginning investors, and also a good reminder for experienced investors.

What stood out for me in this book is in Chapter 9 “Financial Professionals – What a Financial Advisor Can Do for You?” I’ll share to you the whole portion of it down below.

Vanguard performed a comprehensive study that sought to quantify how much value a successful advisor could add to the performance of a client. They looked at a number of portfolio management issues and determined an amount that each could add to the client’s bottom line relative to the average client experience. The conclusion was that improving upon each of those particular areas could add about 3 percent in net returns to the client, as you can see in Table 9.1. This is a huge performance number. You should notice that half of that 3 percent estimate in value-add, or 1.5 percent, comes from behavioural coaching. All of the other areas listed are important, but they will be all for naught if a financial advisor is unable to close the behaviour gap. Client education, counselling, and setting reasonable expectations are the three pillars to this piece of the puzzle.

This 3 percent figure shouldn’t be thought of as an annual return number to add on top of your market performance year in and year out. That would be far too easy. The value-add is going to be sporadic. Most of the value will accrue during times of market stress or euphoria because that’s when it’s easy for investors to lose sight of their long-term plans. If your advisor is able to talk you down from the ledge when you’re about to make a huge mistake, that’s when they earn their fees and create value.

If you think an advisor can help improve your results and lower your stress level, a good starting point for what to look for is in this Vanguard list of value-added best practices. But you have to make sure that the advisor you choose actually focuses on these areas to help you reach your goals. If someone makes claims that they can add value in other areas, I would be sceptical. In the spirit of keeping things simple, financial advisor and author Carl Richards has laid out three basic reasons to seek help from a financial advisor:

1. To help me clarify my goals.
2. To remind me of my goals.
3. To stand between me and stupid.

Standing between you and stupid is what helps close the behaviour gap (a phrase coined by Richards, actually). A good advisor should be better at forecasting your emotions and potential reactions than figuring out where the markets are heading. If they can talk you out of a few rotten decisions over the course of your relationship then they’ve done their job.

It’s not enough to say they can do these things for you. An advisor has to be able to inform and show you how they will carry out a comprehensive financial plan on your behalf. They must be able to provide objective advice. They have to recommend suitable investments that make sense for your particular situation. It’s also important to remember that a financial advisor is providing a service that you are paying for. They work for you, not the other way around. And while you can’t make obscene demands, you absolutely must ask questions if you are confused or need more attention.

Behaviour economist Meri Statman says that “Financial advisors frame themselves as investment managers, providers of ‘beat-the-market’ pills, when, in truth, they are mostly managers of investors.”
If you’ve gotten this far in the book you should understand this distinction. Not only does an advisor need to be an educator to their clients, but they are also something of a psychologist and emotional coach. They are there to manage your emotions, a somewhat odd relationship, but it’s true. This is not an easy job, as we humans can be a tough bunch to understand. An advisor isn’t there to simply choose investment products for you. Anyone can do that. In non scientific terms, one of the most important jobs of a good advisor is cutting through the noise on behalf of their clients. They should be able to tell you two things:

1. These are the things you need to focus on and pay attention
   to.
2. These are the things you should ignore and pay no attention
   to.

Since ongoing education to the client is so important, that means the advisor must be continuously learning, as well. Most of the investment process comes down to thinking about thinking. If advisors aren’t willing to put in the time to improve themselves, how can they be expected to improve your results? They should be selling a process, not a bunch of products. There’s nothing inherently wrong with investment products. You do need them to build a portfolio. But your advisor should not just be a glorified salesperson.

A financial advisor should put your interests first when making investment decisions and recommendations. In finance terminology, they should be acting on your behalf as a fiduciary, meaning any time they offer advice they should first ask themselves, “Am I acting in the best interest of my client?” Advice should be based on evidence, not on the whims of their gut instincts. Advice should be given with a complete understanding of your entire financial ecosystem, not just your investment portfolio. You can’t make informed decisions without a clear picture of someone’s overall financial position including debts, spending habits, and future needs.

You’ll need to know exactly how your advisor gets paid and what that fee will be, on both a percentage of assets basis, and a ballpark dollar amount based on the size of your portfolio. It’s not a good
sign if you find someone that’s compensated based on commissions. Incentives matter, so you have to distinguish between someone selling you products versus giving solid advice and aligning their interests with yours. If a financial professional makes their money through commissions they are incentivized to churn your portfolio and sell you more and more products. That’s not the type of advice that works
for the client’s interests.

You’ll want to find someone who listens more than they talk. They should ask you plenty of questions and then spend their time explaining things when you turn the tables on them. They have to manage your portfolio using a well-thought-out process that includes the right asset allocation that suits your circumstances. And finally they need to lay out the policies that will guide their actions in the future to make sure the implementation process and ongoing maintenance of the portfolio are planned out in advance.

Getting things set up should be fairly painless. It’s the implementation and ongoing maintenance of your financial plan that will cause you problems when it’s someone else that’s making the decisions on your behalf. In one experiment, whenever a broker gave accurate advice, clients reported that they felt less satisfaction than if they would have made the decision independently. It’s more emotionally gratifying to make those calls yourself. It turns into something of a game. However if the same clients lost money, they felt much more regret than if the decision was theirs alone. So following someone else’s recommendations reduces the emotional impact of losses. A financial professional can act as something of a shock absorber to your loss aversion. This is why people pay for investment advice. It’s a way to defer not only your decisions, but your emotional state in the case of losses.

Education should be a huge aspect of any financial advisor–client relationship. This cannot be overstated. If an advisor is ever going to be able to save you from yourself, first they must educate you. Not only do they have to tell you what to pay attention to or avoid, they also have to be able to figure things out about your situation that you’re aware of, but you don’t understand how important they are. Both analytical and good communication skills are essential for a successful financial advisor. You shouldn’t need a translator to understand what they’re saying. It should never be “Trust me, I’m the expert.” It should be “Here’s what I’m doing and here’s why I’m doing it.”

“Usually, you end up in the hands of promoters and not the hands of the people who really know how to make money.”

Warren Buffett at the 1999 Berkshire Hathaway annual meeting.

Find a Financial and Investment advisor that prioritizes your well being as a person, who loves what they do. Though money is always important to pay their bills, but for most of these wonderful advisors, money is an outcome of the tremendous value they give to their clients.

How to Be a Good Client? —>