Sometimes the home office is right

Tina Haapala |

By Gary Silverman, CFP®

Let me tell you a little secret of Wall Street: Often your financial adviser is a really terrible investor. I don’t mean that sometimes they have a bad year. We all have bad years. What I mean is that some advisers are always bad at investment research and portfolio building. And in many cases, that doesn’t matter.

“What?” you say,“Of course it matters. Why the heck would I use an adviser who is lousy at advising?” Well, I didn’t say they were lousy at advising, I said they might be lousy in making research and allocation decisions in a portfolio. They might be an excellent adviser. Let me explain.

If your adviser is employed by an insurance company or brokerage firm, their primary job is to sell. Whether it is to sell you an investment or policy, or to sell you service, it doesn’t make sense for the firm to employ them unless they can make that firm more money than they cost. That’s okay. Well, it’s okay if they also happen to make you more money than they cost. This can be done either by helping you make more good decisions or fewer bad ones than you would have without their help and guidance.

Nothing about that says that they are the ones who came up with the advice.

A recent study by Cerulli Associates looked at portfolios that were designed by stockbrokers and compared them to the portfolios their home offices recommended. Yes, the home office recommendation may have been a bit more generic; and yes, the stockbroker may know you and your situation more intimately. Yet the Cerulli study showed that the home office portfolios gave the clients a better return on their money.

It seems that most advisers are rather human. They fear losing money to an extent that causes them to give up too much return. They tend to sell into market drops and buy into bull rallies when a buy-and-hold strategy would have done better.

Now the Cerulli is just one, and it is necessarily of limited scope across a limited time. Anecdotally I can tell you there are many advisers out there who do a good, and often a better, job than their New York-based teams recommend. But whether you have an astute adviser or an adviser who astutely uses his home office’s recommendations to fuel your portfolio this study indicates that the former is not necessarily better than the latter.

So instead of worrying whether your portfolio is built by your adviser or by a team in the background, concern yourself with whether your adviser is ensuring that the advice meets your particular wants and needs. Is the risk and return profile of the portfolio one that matches your psyche and financial situation? Have they asked questions about your ability to weather a financial storm with adequate savings? Are they aware of your tax situation? Do they have the ability to explain things to you in a way you understand?

Do you trust them?

This article was published in the Times Record News on October 18, 2015.