The question is this: does the value you are receiving now justify staying put. After all, change is usually difficult. Have you really evaluated what value you are receiving right now?
Do you remember Harry Truman: not President Truman, but Harry Randall Truman? Harry Truman lived on the south end of Spirit Lake at the base of Mount St. Helens. He had owned and operated a recreation and fishing lodge for decades. He called the mountain his friend and claimed a deep relationship with it. He had watched the puffs of ash and had become an expert in the earthquakes. Those tremors had become more frequent in 1979 and 1980. In the spring of 1980, geologists told him he was living in the most likely path of lava flow in the event the volcano erupted. They had told him the lava would run down the mountain and right through Truman’s house and lodge. But Harry convinced himself that everything would be ok. After multiple burps and earthquakes, he said, “I think it’s shot its wad.” And even if it did erupt, he “knew” the lava flow would be down the other side, away from his lodge.
Family members implored him to move, but Harry only said, “They’ll never get me off this mountain. Spirit Lake and Mount St. Helens are a part of me—they’re mine. They’re as much a part of me as my arms and legs.”
On May 18, Mount St. Helens did erupt, and the north side of the mountain collapsed, sending a flow of molten rock down the northern side right over Harry and his longtime home.
Change is difficult. Even when experts told him he was in danger, he rationalized that the mountain had already puffed out the pressure and rationalized even further that if the mountain did blow, it would be in the other direction.
We are creatures of habit and will always try to rationalize reasons to keep doing exactly what we have always done. In investing, clients stay put because they really like the financial advisor. They have developed a relationship with them. According to a survey by the Carson Group, 81% of clients who have a prepared plan feel highly satisfied with their advisor.
To develop a plan, the advisor collects a raft of information about the client(s) and feeds it into a computer software program. That program produces a plan in a rainbow of colors with pie charts and bar graphs and tables and pictures and illustrations. Yes, most of it is pretty boiler-plate, but it is specific to the client.
Four of every five clients will deem that valuable enough and will be very satisfied. The plans have all their information and each forecast is customized to the client’s actual financial situation. There will be up to 400 or more pages. It is a magnificent display and builder of confidence.
But those plans never seem to lay out a comparison to other investment options. The plans never make the comparison to simply investing in, say, the S&P 500 Total Return Index Fund. No, the plans are set and list out the investments as if they are they only investments that will ever get the client to the end goal and see the client never run out of money.
And that is what the plan is selling: never running out of money. They will give a whole set of probabilities on how well the client will do if they continue to save prior to retirement and make a relatively consistent withdrawal after retirement. They give a feeling of comfort that the client will not run out of money and will be able to maintain a quality of life.
Even during a black swan pandemic or Great Recession, the advisor will not revise the plan just because the plan did not foresee the black swan event. The advisor will encourage the client to just stay the course because the markets always come back. Maybe the advisor will encourage the client to add more to the plan even if it means having less current income.
What is perplexing to me is the plans are as right as a broken watch. They are based on a static market that never changes and the forecasts are based on incorrect statistical assumptions. I think these plans are more emotional comfort than sound investment advice.
What is strange to me is that a robo-advisor can do exactly the same thing. The robo-advisor can gather all the information from a client, produce that 400 page report with the kaleidoscope of graphs and make the same projections. The robo-advisor can put together the same potpourri of investments as the human advisor with the exact same probabilities.
In fact, the robo-advisor may deliver a superior plan and investments. They are computer algorithms and completely objective. The robo-advisor has a greater range of investments and can pick out the best of the 26,254 (and growing!) mutual funds available to investors. Human financial advisors probably do not have the capacity to scan and analyze all the mutual funds to optimize for each specific client. The robo-advisor will not be swayed by the mutual fund wholesaler who calls on and hawks his own brand of fund to the human financial advisor.
But the big difference is that the robo-advisor is ¼ or less the cost of the human advisor.
If robo-advisers are so obviously superior, what is it that keeps clients with their human advisor? The point of writing about robo-advisors is to illustrate that the value of a financial plan is a lot less than most clients are paying their financial advisor. Most of what is being paid to financial advisors is for the emotional support.
If it was not for the emotional hand-holding, clients might sit down and look at their actual returns – and see how they stack up next to others.
But change is hard. Harry Truman loved his mountain. It was a special relationship and he was unwilling to change. His was an emotional decision. Harry had to disregard the facts.
That raises the question: how much are you paying your advisor per year? What is it giving you beside the financial plan? Financial plans can be purchased for ¼ of what you are paying. What are you getting for the other ¾?
I publish my returns. Have a look at them. Compare how you are doing to how my clients are doing. Ask yourself this question: “Has it been worth the difference to continue working with my current advisor?” And yes, I know that past performance is not guarantee of future performance.
Is your financial advisor worth what you are paying them? You are probably paying them quite a bit. Are they really earning it?
If you are not seeing new highs in your account, are you are considering the “opportunity cost”? That is the amount you might have been making with a different strategy. Isn’t that cost is much higher than the fee being paid? Will you sit down and figure out what the shortfall has been? Will you ask yourself if is it worth it?
Harry Truman was happy on his mountain. He trusted the mountain to stay calm and not erupt. Harry even believed that if the mountain did erupt, it would understand it should flow to the other side. He heard the experts. But did he ever ask himself the question, “what is the cost to stay where I am?” Or maybe he was 83 and he didn’t care. Or maybe he just didn’t know what he would do or have if he left the mountain.
Will you ask the tough questions about whether you are getting your money’s worth? Change is hard. It is going from the familiar, whether it is the mountain or advisor you love, to someone new. The big question is, will it be worth it?