Do Skilled Investors Need a Financial Advisor?

The headline of Steve Garmhausen’s recent article on says it all: Even Skilled Investors Can Use a Financial Advisor. And he shares some compelling statistics to show that many investors feel the same way. Assets under management with registered investment advisors grew from $22 trillion in 2002 to nearly $50 trillion in 2012.

Take a look at the chart below and it’s clear why investors could have benefitted from professional advice. 1

According to the Investment Company Institute, in March 2009, when the markets hit bottom, household net worth had fallen from a high of $64.4 trillion in second-quarter 2007 to $50.4 trillion in first-quarter 2009. Stock holdings plunged 5.8% to $5.2 trillion, and mutual funds holdings slid 4.1% to $3.3 trillion, as investors pulled $300 million out of their equity funds.

Of course, hindsight shows that shell-shocked investors fled from the market at the very bottom of the Great Recession. And it’s a good bet most these investors weren’t around to participate in the ensuing recovery. This is just the latest example of a harmful trend firms like Dalbar have been tracking for years. That is, alternately driven by greed and fear, individual investors tend to buy high and sell low. And that results in significantly lower long-term returns than if they had remained invested in the market.

That’s precisely how a trusted advisor can help. In the same way coaches train athletes to calmly execute the game plan, an advisor counsels clients not to panic in a downturn and, equally important, not to become irrationally exuberant in a bull market. Work with an advisor and you’ll have an investment policy statement that includes an asset allocation that reflects your goals and your risk tolerance. When the economy hits a rough patch, the investment policy statement can help you deal with your emotions and maintain your focus on the long-term. Ultimately, this document, not headlines in newspapers or your neighbors’ behavior, becomes your guide and anchor.

In all markets, a trusted advisor provides the necessary context and support to help you synthesize relevant information, avoid market noise, and move confidently forward to reach your goals.

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