DIY Investing vs Using An Advisor [HOT TOPIC]

Of course, I am biased, but I really enjoyed reading this article on Bloomberg this week which looks at the trending relationship between using an advisor and DIY investing.

Doing Something is Better Than Doing Nothing. I am not an advisor that gets concerned if potential clients tell me that they want to go it alone. Actually, I would sooner see people doing something rather than nothing and if they stick simply to a range of passive ETFs with some solid mutual funds for support they will probably do just fine in time.

However, I am super confident that over the course of time they could have done better with an advisor helping them through the process and here is why:

1. Having a plan. Entering the market with no plan is probably ok when the amounts are smaller and you are just beginning to get started. However, in time, the pot will increase in value and, hopefully, so will the amount being invested and, at that point, it is important to have a plan that aligns with what you are investing for.
2. Tax Efficiency. Why are you doing this? Most people forget that, on the whole, they are doing it to grow money which they hope to one day spend. At that point, we need to ensure that the money is invested suitably to see a tax efficient income stream. This is not usually going to be a fallout form a DIY product.
3. Drawdown Efficiency. Similarly to point 2, why are you doing it and have you positioned the assets suitably to give you what you want? This will be different depending upon what stage of the process you are in, other assets you may have and what you are hoping to achieve.
4. Holistic Planning. Probably obvious but everything you are doing should compliment and point towards a shared goal/objective. If you were planning anything you would start with a time line, add objectives and then assign resources to tasks whilst ensuring everything pushes in the same direction – financial planning should be no different.
5. Disciplined Strategy. Volatility can be off putting, however, it is not possible to remove volatility altogether and still obtain growth. Having a disciplined strategy that is adhered to regardless of market movement will negate the consequences of volatile market movement over time.
6. Market Knowledge. It is unlikely that you will have the time to research and read about markets, economics and politics as much as you would want to if DIY investing. Further, there are always interesting elements to add to portfolios within up and coming sectors. At the moment, these include areas such as cyber security, FinTech, Robotics and AI, Innovative Disruption, the Genomic Revolution, Block Chain and so on. Having exposure to these thematic based sectors is something that I believe to be useful to not only boost returns but also make the whole process a bit more fun and interesting. In reality, most professional people will not have the time to sit down and read about these things and figure out how to best utilise them.

In summary, I accept that I am biased, but I am also confident that I am right and most professionals would also agree with me.

The age of coronavirus lockdowns helped fuel a blistering rise in retail trading, and many rookies even beat the market. But day traders also found that the year’s market gyrations required constant attention and that their amateur trading tools were limited.

So many do-it-yourself investors have decided that they need professional help.

Jeremy Johnson, a 31-year-old ad tech sales manager in Atlanta, started out trading popular stocks on Robinhood and making deposits to his Roth individual retirement account. But after investing more than $15,000 a year on average by himself, Johnson in November decided that it was time to turn to a financial adviser.

“You can save your money all you want,” he said, “but if it’s not doing anything, what does it look like long term?”

The pandemic-fueled surge in the ranks of day traders could have been seen as a death knell for the financial planning and advice industry. But the field continues to grow, since even day traders and people who prefer set-and-forget index fund investments have come to realize that there’s a lot more components involved in building wealth.

Johnson’s new adviser, chosen based on a friend’s recommendation, helped package his life insurance with a mix of whole- and term-based features, bolstered his savings habits and altered his retirement investments to improve their tax structure.

According to a Cerulli Associates research study from October, 40% of U.S. investors surveyed said they need more advice. Those who said they were willing to pay a financial professional rose to 56%, up 5 percentage points from 2019. And 82% of those who are paying for financial advice said that it’s worth the price.

In fact, stock investors who have a financial adviser were more than twice as likely to say that they are very confident that they have the best investment strategy compared with those going at it alone, according to a survey by Franklin Templeton and Gallup.

Increased Confidence Associated With Advisers

How confident are American stock market investors that they have they have the best possible strategy given the current state of the economy?

Franklin Templeton-Gallup Economics of Recovery Study, Oct. 2020

After stocks plunged in March over Covid-19 fears, Los Angeles wealth management firm Aspiriant LLC saw greater demand for its services. And another set of new clients arrived later in the year as a wave of initial public offerings hit the market, according to Sandi Bragar, the company’s managing director for planning strategy and research. All told, she said by phone, the firm’s client list grew 32% in 2020.

When Tia Ware, a 30-year-old pharmacist in Virginia, first considered hiring a financial adviser five years ago, she was taken aback by the $1,200 yearly fee.

“At first I was like ‘hell no,’” Ware said in a FaceTime interview. “But now, yes, when I see my accounts. If I didn’t have a financial adviser, I’d only have shoes and bags to show for it.”

In the early years, Ware just saw her adviser once or twice a year. But last year after the pandemic hit, she realized how imperative it was to engage more often.

Eddie Welch, whose Montgomery, Alabama-based advisory firm was bought by Captrust Financial Advisors last year, said that any time there’s been financial upheaval, people “have been more warm and receptive to paying for and receiving advice.”

Robinhood’s Impact

Welch, now a principal at Captrust, said that while apps like Robinhood make it easy to trade stocks, “it’s a little more difficult to get into the market with a plan. And in most cases I think that’s what people seek from us.”

The growth of retail trading on free apps prompted major brokerage firms to also offer no-fee trades, with the hopes of convincing some of those customers to pay for advice. Many firms also added robo advisers — software programs that use algorithms to mimic flesh-and-blood financial advisers.

Charles Schwab Corp., which in October 2019 became the first of the majors to offer zero trading commissions, added 142,000 new accounts that month. This created “more of a pipeline for paid financial advice,” according to Morningstar analyst Michael Wong, who said that many of these clients would likely gravitate toward Schwab’s robo advice.

In fact, Schwab’s digital advisory assets grew 18% year over year to $57.9 billion in 2020. This was part of the explosion in robo advisers, with users increasing to 71 million from 46 million in 2019, according to data compiled by LearnBonds.com.

But most traders still want a personal touch. An Investopedia survey of young adults with household incomes of $50,000 or more found that 56% trusted a human financial adviser more than an automated one.

Phyllis Klein, who leads Captrust’s education and advice programs, said clients’ desire for insights was growing sharply as the coronavirus pandemic wreaked havoc on society. “We’ve had almost 12,000 webinar attendees and that is threefold of what it was the prior year,” she said.

“I can’t emphasize how much people need help,” Klein said, “and how much they just want to talk to somebody.”