Going Professional

Selecting an long-term investment advisor is not entirely unlike maintaining a car... Stick with me.

There are three choices regarding car maintenance: hire someone to maintain the car for you, care for the car yourself, or don't maintain the car at all. This decision is informed by your knowledge of car maintenance, self-confidence, interest in the task, and the time/money tradeoff. Do you save some bucks busting your grease-covered knuckles under the shade tree on a Saturday afternoon or dip your well-manicured hands into your wallet to pay a pro? The choice is also informed by the value of the car, and the car's complexity; you may be more inclined to turn a wrench on a Mercury than a Maserati. Some cars are inherently lower maintenance; other rides are 'high-performance machines' that require lots of monitoring.

Similarly, there are three options* for maintaining long-term investments. First, management can be accomplished using a professional advisor; this is a tried-and-true approach and a $56B industry stands at the ready to help you invest. Alternately, you can educate yourself and develop/implement a strategy on your own. Self-management will save advisor fees along the way but, not unlike a with a car, if you don't know what you're doing it can cost you big over the long haul in lower returns. Lastly, while technically you can also ignore long-term investing and simply hope that your lack-of-strategy gets you to the finish line, this is not a recommended approach.

If the car buyer intends to have the car professionally maintained, the cost of maintenance is important; if he intends to perform all the maintenance himself, ease of maintenance is likely prime. A wise car-buyer chooses a reliable, easy to maintain car giving him the flexibility to self-perform or outsource the work.

A wise long-term investor chooses a reliable, easy to maintain portfolio giving the flexibility to manage himself or outsource the work to an advisor. Self-directed long-term investing should focus on simplicity, cost efficiency, and performance (actually, so should advisor-assisted investment). Avoiding 'high-maintenance' investments which require monthly (or even daily) care is key when building a successful long-term portfolio.

So, the self-directed vs advisor-directed decision - like so many other things on this site - can be expressed as a simple equation:

Advisor Worth = (Excess Return + Convenience) - (Advisor costs)

So, if the advisor charges more in fees than he provides in return and convenience, then you're losing money every year by retaining him as an employee.  But how does one turn these concepts into numbers?

Convenience is a personal judgment, but it's a pretty easy notion to grasp. What's it worth for you (per year) to not have to 'deal with your investments'? How much better do you sleep at night having a professional watching the store?

Advisor costs can be trickier to get at but are discernible, but an investment advisor surely knows exactly what he makes from your account each year. You should know too.  

Excess return is the additional return the advisor provides above what you could achieve yourself (say, using a publicly-traded index fund). Excess return regards specifically future returns - which are impossible to know in advance-  so the equation remains unsolvable looking forward. However, the equation is quite solvable looking back, and it's an important calculation to make periodically to ensure you're getting value from your advisor.

In summary, hiring an investment advisor is not only a personal choice, but it is largely a function or personal interest in (and aptitude for) financial matters. Beyond the math, you must be comfortable with your chosen path forward since - by definition - it's a long-term thing.

*One important caveat:  'Robo-advisors' - or automated investment advisors - have emerged in the last decade. Robo-advisors are becoming incredibly popular; in fact, they're transforming the industry. We'll discuss them in an upcoming post. For now, you can read this: https://www.forbes.com/sites/robertberger/2015/02/05/7-robo-advisors-that-make-investing-effortless/#3df5c27e4ae4

A more recent update here: https://www.barrons.com/articles/the-best-robo-advisors-for-2020-according-to-barrons-exclusive-ranking-51596243960