Financial Advisors are not oracles.
A Financial Advisor should not guarantee the price of a stock, the future performance of the market or future interest rates. Financial advisors should not guarantee an investment product’s performance. To claim such omniscience is foolish. There are no get rich quick schemes. There are no sure things. There are no risk free investments (or even low risk investments) with high interest or valuation returns.
The fundamental rule is that return on investment directly reflects the risk in the investment. The higher the projected or hoped for return, the higher the risk. The higher the level of security in an investment, the lower the return on the investment. There are no free rides.
Also, long term studies have shown that financial advisors routinely underperform the open market. The basic reasoning is that retail financial advisors, those who are available to work with you and me, are low down on the knowledge chain with respect to market developments. If there is a development in the marketplace, who do you think knows first:
- Senior market players like banks, insurers and pensions trading on their own accounts;
- Large entities like massive multi-national corporations;
- Financial industry participants who are in the inside circles (those not advising John Q. Public); or
- A Financial Advisor who deals with the public.
By the time you get a call, the news is priced into the market. Did your financial advisor tell you this truism?
Process Guarantee
While financial advisors cannot provide a price or performance guarantee, they can provide valuable insight on how to position your long term investment options through life cycles, including “unforeseen” contingencies.
Financial advisors are trained and experienced professionals who are required to learn about their clients’ needs, investigate suitable investment products, recommend these suitable products to their clients (while warning of the products limitations and advising about alternative options), implement their clients’ informed instructions (if suitable to their clients’ circumstances) and then to review these investment products and their clients’ circumstances to ensure that the investment products remain suitable to each client’s needs.
The true and valuable skill offered by the financial advisor is the “Process Guarantee.” A Process Guarantee is a simple concept. Your financial advisor likely committed (legally known as a “contract”) to you to follow a pre-established process in order to ensure that meaningful information is exchanged between you and your advisor. Once your advisor has established effective communication, the advisor can consider suitable recommendations specific to your circumstances. The financial advisor is required to provide meaningful options and recommendations which not only explain the benefits but also lays bare the risks in your circumstances, your options and his/her recommendations. Only then can you make informed choices. Once you make your informed choice, then the financial advisor is only continually obligated (the “Continual Obligation”) to:
- implement your instructions;
- keep up to date with your personal circumstances (and changes in these circumstances);
- keep up to date with the benefits to you of holding and/or selling your financial investments and/or buying more or alternative investments;
- continuing this process for as long as they are your professional advisor.
Note: The Continual Obligation includes changes in products, investment value and market forces. For example, during the falling market of 2000/2001 and 2008, the financial advisor’s Continual Obligation was foremost in many investor’s losses. Financial advisors who breached their Continual Obligation were vulnerable when clients suffered avoidable losses.