Retirement Investing: Don’t Go It Alone
Evidence is mounting that hiring a financial adviser is a good idea
Trust me, I’m no shill for financial advisers. But three points of data — as some journalists are fond of noting — do make for a trend. Consider:
1. Dalbar recently published a report suggesting that do-it-yourself investors aren’t doing so well when it comes to managing their own money. (In the interest of full and fair disclosure, I was employed by Dalbar when it first published its report, the “Quantitative Analysis of Investor Behavior,” some 20 years ago. The report has shown since it was first conducted in 1994 that investors lag the mutual funds they buy, with seemingly every move working against them.)
2. Dan Heath, co-author of Decisive, said recently at the Investment Management Consultants Association conference that advisers can help retirees and investors avoid bad decisions. His reasoning is that advisers provide a buffer to an investor’s emotional reactions to the swings in the markets. The advisers help investors stay the course when emotions might suggest otherwise.
3. If all of that wasn’t enough, I chanced upon—don’t ask me how—a persuasive dissertation written by Benjamin Cummings, who is now an assistant professor at St. Joseph’s University. Cummings conducted three research projects, two of which are worth noting: Bounded Rationality Strikes Again: The Impact of Cognitive Ability and Financial Planners on Roth IRA Adoption and Ownership and The Impact of Financial Advisors on the Subsequent Wealth of Older Adults.
In one study, Cummings discovered that greater cognitive ability and having a financial planner are both positively related to Roth IRA ownership and to earlier Roth IRA adoption. And in his other study, Cummings looked at the effect that financial advisers have on actual wealth retention and consumption decisions among adults age 60 and older. And what he found is that “using a financial adviser is significant and positively related to subsequent net worth, especially on net worth values more than a decade after initially reporting the use of professional financial advice.”
So, for instance, the mean net worth of those surveyed who were 60 years old in 1993 and still alive in 2008 and who had an adviser rose from $400,000 in 1993 to slightly more than $500,000 by 2008. By contrast, the mean net worth of those who didn’t have a financial adviser was mostly flat at around $200,000.
“There was a statistically significant difference,” said Cummings in an interview. “And the big takeaway is that the significance is greater when you are looking at differences 10 years out.”
Specifically, Cummings and his co-authors found that having a financial adviser is associated with a greater allocation to equities. “A lot of older adults sit in CDs and cash. And so a big value that financial advisers can have is to help them invest in the market so they can get those market returns. Having at least some allocation to equities could be one of the values that a financial adviser can have,” said Cummings.
“Taken together, these results provide evidence that financial advisers provide financial and nonfinancial benefits to individuals who use their services,” wrote Cummings. “Frequently, the quantifiable benefits of their services may only be realized when considering long-run financial outcomes.”
Manage Your Expectations
Now, if you have designs on hiring an adviser or even if you have one already, this means that it’s an in-for-a-penny, in-for-a-pound sort of exercise. Or put another way: You’ll need to manage your expectations about what an adviser can or can’t do in the short term.
You may not realize the full qualitative and quantitative benefits of having an adviser for at least a decade, according to Cummings.