Friday, April 17, 2009

Losing Trust in Your Financial Adviser

Jeffrey Goldberg speaks for a lot of people when he opens his recent Atlantic Monthly article by saying that he and his wife "behaved in the way responsible cogs of capitalism are supposed to behave." Link here.

He had trusted the advice he was receiving from his broker, from respected finance gurus, and from talking heads on television.

And then, he got hit by a bus. Figuratively, of course.

Now, trying to recover his depleted fortunes, he travels around the country speaking to a diversified portfolio of finance gurus, from Robert Soros to William Gross to a survivalist in Arizona.

They all tell him the same thing. That he was a sap for believing that his broker cared for anything more than the commissions his trades could generate. As Bill Gross, the bond guru from Pimco tells him, the game is rigged against small investors.

Clearly, Goldberg's portfolio suffered because he had placed too much faith in expert opinion. Now he seems to believe that he needs to find more expert experts.

This conclusion is too facile. Not least because some of our most respected gurus got reamed by the market crash. If you had invested with Warren Buffett you would have lost, from peak to trough, approximately 50% of your assets.

Perhaps the market was also rigged against Buffett.

We should still ask whether Goldberg really did the right thing. He believed in the system and he believed in his expert advisers. And he believed that by acting as a true believer he would necessarily be rewarded.

But did he really understand the markets? If he believed that the markets were in the business of taking care of us or of making us rich, then clearly he did not.

If he thought that he could simply sit back in his chaise lounge while his broker worked for him, he did not understand the investing business.

Markets do not necessarily reward people who believe in capitalism. A religion might reward people who believe in God and who do all the right things, but the markets are functioning on a different plane.

Markets often reward hard work, work that you do for yourself, work that you might do in conjunction with an adviser, but work that cannot merely be done by your adviser.

Clearly, Goldberg is not in the position to spend all his time working on managing money. As a self-interested amateur his job involves making the best choice of a financial adviser.

While some advisers are clearly in it for the commissions, others are not. It is an investor's job to work hard enough to make a good choice of an adviser.

An investor's second job is to work with the adviser to develop a coherent strategy for dealing with the markets and a good working relationship.

If Goldberg did not hear from his broker for months on end, clearly, his broker was negligent. And yet, what prevented him from picking up the phone?

But let us grant that Goldberg, like many of us, was too trusting in the great financial minds who were assuring us that the markets would make everything well.

Is it a good idea to go to the other extreme now, and trust no one?

Whatever caused Goldberg to fire his broker, it is not necessarily a good thing for him to place his trust in the wit and wisdom of a survivalist who is speaking to him while standing in the snow in his bare feet.