What value does a financial advisor provide to investors? Many investors believe they are capable of producing above-average market returns on individual investing on their own, and they may be right. It’s likely they’re also facing significant risk they may be unaware of in regards to their financial future.
There are three specific ways in which a financial advisor provides intrinsic value to investors:
1. You like making emotionally charged investing decisions.
Science writer and historian Michael Shermer explains this ingrained response in his TED Talk “The pattern behind self-deception”. Shermer invites his audience to partake in a thought experiment: pretend you are an early human walking the plains of Africa eons ago. If you hear a rustle in the grass, you have two possible beliefs: the rustle in the grass is the wind, or it is a dangerous predator.
If you believe the rustle is a predator when it was merely the wind, you’ve made what is called a Type I error in cognition, a ‘false positive’. There is no harm in your error because you erred on the side of caution. Now, if you believe the rustle in the grass is the wind when in reality it’s a hungry predator, you just self-selected to end your existence. You committed a Type II error and the predator is no longer hungry.
We as humans aren’t hardwired for successful investment strategies when left to our own devices. We tend to make emotional investments. We're trained to take action when what we value is threatened. If we rely on our emotions to drive our investing, we can make fatal investing mistakes. Ignoring a financial advisor’s advice is equivalent to assuming the rustling grass was caused by wind.
For example, when the markets are down 20% and you have a portfolio with long-term objectives, the best practice is often to leave your investments alone. And yet, our brains tell us to make uncalculated reactions based on our ‘lizard brain’ responses of fight or flight. We are naturally conditioned to believe dangers exist instead of disbelieving in their probability.
What we believe creates a structure for our perspective on the world around us, including financial investing. Investors who make judgments based on false beliefs can subsequently make egregious errors that compound their initial mistake. A reliable financial advisor may help protect you from committing emotionally charged investing decisions based on unfounded beliefs.
2. You believe in making biased decisions with limited evidence.
Investors often fall prey to a litany of behavioral biases, one of which is confirmation bias. You as an investor may want to make unbiased investing decisions based on empirical data, but confirmation bias can lead to finding data that only supports what you want to be true. This cognitive disconnect creates a potentially dangerous investing mindset.
Market volatility can cause our brains to accelerate and make short-sighted investing decisions. A good financial advisor may help slow your thinking and consider market evidence to keep your behavioral bias in check.
3. You like operating in a vacuum with little input from third-party experts.
If you are an individual investor without the guidance of a financial advisor, who do you trust to provide an unbiased perspective? Your spouse can often see a situation differently than you and provide a good perspective. If you’re sick, you can trust a doctor has the education, experience, and resources to give you the best insight to your situation.
A financial advisor can provide trustworthy third-party perspective in times of market volatility and investing decisions. For example, if a majority of your financial investments are tied up in your company’s stock, you may not realize the potential risk your portfolio holds. A financial advisor can help hold the tension between the fear of the unknown and the greed of get-rich-quick gain.
These three benefits are simply part of the value a financial advisor can provide. Our American Portfolios Denver team of trusted advisors rely on evidence-based investing principles in conjunction with risk tolerance and asset allocation. We have the experience and insight to help you navigate your financial investing journey.