The Secret About Advisors

I’m going to let you into a little secret. Investment advisors are human. This is true regardless of whether they work for a big-name broker, an insurance agency, or are independent. Each and every one of them is human. And that’s a problem.
 
If you’ve read my columns, I’ve talked about a strange phenomenon among individual (meaning non-professional) investors. They seem to have a bias to get out of the market afterit’s gone down and a penchant for getting into the market afterit’s gone up. While they still, on average, make money, they don’t make near the money they would have if they had just left their investments in place.
 
Enter the professionals. You might call them financial planners, financial advisors, investment advisors, or some other such title (I’ll answer to just about anything). They do this for a living. You’d think they must be immune to the emotions brought on by a volatile—these days veryvolatile—market.
 
You’d think that, but you’d be wrong. You see, it’s that human thing. Humans are emotional creatures. It’s wired into our brains.
 
In a Wall Street Journal article, Jason Zweig talked about a study that TD Ameritrade did. They looked at what percentage of cash and bonds wasbeing used by advisors. In October of 2007, which has so far remained the high point of the stock market, advisors had 26% of client assets in bonds or cash. But on March 9, 2009, which was the market low during the credit crisis, those cash and bond holdings had risen to 51%.
 
Now, there may be some extenuating circumstances. Advisors have to follow their clients’ orders, and some clients told their advisors to sell all of the stocks in their portfolios. Also, if they did nothing, the percentage of stocks would have dropped, since the value of stocks plummeted to less than half of their high values during that time period.
 
But even taking that into consideration, and given my own observations of what many investment professionals did, there was a tendency toward amateurish behavior on their part; many advisors moved to a safer configuration afterthe markets had gone down.
 
This isn’t to imply that all investment advisors do a poor job of investing; and it doesn’t mean that all, or even a majority, of them are not doing a professional job. But it does show that they are human after all, subject to the foibles that plague us all.
 

This article was published under the title "The Secret About Advisors" in the WichitaFalls Times Record Newson November 27, 2011.