Do You Need an Investment Advisor?

September 16, 2008
Chandan Sengupta

Physician's Money Digest, March15 2003, Volume 10, Issue 5

Almost everyone who invests needs an investmentadvisor, especially those with portfolioslarger than $500,000. People who try tomanage large portfolios on their own based onadvice from brokers, the media, newsletters, andothers almost always miss out on making hundredsof thousands of dollars over the yearsbecause of investment mistakes. Unlessyou're sure you have the time and aptitudeto learn about investing to developthe conviction, discipline, and patiencenecessary for long-term investment success,consider working with an advisor.It is essentially impossible to make upfor the years you waste in underperformingthe market.


History shows that on a well-managedportfolio, investors can expect toearn an average of 6% to 10% per yearover time, although the numbers willvary widely from year to year. Workingwithout the help of investment planners,most investors are likely to earn less than3% per year. In the bull market thatstarted in 1982, most investors actually lost money.

Over 20 years, a $1-million portfolio today at10% will grow to $6.7 million, at 6% to $3.2 million,and at 3% to $1.8 million. The benefits of havinga portfolio managed well is enormous. But thecosts can wipe out much of the benefits unless youwisely choose an advisor. Average investment advisoryfees are around 1.5% per year, and on top ofthat, many investment advisors put clients' moneyinto high-cost funds—often because they have specialrelationships with the funds—costing another1.5% or more per year.

Find competent fees-only investment advisorswho charge you between 0.5% to 0.75% per year,depending on the range of services theyprovide, and who use low-cost, primarilyindex funds, to keep your total costs ataround 1% per year. The fees should belower for large portfolios. Most investmentadvisors can't charge you less thanthis unless they earn fees on the side byselling you products with high hiddencosts, which is not in your best interest.

Looking at the $1 million portfolio,your average return per year should bebetween $60,000 to $100,000, withinvestment management fees of around$6000 per year and other costs ofaround $4000 per year. Even without aninvestment advisor, many investors actuallypay a lot more than these amounts infund fees, wrap-account fees, and otherexpenses, but they don't realize itbecause those are well hidden. As part oftheir service, your advisor should minimize yourother investment costs and taxes.


To find the right investment advisor and bene-fit most from their expertise, you'll need the rightexpectations and attitude. Make absolutely surethat you pick someone who wholeheartedly believesin the results of the past 3 decades of scientificresearch in investing and not in the myths andfantasies of Wall Street. Don't expect market-beatingperformance from any investment advisor.

The most important thing a good investmentadvisor can do is help you take your proper amountof risk and earn the best return. On their own,investors swing between taking risk extremes—firstthey fearlessly take too much risk, and then tend tocut back too much, which results in smallreturns—and overall underperform the market.

The best investment advisors will help you stayon a steady course and keep your investment costsand taxes as low as possible. They will maintain awell-diversified portfolio and the right asset allocation,and do very little trading. They may not seemto earn their keep every month or every year, butthey will probably make a big difference every fewyears. For example, a good investment advisorwould have stopped their clients from pouringmoney into tech stocks at the height of the bubble,thereby saving investors many times the annualinvestment advisory fees and a lot of agony.

Investment advisors often worry that if theydon't appear active, clients will wonder why theyneed them, and they will lose business. In your ownbest interest, assure your advisor that you are notlooking for activity for the sake of activity; you arelooking for steady performance and good advice.Know that as long as you have found a knowledgeableinvestment advisor who charges a reasonablefee and always acts in your best interest, you will bemuch better off staying with them than switchingto someone else or trying to do it on your own.

Chandan Sengupta,

author of The Only

Proven Road to Investment

Success (John

Wiley; 2001), currently

teaches finance at the

Fordham University

Graduate School of

Business and consults

with individuals on

financial planning and

investment management.

He welcomes

questions or comments