WASHINGTON, Feb. 20 (UPI) -- Lord Finchley tried to mend the electric light
Himself. It struck him dead. And serve him right!
It is the business of the wealthy man
To give employment to the artisan.
Hilaire Belloc's immortal rhyme encompasses a very important principle in life: Don't do for yourself things that other people can do much better for you. I follow the principle religiously, avoid DIY like the plague, and tremble in fear every time I have to go into a Home Depot.
Unfortunately, it doesn't entirely work the other way around. The electrician seeking to provide for his retirement cannot simply delegate the task to a financial adviser; his chances of financial electrocution are thereby increased rather than diminished. It seems unfair that the plumber or electrician provides more reliable service than the financial adviser, but it is indeed the case.
The reason, of course, is that there is not a well-established corpus of knowledge that the financial adviser can use to help his retail investor client. It is well-known that very few if any investors or fund managers beat the stock market index; as a retail investor of modest means you are vanishingly unlikely to come across one of them. Consequently, when you go to a financial adviser, you are at best paying him substantial fees to do something that you could do for yourself: Invest in an index mutual fund.
That of course assumes that you go to a "financial planner" who charges a fee based on the amount of your assets, perhaps some (hopefully modest) percentage of their value each year. At least in this case the planner's interests are more or less aligned with yours; if your assets increase, so will his fee next year.
The truly dangerous financial adviser, and the one who is likely to provide the honest tradesman with financial electrocution, is the adviser remunerated by brokerage commissions on his client's trading activity. In that case, the adviser's interests are sharply divergent from the client's. The client wants his assets to be placed in safe investments, that will ideally increase in value somewhat faster than the market as a whole (this is an unrealistic wish, but it is an abnormal client who does not wish it.) The adviser remunerated by commissions wants the client to have an active account, trading in and out of stocks day by day, as different ones become fashionable. Of course, having mankind's normal self-confidence, generally (since he is largely a salesman) to an excessive degree, the adviser will expect his expert short-term trading to generate profits for the client that will more than pay for the cost in brokerage commissions. It is thus a disappointment to him when the profits fail to appear, but he loses very little sleep over it; it's the client's money, not his, that has been lost.
The problem of the salesman/adviser was of course greatly exacerbated in the late 1990s. First, advisers had generally made money for their clients in the early and middle 1990s (because the market went up) so they took bigger risks as the decade wore on. Second, investors were more likely to be seduced by advisers who promised big returns, and more willing to suspend their disbelief that rapid "churning" of the account made such returns more likely. In extreme cases, such as Lehman Bros.' Frank Gruttadauria, where $100 million went missing, the SEC and the brokerage industry forced a cleanup and partial restitution to investors. However, the investor who, in the five years from 1998-2003, trusted his wealth to a commission-based financial adviser and lost only two-thirds of his money has no chance of restitution from the SEC or his broker -- and indeed he may consider himself relatively lucky.
Having said that it is almost (but not quite) impossible to beat the market consistently, the above example demonstrates that it is indeed only too possible to underperform the market by a huge margin. There are two ways of doing this: paying excessive brokerage commissions and switching among investments according to the latest fads and rumors. Over the long run, both are guaranteed to lose you money. Indeed, the best customers for fee-based financial advisers are individuals who have just lost money by one or other of these methods, and have ceased to trust their own judgment. If you totally lack discipline, then you should arrange to have your money managed by someone who doesn't -- and a fee-based financial adviser may in such a case be the least bad alternative.
However, for electricians and plumbers who want to manage their own money, there are really only three things they need to know:
-- First, they should invest on a regular basis over a long term, a fixed amount per month, and should keep a cushion of savings (or credit card borrowing capacity) available so that they NEVER have to withdraw money unexpectedly, at what may be a market trough.
-- Second, they should balance their portfolio between bonds and stocks, including if they wish more specialized asset categories such as small-capitalization stocks, foreign stocks or gold. It doesn't really matter what the balance is, but they should avoid changing it and when (because stocks go up, for example) it changes itself, they should, say once a year, move assets from one category to another to get back to the balance they started with.
-- Third, they should in general buy "index" mutual funds, which track the average of the bonds, stocks, international stocks, small stocks or whatever asset class they choose. They should buy only funds that do not charge a front-end commission, and whose annual fees and expenses are below average in the industry. Vanguard and T. Rowe Price are good fund management companies to look at, but any well-established fund management company whose fees are low is fine (by definition, all index funds are pretty similar).
How many English lords does it take to change a light bulb? None -- they get someone else to do it for them.
But electricians and plumbers, who have to master technical details and complex instructions, are smart people who should not regard themselves as the financial equivalent of Lord Finchley. They are perfectly capable of managing their money themselves, provided only they follow the above three rules and stay disciplined.
(Wing Collar is a biweekly column of personal finance advice, expected to appear alternate Thursdays. It intends to give readers the solid financial advice, tailored for today's financial needs and markets, that a wing-collared bank manager would have given in the days before bank managers were salesmen.)
