The Investment Scientist

A Good Advisor Helps You Do Nothing

Posted on: August 20, 2013

I had a fun conversation with a prospective client who I lost a few months ago. He actually got me to create an investment plan for him, then he shopped around and found an advisor who charges less.

He then had the gall to call me back and ask whether I think he is paying too much for his new advisor. Here is what he said.

My advisor puts me in low cost ETFs and meets with me every quarter. But otherwise he does nothing with my portfolio, so what exactly do I pay him $15k for?

I know this gentleman has a sizable portfolio, and $15k means a fee of well below 1%. So I told him what I thought.

  1. The fee is very competitive.

  2. The advisor did the right thing by putting his money in low cost EFTs.

  3. Doing nothing with a portfolio is the only right thing to do!

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The guy was totally surprised by my statement #3: “So I am basically paying him to do nothing?! And you say that’s the right thing to do?”

Yes, emphatically!

There is a study by Berkeley professor Terry Odean whereby he examines all Charles Schwab accounts. He classifies them into five categories according to how active the accounts are. He has a surprising finding: the more active the accounts, the more money they lost!

From 1992 to 2011, the stock market produced annualized 7.81% in returns, the average investor only got 3.49%, all due to their counter-productive activities.

There are a lot of advisors out there who are busy spinning their wheels trying to get you into the next hot stock. Stay away from them. They will cost you dearly.

It’s very counter intuitive, but a good advisor should help you do nothing. When you get restless, he should have a way of saying to you:

Don’t just do something! Stay there!

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Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.


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