Realistic Expectations and the Cost of Bad Advice

Many reading this may remember how, only a few months ago, the financial news seemed to be constantly reporting new, all-time highs in the financial markets. In fact, the constant barrage of record-breaking finishes on the Dow, the S&P 500, and other major indexes reached a point where it hardly got anyone’s attention. In the first month of 2018 alone, the Dow reached ten new highs, and the S&P broke three records in the year’s first three days of trading. No doubt, many were wondering if there would be any end to the market’s long bull run.

And then, in early February, we learned that the answer was, “yes.” Economic news created market jitters, and stock prices began to plunge. Many pundits began to loudly announce the end of the world as we knew it. Nervous investors dumped stocks. Eventually, the markets began to stabilize, building a foundation for the next upward trend. Sadly, however, many of those who panicked and raced for the exits will sit on the sidelines, earning paltry rates of interest as the equity markets continue to do what they have done so well for so many decades: build wealth for patient, disciplined investors.

What is the difference between those who allow emotion to rule their portfolios, and those who successfully achieve their long-term investment goals? In most cases, the crucial variable is the quality of advice they receive. If that is the case, how can we tell between good advice and bad advice?

In a January 21 article for The Spokesman-Review, financial reporter Liz Weston gives some excellent hints that can help. For one thing, good advice “doesn’t promise the moon and stars.” In the go-go environment of the recent bull market, many so-called advisors were prone to emphasize their wins. But as my friend and veteran advisor Chas Boinske points out, research consistently shows that most advisors aren’t able to consistently out-perform the markets, and those who attempt to do so usually cost their clients so much in trading costs and other fees that any gains are negligible or nonexistent. In fact, another marker for good advice is that it carefully considers and explains all costs to the client before taking action. Bad advice, on the other hand, often involves opaque fee or commission structures and exotic, illiquid products that benefit the advisor far more than the client. Good advice tends to be clear, reasonable in cost (though not free), and always delivered and executed in the client’s best interest—not the advisor’s.

If an advisor tells you that a particular course of action is “a sure winner” or “ready for a huge upside breakout”–beware. Such promises lead to unrealistic expectations that can cost you a fortune. On the other hand, if an advisor warns you that “the markets are about to tank” or that “it’s time to sell everything and sit out the downturn”–get a second, or even a third opinion. Such fear-based, emotionally manipulative counsel is rarely delivered with the client’s best interest at heart.

But if an advisor takes the time to get to know you, your goals, your risk tolerance, and your current resources; if the advisor asks good questions and then listens to the answers; if the advisor refrains from making sweeping forecasts, promising rosy futures, or offering iron-clad protection against market downdrafts; if the advisor works closely with you to establish a long-term strategy and reasonable expectations based on empirical research; then that is advice worth listening to. An advisor like that will usually be one of the following:

• ​Registered Investment Advisor (RIA) or Investment Advisor Associate (IAA),
• Certified Financial Planner (CFP),
• Certified Public Accountant (CPA),
• Certified Private Wealth Advisor (CPWA),
• Accredited Investment Fiduciary (AIF),
• Personal Financial Specialist (PFS), or
• The holder of another designation of training from a nationally accredited financial advisory organization.

Such an advisor is someone whose advice, rather than costing you, can actually save you money, time, and heartache as your journey toward your financial and investment goals.