By Nicholas W. Stuller
Investors historically have either been Self Directed and made all their own investment decisions or used an advisor and delegated all financial decisions to their financial advisor.
However, there is mix of the two, called Semi Self-Directed or a more contemporary term Validators, which could offer the best of both worlds. As the term implies, its an investor who both makes some of their own decisions but also uses a financial advisor.
For most people, they start out making their own investment decisions (Self Directed), then either completely move to using an advisor or become Semi Self Directed. It is rare that an investor hire an advisor, then stop using an advisor and become completely Self Directed later in life.
If employing an advisor to work alongside with you is appealing, there are many ways to go about it, and many ways to pay for the services of an advisor.
Parallel Accounts
Most people that are Semi-Self Directed separate their money into two “buckets”: one they manage and a second bucket the advisor manages. For some of these investors, they literally are comparing how they perform over time to how their advisor performs. This comparison is most effective when the advisor has trading discretion, meaning they can buy and sell securities without getting permission first. These accounts almost always are done on a fee basis, usually charging 1% of the assets (and the advisor is not paid via commissions so there is less conflict) and the advisor is operating under the fiduciary standard so they legally must put your interests ahead of theirs.
If the account the advisor is managing is not under a trading discretion arrangement, keep in mind if you override the advisors’ desire to buy or sell a specific security, the ability to compare you and the advisor side by side may be very difficult, if not impossible.
Some investors use an advisor for either the “fun” money or the “serious” money, and the investor handle the other type of money. This is of course is based on the investor’s interests, risk temperament and time. It is a useful way to separate assets by the purpose of those funds and allows each party to focus on their strengths.
Player and Coach
Another way investors employ advisors is to be the investors second set of eyes. In this relationship, the investor asks the advisor to opine on all investments and other financial actions like insurance, savings, taxes and the like. Investors like Ron have employed this strategy for years with great success. Every decision is ultimately the investors, but before pulling the trigger on an action, they get to bounce the idea off of a professional to think through the action. Typically, advisors like these are paid either by monthly or annual retainer or by the hour and of course by commission.
Best Practices
No matter how you implement the strategy of being a Semi Self Directed investor, there are best practices to get the most out of the relationship.
First, do not withhold information from your advisor. It might be intuitive to not share with your advisor details about the portion of your portfolio you are handling, but in reality, it is harmful. For example, if you are a big believer in high risk technology stocks and your advisor does not know the holdings you personally have, she could be recommending securities that put your entire portfolio in a position of too much risk.
To use a health care analogy, if you are a skin cancer survivor, neglecting to share this with your Dentist would be a mistake even though from a layman’s perspective skin cancer and Dentistry don’t seem related. However, Dentists, like all medical professionals are kept up to date on all types of correlations in health and omitting your history could be detrimental.
Second, keep a journal to document all the advice your advisor gives you, especially if that advisor is working on a non-trading authority basis. It will be very helpful to review the past notes a few times a year, not only to measure how your advisor is doing but to measure yourself. One of the major complaints’ advisors have is that their clients will not implement vital advice. The most common is not getting life insurance, which is something only the investor can do given it’s a legal contract that the advisor cannot directly effect.
Being a Semi Self Directed investor can provide terrific benefits to the investor that wants to be actively involved, and once you get comfortable with the method that works best works for you, your financial life will likely be greatly improved.
Nicholas W. Stuller is the Founder and CEO of MyPerfectFinancialAdvisor the premier matchmaker between investors and advisors using personalized data, proprietary algorithms, and deep industry experience.
