By Nicholas W. Stuller
Investors often ask is what is better for an investor, an advisor that takes investment discretion, meaning the advisor makes investment decisions without getting permission by the client prior, or one that does not, meaning non-discretion?
While ideally an investor who hires an advisor should let the advisor do their job and not override investment decisions, there are many investors that cannot emotionally deal with letting go and they would likely terminate the relationship anyway, so for these investors non-discretion is best. This excellent question begs for greater review. To be clear, some firms do not let their advisors take investment discretion, but the greater issue is listening to and trusting your advisor’s guidance.
For some fascinating perspective on the impact of second-guessing your advisor, I go back to my own personal experience when as a rookie broker in 1987, I watched the literal chaos on Black Monday, October 19, 1987 when the market dropped 22.6% in one day. It remains the largest percentage drop of the Dow Jones Industrial Average. I was working at the 14 Wall Street office of Shearson Lehman Hutton, an office of roughly 100 brokers. What I saw and heard was unnerving. Clients were calling their brokers and telling them to sell and sell fast. What many of the brokers were advising their clients to do was not sell, and in some cases the broker could not even get a price, yet the client demanded the broker to sell their stocks at any price, despite not being able to get a quote! In those days, and at that firm and that type of firm investment discretion was not permitted, so a broker would do the best they could to persuade the client, but in the end, they had to obey the instruction of the client. History of course proves out that many of these clients made a grave mistake that day by not listening as the market recovered and made gains in only a few short years later.
When one thinks about what is best in a vacuum, assuming the investor selected the right advisor, it makes logical sense that the investor should not override their investment professional, after all, why have an advisor if you believe your own investment skill sometimes is better? It makes no sense from an objective stance.
Adding to the point, as research studies prove out the mathematical value of advisors, very often the most important time to have an advisor is when there is turmoil. Turmoil in the markets, turmoil in your personal life, turmoil in the world, such as the Covid pandemic. During emotional times people tend to make the most mistakes, and this is when the advisor adds the most value.
Echoing this concept, I have talked with and interviewed many advisors, financial planners, and other types of advisors who bemoan the fact that when a client ignores great advice it is not only frustrating, but the client is actually sabotaging themselves. Again, it makes no sense. However, there are investors who have a very hard time letting go and trusting and if their only option was investment discretion, they would never use any advisor at all. For these investors, while not perfectly ideal, the non-discretion route is the next best thing.
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.