Do Financial Advisors Utilize the Same Strategies which they Recommend to Clients?
Have you ever pondered the question… does my financial advisor practice what he/she preaches? Do they utilize the same investment products and strategies which they suggest to everyone else? Do they follow the same asset allocation guidelines which they are recommending to others? I think you’ll find the results of my study quite intriguing. Over the past month I’ve spoken with a random handful of financial professionals whom I’ve met over the years to ask them how they invest personally and plan for retirement:
First, I spoke with Josh Cumrine of Butcher Hansen, LLC. Josh told me that he aims to save 15% of his gross income each year. “I invest 2 of that 15% in my 401k” he tells me. “And I take a very conservative approach by investing in all cash and money market instruments.” “Another 3 of that 15% is invested in whole life insurance policies.” While Josh told me he does have some money in slightly more volatile market investments such as bonds, for the most part he invests in ultra-conservative vehicles such as money markets, credit unions and savings accounts.
I also spoke with Dale Jacobs, a former executive with a wirehouse firm who left the business several years ago. Like Josh, Dale invests a portion of his retirement savings in stock and bond investments but, for the most part, utilizes CD’s, money markets, and savings accounts. “Working in this business for a bunch of years, sometimes you get tired of all the volatility” he told me. “Sometimes it helps you sleep easy to know that the majority of your savings are safe and sound.”
This theme of financial advisors thinking and acting conservatively would be reiterated to me several times. I found that most, almost 70% of the advisors I spoke with had a tendency towards CDs, savings accounts and money markets. The majority of stock oriented investments owned by financial advisors are inside IRAs, profit-sharing plans, 401ks and other tax-deferred investments which are generally not accessible without penalty until retirement. But not everyone thought this way:
Christine Benz, director of personal finance for Morningstar mentioned in the July 20th edition of Business Week that she has about 60% of her personal portfolio in equities. After the financial crisis, a lot of her family, friends and clients insist that they converted all their assets to cash, but she is “talking [them] out of making bad decisions.” Her strategy is for her and her clients to remain invested in equities.
A similar sentiment was reiterated by Benjamin Margolis, a former financial advisor and retirement specialist: “I follow the same advice I gave my clients—obviously.” Asset allocations have historically been based on age and as a client reaches retirement they should take on less risk. “As a guy in my late 20’s, I invest aggressively in equities and corporate bonds and have only my emergency fund (3-6 months of living expenses) in cash and money market instruments.”
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At a more personal level, I consider my own attitude when it comes to my investment strategy. My asset allocation for my retirement accounts is 80-100% stocks at any given point. Because of my age I'm prepared to handle any level of volatility if it means greater potential for returns over the long term. Especially after the recent recession in which stock prices reached shockingly low levels, I added more money to stock market indexes to (hopefully) take advantage of what will eventually be viewed as a once-in-a-lifetime opportunity to buy stocks on sale.
My main strength when it comes to saving and investing is discipline. Like Josh, I aim to save 15% of my gross income each year, but I do so through an automatic investment program in which I pay myself first. All contributions to my retirement plans come out directly after each pay cycle and go into my 401k and IRA accounts. If I max out on my retirement accounts, I'll put the extra money into my savings account to beef up my emergency funds. I don't have any insurance products in my current retirement plan because I believe there are lower-cost avenues to utilize for accumulation. When I get closer to the distribution phase, I will likely consider integrating insurance products into the mix.
My conclusion after speaking with almost a dozen wealth managers and other financial professionals is that many of them tend to follow a more conservative approach than that which they preach to clients. History may show that younger investors are supposed to invest more aggressively and investors nearing retirement should be cutting their exposure to risky asset classes, but advisors seem to do what makes them feel safe and secure. My guess is that watching volatility all day long causes some advisors to become sick of it. It’s analogous to a blackjack dealer who hates to gamble. Watching the emotional rollers coaster experienced by each blackjack player probably exhausts any thrill or excitement which a dealer would get from actually playing the game.
For the record, what inspired me to first think about this topic was Suze Orman a few years back. She announced that she invests primarily in T-bills and other ultra conservative investments, even while she promotes the use of index investments and more aggressive allocations for younger investors. It surprised me that someone so famous and well-publicized wouldn’t follow the advice she was giving to America.
As always, I welcome any questions or comments.
Russell Bailyn
Wealth Manager
Premier Financial Advisors, Inc
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *31
F: 212-752-7673
rbailyn@premieradvisors.net
Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.
