Don’t have any investment advisor – 05/11/2023 – From Grain to Grain

In recent years, along with the growth of digital investment platforms, the number of investment advisors has multiplied. The growth meets a demand from investors eager for more sophisticated financial products. However, is it worth having any advisor?

I get this question frequently.

I know someone will comment: your opinion is biased. Yes, after all, which opinion is not biased?

I confess that I have been an investment advisor for over 10 years. But, I consider myself impartial to comment. And you will understand my point and explanation why you shouldn’t have any advisors.

Putting it in perspective, I used to be an investment analyst, manager of fixed income funds, equity funds and multimarkets. I understand what each one does, because I’ve acted as such. I am well aware of the potential successes and frustrations that each of these professionals face. As well as their potential conflicts.

And it’s conflict I’m going to talk about.

Many argue that it is not worth having an advisor because of potential conflicts of interest. If you really believe you shouldn’t hire a professional because of this, your life will be difficult.

Yes, all areas of activity have some potential conflict.

Even corporate CEOs have potential conflict. One of the corporate finance case studies is the so-called Agency Problem. He studies potential conflicts between company directors and shareholders, between creditors and shareholders, and between shareholders and stakeholders.

Make no mistake, there are potential conflicts in any type of relationship.

So this is not why you shouldn’t have an investment advisor.

The important thing is to understand which advisor is right for you. That’s why you shouldn’t have any advisors. You need to choose well.

I know that several advisors will possibly be angry with what I’m going to say.

I believe there are two types of advisors:

The first advisor, I’ll call the sales advisor. This is the one who just wants to sell products. His objective is the massive sale of products. You will identify it in a simple way. Often, he calls you, or gets in touch offering a new product or some exchange in his wallet. It looks like he’s giving you a lot of attention, but his goal is the sale. This advisor is charged for selling more.

The second advisor, I’ll call the advisory advisor. Not because he consults, but because of the role he plays in educating and understanding investors. This contacts less frequently, after all, it is not appropriate to change the portfolio frequently. This advisor is charged for serving the customer better.

I don’t think one advisor is right and the other wrong. Each plays its role.

The problem occurs when the investor’s expectation regarding the advisor does not match his performance. Then frustration occurs and the discussion of believing that the problem is the potential conflict begins.

To understand this, I will separate investors, too, into two types.

There are investors who want to receive information about any new product and, if possible, about all of them. These investors have the capacity themselves to decide on the adequacy of a product to their profile. They are able to analyze the risk return of each product, follow the economy, changes in the scenario and are well aware of the risks they are running.

These aren’t necessarily the most experienced investors, but they want to be in complete control and don’t want to have any filters about product suitability for the current portfolio and market. They want to receive ideas, even if they make little sense to the wallet.

For these investors, possibly, the selling advisor is the most suitable.

The second type of investor is the one who prefers that a professional carry out a filter on the suitability of the products, who analyzes their profile and understands the changes in their life cycle, who alerts them if there is any exaggerated exposure to a product or risk, which draw your attention to changes in economic scenarios and their possible impacts, that is, that you provide advice in order to remove, from the investor, all the burden and time demanded in the investment portfolio.

For these investors, the advisory advisor is certainly the most appropriate.

Realize the problem when an investor expecting an advisory advisor is faced with a selling advisor. The investor will invest in everything that the advisor recommends, as he expects the advisor to perform a filter. The advisor, on the other hand, continues to sell everything, as he believes that the investor is carrying out the filter. Failure to choose can be costly for the investor who ends up blaming the advisor.

So don’t have any advisor. Get the one that is best suited to your type of investor.

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

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