Two pieces of reading came to my attention over the past week that both give some prudent insights into why it pays for investors to get "good quality" financial advice. The first was an article in the Australian's Wealth supplement that is published every Wednesday. The lead story for this week started with the following phrase:
"Investors who use qualified financial planners tend to have a lower casualty rate"
In his article, Tony Kaye quotes some research commissioned by he Financial Planning Association of Australia. As you would expect, otherwise the FPA wouldn't have released the findings, the study found that investors who use financial planners have been receiving much lower rates of margin calls (only 5%) compared to those who do not utilise a financial planner. This is a good result given the carnage on the markets especially in February. A 2nd point from the article was that something like 95% of all investors using the services of a financial planner feel in better control of their finances and they feel much better prepared for retirement. Both suggesting the raltionship is extremely valuable.
A third statistic quoted by the FPA suggested that 77% of Australians who use financial planners are more likely to sit tight and ride out the current volatility than those who don't. Some may think that this statistic is not as flattering as it might suggest that financial planners are just sitting on their hands doing nothing.
Well, in fact, sitting and doing nothing is a pretty good strategy during tough times and this brings me to the 2nd piece of information I have looked at this week - the Quantitative Analysis of Investor Behaviour 2008. This publication is produced by Dalbar and is based on US data. Each year these studies are consistently finding that investors are not achieving the returns they deserve from the share market. The latest results look at the past 20 years of returns up to the 31st December, 2007. What it finds is that the average equity fund investor has achieved an annualised return of just 4.48% underperforming the S&P500 by more than 7% and only beating inflation by 1.44%.
So why is this happening?
A conclusion made by Dalbar is that the reason behind the discrepancy lies in investors frequently timing their investments and redemptions unsuccessfully. It concludes that this poor timing is worse during market declines. Basically what they are saying is that many investors are buying at high prices, selling at low prices and in the process destroying value.
A financial planner worth their salt will be able to "coach" their clients into understanding the reality of how markets work and keep them calm both in times of downturn as well as booms. Keeping them to the strategy that will see them do much better over the long term rather than trying to time markets.
Is it time you found such a financial advisor?