Portfolio Second Opinions Are Useless

Portfolio Second Opinions Are Useless

The typical way that a client interviews a prospective advisor and the number one way that advisors gather new assets is by offering a portfolio “second opinion”.  This is considered a no-risk proposition for the prospective client because it is almost always a complimentary service where supposed tremendous value will be derived.

The goal of this second opinion is to tell you all the shortcomings of your portfolio.  On the surface, this may be attractive to you, the prospective client, because that’s exactly what you’re looking for – for a qualified person to show you what you might be missing in regards to portfolio construction.

But it’s a little like asking an umbrella salesman if it’s going to rain.  And surprisingly, there is an even more glaring issue.

That is that the shortcomings they’ll inevitably “discover” will be totally dependent upon the advisor’s investment philosophy.

If they prefer active management, they’ll try to tell you why you should too.

If you’re already in active funds, they’ll tell you why the ones they choose are better.

If they use individual securities, they’ll attempt to explain why you should trust their stock-picking strategies.

If you invest in individual securities, they’ll tell you why you should be using funds or ETFs instead.  Full disclosure – this is probably true.

If they invest in index ETFs, they’ll let you know that you’re paying an arm and a leg to underperform the market indices.  Full disclosure – this last one is probably true too.

Long story short, even if you are in agreement with their philosophy, they’ll do all they can to pick it apart so that they can win the account.  After all, that’s the point of the exercise from the advisor’s perspective.

So, there is honestly little to no value in seeking a second opinion on your portfolio.  And, if you took the time to go through this complimentary process with multiple advisors, you know that it likely leaves you more confused than before you started the process and with no clear direction.

Note that I did not say that there is no value in seeking help from an advisor.  In fact, I feel it’s quite the opposite.  I would just advise a different tact than asking an advisor for a second opinion.

What should you do in lieu of this second opinion charade?

  • 1st: Ensure you meet the prospective advisor’s minimum investable asset level.
  • 2nd: Instead of asking for a second opinion, have a detailed discussion of their investment philosophy to see if your beliefs align or why you might consider changing your philosophy.
  • 3rd: Ask what their planning process looks like or do they just run portfolios?

What you’re actually looking for is somebody that:

  • First and foremost, is someone you believe you can trust.
  • Is going to add value beyond what they charge.
  • Will help you put all the financial pieces together.

By interviewing a few people, you should be able to identify a preference of who you’ll want guiding you because they are the right personality fit and offers everything that a true financial advisor should offer.

Whatever you do, do not:

  • Believe anyone that says they can give you stock-like returns with low volatility.
  • Believe anyone that says they can successfully time the market.
  • Trust your retirement to a stock-picker.  It’s a loser’s game.  There are unbelievably few people (fund managers, advisors or investors) that have consistent success.
  • Do not listen to their track record – listen to their philosophy.
    • If they are a true advisor, they do not have a “track record” because their clients each have different goals, and therefore different strategies.  This should be true even if the advisor uses model portfolios.

Trust your gut, and don’t be dumb – if it sounds too good to be true, it probably is.

This brief post may sound like I’m against advisors, but the truth is I’m against second opinions.  I am actually pro-advisor simply because most people stink at managing their own finances.  Let’s face it, you don’t know what you don’t know.

And most people will never dedicate the time that it takes to educate themselves properly and make the hard decisions that often need to be made.  Often times, making tough decisions requires accountability.  This is one of the many ways an advisor can earn their keep.

That said, I am only pro-advisor to the point of finding a real advisor that is truly honest and transparent.  This type of advisor will do far more than just manage your portfolio.  They will help you with insurance planning, estate planning, legacy discussions, etc.  And, they are NOT a salesman.  Read this article for additional perspective on what you might look for in an advisor.

Just remember:  Don’t ask for a second opinion.  It will save you and the prospective advisor time and confusion.  By coming prepared with a set of good questions that you can ask, you’ll actually set yourself apart from most prospective clients without the song and dance.  Just having a good old-fashioned conversation is underrated.  I’ll bet you’ll know pretty quickly if the person you’re sitting across from is a good fit for you.

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