Welcome to Lesson #4 of "5 Big Ways Your Financial Advisor May Not Be Acting In Your Best Interests"

  Setu Mazumdar, MD, CFP®    The Financial Planner For Doctors

Setu Mazumdar, MD, CFP®

The Financial Planner For Doctors

Overview: This one is huge. Absolutely huge. If you think that you have an investment plan by hiring a financial advisor, think again. Many financial advisors are not well versed in the academic studies which show how we should and should not be investing. Instead many engage in behavior that is more like gambling than investing. Last time I checked, gambling should take place in casinos not in 401ks, IRAs, or investment accounts.

I’ve reviewed hundreds of physicians’ investment accounts, many of them managed by other financial advisors. There are certain themes that strike me over and over again and it drives me nuts when I see stuff like what I'm about to share with you.

Here are two real examples of portfolios I reviewed and which show common problems I’m seeing with the way many financial advisors manage your money:



Example #1: Stock holdings of 62 year old physician about to retire next year





Corrections Corp of America



KKR and Company

Mondelez International




This portfolio makes no sense on several different levels.

First, there are around 15,000 publicly trades stocks in the world. The financial advisor managing this physician’s portfolio has chosen only 12 stocks out of the 15,000 in the universe.

How in the world does that financial advisor know which ones will perform the best?

There is no way the advisor knows everything there is to know about all 15,000 companies.

There is no way the advisor or even a team of analysts has any way of researching all publicly traded stocks and companies in the world.

Second, how can the advisor be so sure that the other 14,988 stocks are the losers? It’s pretty arrogant -- and stupid -- on the advisor’s part to think that he can pick the winners and skip the losers. Plus the academic studies show that you need to own thousands of individual stocks for effective diversification not just a handful.

Third, a number of studies over the years have shown that stock picking does not contribute to your overall portfolio return and on average stock picking detracts from your returns so why is this advisor playing that game?

Well, I'll tell you why. You see, the financial services industry and financial advisors want you to believe that by calling themselves "professionals" somehow they can help you achieve higher investment returns than market averages. Hand your money over to them and they'll be able to generate higher returns. Why settle for average right?

Unfortunately for you if your financial advisor is tries to convince you of this or he's engaging in this activity, it's almost like taking your money to the casinos. At least in the casinos they give you some free drinks and maybe a buffet.

Let’s take a look at another example:

Example #2: Mutual fund holdings of 35 year old physician

Mutual fund holdings example

On the surface this portfolio has the illusion of being well diversified because there are over 20 mutual funds. Each mutual funds owns individual stocks or bonds.

But it’s all smoke and mirrors. Here’s why:

Problem #1

Just like in the first example where the advisor invested the physician’s portfolio in a handful of individual stocks, in this portfolio almost every mutual fund manager is trying to pick the winning stocks also.

Mutual fund managers do not have more information or knowledge than the market as a whole. This portfolio is also engaged in stock picking.

Problem #2

Many of the mutual funds in this physician’s portfolio overlap and invest in the same types of investments. In many cases they invest in the same stocks! So all this does is add complexity and higher fees without more diversification. But you'll probably never know because your financial advisor probably didn't explain what the funds actually hold.

Problem #3

The chance that you, me, or your financial advisor can identify the mutual funds managers that will beat the stock market averages is really low.

For example over the 10 year period ending 2014, no matter which investment class you looked at -- whether US stocks or international stocks -- in every category the average mutual fund manager underperformed the average return of that investment class (Source: Standard and Poors SPIVA Scorecard 2014).

So What Does This All Mean?

It means that if your financial advisor is engaging in stock picking, market timing, or trying to identify the winning mutual fund managers, then he’s not investing your money...he’s gambling!

The academic literature and evidence are crystal clear that the chance of me, you, your financial advisor, or anyone else consistently beating the market is incredibly low in the long run.

You see, the market is the collective opinion of millions of investors, who set prices instantaneously as new information and new events develop. What changes prices are future events, which by definition, no one knows.

But don’t take my word for it. Here’s one of MANY pieces of data I could show you that concludes that active managers tend to underperform the market averages.

If you ask the question, “What percent of active mutual fund managers in the US beat the US stock market’s return every year over a 5 year period?”, you’d be shocked to find out the answer.

It’s only about 1% !

No that’s not a typo.

Think about that for a minute. These fund managers have access to information and data that you and I can only dream about. And they still fail to beat the market’s returns.

What makes your financial advisor think that he can beat the market if the vast majority of the fund managers fail -- and these people have access to more information than you financial advisor does ?

A prudent financial advisor -- one is who acting in your best interests -- will not play that game at all. Instead he will accept the market’s rate of return. Yes, you will lose money from time to time -- a good financial planner will explain this to you rather than touting high returns and not mentioning the risk of loss.

If your financial advisor is engaging in investment strategies that are attempting to beat the market averages, then you don’t have an investment plan. You have investment chaos.

In my opinion he is not acting in your best interests if he’s engaging in those activities.

He’s essentially saying “I can predict the future” and “I know information that no one else knows.” That’s pretty arrogant...and stupid!

It’s no different than going to Vegas and rolling the dice! Is that how you want your money managed?

Instead of trying to fight the market, let it work for you by capturing its return and basing your investment philosophy on financial science and academic evidence not costly speculation and guesswork.

The market is WAY smarter than your financial advisor.

And when you accept this fact, you significantly increase your chances of having a successful long term investment experience.

What’s The Treatment Plan For This Problem?

1.  First, figure out how much risk you can take since fundamentally it’s risk which drives returns. Your risk capacity depends on: (1) your ability to take risk, as determined by your income, your age, and your time horizon (2) your willingness to take risk, as determined by what dollar amount and percent you can lose and still sleep well at night and (3) your need to take risk, as determined by your financial goals.

2.  Next, get asset allocation right. Asset allocation is simply the right mix of investments or asset classes for you. Do this by diversifying your investments as widely and deeply as you can. It’s the asset class that matters not individual stocks so own the entire asset class through diversified mutual funds called index funds. Then diversify those index funds by owning many different asset classes: US stocks, international stocks, bonds, and real estate.

3.  Finally, stick with this no matter what happens. While this is easy to say, it’s much harder to do. This way you’ll free up time to get on with your life instead of focusing on things that you have no control over. You’ll probably end up with better investment performance also

If you want me to review your investment and retirement portfolio and see if you or your financial advisor are gambling with your money, set up your FREE Financial Coaching Session with me:

Talk to you soon.

Making Work Optional For Doctors,

Setu Mazumdar, MD, CFP®

The Financial Planner For Doctors