Lt. Col. Custer did not know what he was up against. He was a distinguished military leader with a history of success in the American Civil War. Yet at the Battle of the Little Bighorn in 1876, he was overconfident and he grossly underestimated the difficulty of the task at hand. He refused to ask for help. He elected to ignore the advice of other experts. Within an hour he and all the men under his command were killed.
Custer’s overconfidence and failure to comprehend the magnitude of the challenge before him offer a timeless lesson: Expertise, experience, and humility matter most when the stakes are high. This same principle applies, although less dramatically, to managing your family’s finances. Maybe you have had some success as a do-it-yourself investor in the past, but as your wealth grows and you march closer to retirement, you should consider enlisting a professional who can help you design a plan of attack.
The Unknown Unknowns
In the world of investing, danger often lies not in what we know – or even in what we know we don’t know – but in what we don’t know we don’t know. Former U.S. Secretary of Defense Donald Rumsfeld famously described these as “unknown unknowns.”
Although you might watch the stock market every day and educate yourself on financial planning topics, what you see is not all there is to know. Wealth management is a constantly evolving and intricate process that is far more complex than most people realize. Success in this field requires a great deal of experience and knowledge as well as full-time attention to the market and the available investment vehicles. You can probably build a diversified portfolio of stocks and bonds for a very low cost, but assembling the portfolio is not the end of the work. It is just the beginning. For example: Do you understand the tax consequences of funding and managing your portfolio? Do you really know how much risk you are taking? Do you have too much or too little insurance? Do you have an estate plan, and, if so, how does that plan fit with your investments? When can you retire, and what will your sources of income be in retirement? Can you afford to gift to charity or leave a legacy for your heirs? A good advisor does much more than just help you plan for the things you have already thought of. Your advisor helps you prepare for the unknowns, the complex interrelated details of all these variables that you might never think to ask about.
The Importance Of Discipline
Wealth management is about more than having knowledge; it is also about behavior. Objectivity and discipline are just as essential to long-term success as analyzing markets and understanding the tax code. Even well-informed investors are vulnerable to emotional decisions in the heat of the moment – selling in a panic during downturns or chasing returns during euphoric rallies. Although you might be able to maintain discipline most of the time, a single instance of lost composure or uncharacteristic bravado – one big mistake – can undermine years of careful saving and planning.
Beyond constructing a sound financial plan, an advisor’s greatest value lies in helping you avoid that one big and very costly mistake. Research consistently shows that investors underperform the markets they invest in – not because they select poor investments, but because of poor timing decisions driven by fear and greed. Vanguard’s “Advisor’s Alpha”
study estimates this cost to be as much as 2% per year for the average investor. An experienced and objective advisor provides a counterbalance to these impulses, providing discipline during fast-changing and even chaotic market conditions.
In that sense, hiring an advisor is less about outsourcing knowledge and more about outsourcing self-control – an act of humility that acknowledges our very human tendency toward impulsiveness and overconfidence. As the writer and investor Jason Zweig once observed, “The investor’s chief problem – and even his worst enemy – is likely to be himself.” A skillful, experienced advisor helps ensure that enemy never gains the upper hand.
Not Just Any Advice
As your wealth increases, so does the complexity of managing it, along with the cost of getting it wrong. With a talented advisor, you have a far better chance of achieving your objectives. But choose wisely, because not every advisor fills that role. The true value lies in working with a seasoned, credentialed professional. Hire an independent fee-only fiduciary – not a salesperson – and learn how to tell the difference. Only work with a well-educated, experienced advisor – let the inexperienced advisors learn their lessons with someone else’s money. The right advisor brings both technical expertise and emotional steadiness; the wrong one simply adds noise.
Confidence, decisiveness, and independence – the qualities that drive success in business and in life – can become liabilities in investing when they crowd out humility and discipline. They can end up being the very force that takes your success away. Even the most informed and capable investors fall victim to overconfidence, only to be reminded that the world is full of unknown unknowns, and wealth management, just like a battle, can be far more complex and less predictable than it appears.
