The Role of Financial Advisors - Part II
The main role of financial advisors, as I see it, is to provide an unemotional reality check to investors. Most people have or can develop the knowledge necessary to manage their finances. It would take some time, but not much more than mowing the grass each week. The hardest part of managing your finances is to remain unemotional about your investments. A second, unemotional, opinion can help.
Planners can protect people from themselves. It is well documented that investors make sub-optimal decisions. They chase performance, sell after market declines, hold on to investments to try to break even, and use heurisics to analyze their portfolio; just to name a few problems. (For more see Psychology of Investing.) Planners can help investors be disciplined in their actions.
Planners can provide target asset allocations and rebalancing discipline; they can stop investors from trading too much, from trying to chase performance. They can also provide comfort by giving the investor financial projections.
Even for knowledgable investors, financial planners can provide value by providing piece of mind and by forcing investors to maintain discipline.
