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Advisors that Overreach

January 28, 2016

Many people cannot handle their investments and rightfully engage an investment manager.  Problems develop where there is overreaching by the advisor.

The overreaching is usually not selfish but, rather, an attempt to help their clients and show they are current in their thinking or where their emotional detachment is not so detached.  Let me explain.

Typically, when an investment manager is engaged, there is a vetting process – by the customer and the manager.  The customer wants to make sure the manager is aligned with their goals, risk tolerances and not so unusual insecurity with the whole investing process.  The manager wants to make sure the customer would be a good fit in his or her business and adaptable to their style of managing, reporting and availability.  Usually, an investment policy statement or something similar is drawn up setting the parameters of the management.  The process works and a vast amount of these relationships are extremely successful, but some are not.

What occurs is that the relationships grow and both become confident with each other.  At some point, the manager wants to help their customer do a little better and also wants to show they are keeping up with changes and suggests a little riskier, but still very good investment that also pays a much higher dividend than what is currently being earned.  It also assures their customer they will watch it closely.  This goes on for a while and then something happens.  I don’t mean a general market turn-down, but a huge sector collapse such as those we’ve experienced recently with oil and commodities.  This does not happen overnight, but it happens quickly.  It happens so quickly that it is hard to watch, grasp, understand or react to.  Certainly it is no one’s fault that it wasn’t watched closely, but in some measure that was an idle promise.  The suggestion of it being a little riskier likewise did not consider that it was really riskier in that it tilted the portfolio toward being less diversified possibly upsetting the carefully orchestrated balance agreed upon initially.  The manager’s emotions come into play when they desire to maintain the losing position because by liquidating it there is an admission and validation that they were wrong.  Also, their “professionalism” seems to deny they could have been so wrong, so they sit and wait… and usually see further declines or lost opportunities by not selling and moving forward by getting back on track.

A suggestion for those in this situation is to get back on track.  Sell, take the loss and get into something that realigns your portfolio with how it should be.  A suggestion for those that stick by their original plans is to not feel you are missing the latest fad or hot item.  You are in this for your long-term financial security and unless there are major changes in your life or the overall markets, stick with your plan.  The gains from getting on a bandwagon can never benefit you as much as the losses would hurt you.

One Comment leave one →
  1. 6hawthorne permalink
    January 28, 2016 2:10 pm

    HI ED VERY TRUE

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