Your Financial Advisor Has Too Many Clients

In this week's Refocus we examine the average advisor of a bank or brokerage firm - and how it they can hurt investors with $1 million + portfolios.  As a bonus, we look at equity valuations within a 25 year historical context.

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Last week, we looked at how difficult it is to use the information the media provides. This week I've got spots on how Wall Street is built for volume, which isn't likely to be of benefit. Here's some data on for national and a well known bank or brokerage based investment advisory businesses. I've listed the number of advisors they have the assets they manage the number of clients they have, if it was publicly available, and then the average per client and per advisor and conversations I have with investors, I tend to get the sense that many believe that these large brand name organizations provide a conservative quality or premium service. I won't comment specifically on my opinions in regards to these subjective matters. However, it's worth highlighting that these organizations are not built to serve as high net worth investors, but more so investors on a volume basis first Each of these has about 10,000 or more advisors nationally, that's over 200 per state on average. Next, the average client portfolio size is often far smaller than what many might assume. If your portfolio exceeds $1 million, I'd encourage you to ask your advisor how many clients they serve and the total assets they manage. You might be surprised to find out that you are one of their larger clients. The average advisor has built their business with layers of management and high fees in order to deal with volume. This model is dated, inefficient, and clients of these business types are likely enduring unnecessary risk because of high fees.


Next, let's turn our attention to our focus on the long run. Today I've got a graph which looks at valuation. It shares the 12 month forward price to earnings ratio for the s&p 500 and compares it Visually across the prior 25 years, at first glance, you can conclude that valuations are high versus average, I'd offer three things that should cause you pause when allowing this to affect your short term investment decisions. First, I've not seen any research that suggests valuations have strong predictive value. Second, safe investments have little to no potential for return. As the Fed has it short term interest rates near zero and is actively purchasing bonds in the open market driving yields lower. This may support higher valuation for equities and a corresponding future lower potential return versus historical averages as safer assets offer a little opportunity for return. Lastly, predicting future earnings is at best a guess especially once you get out past 12 months. investors should invest based on the long run potential for companies to Generate earnings. Recent increases in equity prices are likely due to increased optimism that earnings will be better in the next several years than previously thought.


Data sources: Google search summary on 6/4/2020

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