Everyone’s a Financial Expert During a Raging Bull Market

As an independent consultant I am forced to take a pretty unbiased perspective of the financial landscape.  I not only have to audit my fellow financial advisors on occasion, but I also have to work carefully with clients to ensure that they’re not taking the other side of the spectrum in what could lead to biased decision making.

One troubling trend I am seeing more and more in recent reporting is how many amateurs now appear to be financial “experts”.  For instance, consider this recent piece by Dilbert creator Scott Adams who argues that financial advisors are the most destructive thing in finance.  Or how about this Bloomberg article today citing a Labor Department Economist who “uncovered” brokers “luring” people out of the Government’s Thrift Savings Plan.  These articles, while written with good intentions, unfairly portray advisors in a negative light.  Now, I spend most of my time coaching retail investors how to avoid expensive and often devious advisors, but even I find some of this commentary extremely unbalanced.

Of course, everyone’s a financial expert during a raging bull market and so the backlash against any “active” portfolio manager or anyone who charges a fee for advice is growing louder and louder as retail investor confidence increases.  For instance, the Bloomberg article above cites the finding that almost all financial advisors contacted by the economist will recommend rolling over out of the government plan into an IRA.  Well, of course they will!  There are only 10 fund options in the TSP and a smart investor can construct a virtually zero fee portfolio with better diversification by rolling the plan over into an IRA.  The rollover is actually a no-brainer, but the advisors recommending this are all portrayed as malicious tricksters stealing from unwitting government employees.  So yes, the advisors who recommended the rollover were recommending the right thing (although, in fairness, I doubt many of them recommended the virtually free portfolio route).

Or, look at the Dilbert article.  Adams argues that stocks are being held back from shooting to a “permanently higher price-earnings ratio” by financial advisors who are picking stocks.  This is madness!  First, stocks have been at high relative PE ratios for the last 20 years even as assets with “passive” fund companies has exploded.  Second, stocks shouldn’t maintain higher PE ratios just because retail investors perceive them as being less risky (as if this would be a good thing to begin with!).  Thirdly, financial advisors (a generalization to begin with since many advisors provide extremely valuable services such as financial planning) aren’t the cause of  retail investor underperformance.  Study after study has shown that retail investors are perfectly adept at running their own portfolios into the ground without the help of an advisor.  And lastly, Adams’s recommendation that the government should help us all become better investors by constructing benchmark portfolio options for us is madness.  The many limitations of the TSP plan is a great example of how poorly the government has constructed options for their own employees!  

It seems that the bull market is going to some people’s heads.  I know, I know – the entire financial industry, MUST, just MUST be all evil.  We’re all just greedy self interested thieves looking to separate mom and pop from their hard earned savings.  Well, it’s not true.  There are a lot of caring and extremely smart experts out there who earn their income by keeping people from falling for the sort of nonsense portrayed above.  We shouldn’t lose sight of that just because a 5 year bull market appears to have created the illusion that now everyone is an expert portfolio manager, financial advisor and monetary theorist….