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The primary mistake that non-advised clients make is to drastically change their investment portfolio during market turbulence, advisors say

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An advisor should have the ability to refocus a client during market turbulence to make sure that they are not reacting emotionally, but remain focused on their financial plan, says Bev Evans, portfolio manager at Evans Wealth Management Team, Richardson GMP Ltd., in Mississauga.

A new report from Charles Schwab shows that U.S. investors with self-directed brokerage accounts (SDBAs) who work with advisors see greater portfolio diversity and higher returns than their non-advised counterparts.

The SBDA Indicators report, published Nov. 27, sampled 137,000 retirement plan participants who currently have balances between $5,000 and $10-million in their Schwab Personal Choice Retirement Account in the third quarter of 2018.

According to the report, only 19 per cent of SDBA participants chose to use an advisor. But this small percentage saw far better results than non-advised participants. The former category showed an average balance of $449,552 – almost double the average balance of non-advised accounts, which came in at $234,643.

The report also found that advised participants had greater diversity in their investment portfolios.

When comparing equity holdings, both advised and non-advised participants held Apple, Amazon and Berkshire Hathaway as their top three holdings; however, non-advised participants’ positions in Apple and Amazon were nearly double compared to participants who used an advisor,” the report reads. “Additionally, advised participants invested in more blue-chip, value companies, whereas self-directed investors allocated to more growth stocks.”

Advised accounts sampled also averaged 9.5 trades in the third quarter of 2018, while non-advised participants averaged 5.5 trades. The former category also displayed more frequent rebalancing, according to Larry Bohrer, vice-president, corporate brokerage retirement services at Charles Schwab.

“In addition, advisors typically rebalance a portfolio more often and keep their clients invested,” Mr. Bohrer said in the report.

Bev Evans, a portfolio manager at Evans Wealth Management Team, Richardson GMP Ltd., in Mississauga, says the report’s results ring true to her personal experience. Ms. Evans has advised a number of formerly non-advised investors and has helped them to achieve improvements in their returns.

She says the primary mistake that non-advised clients make is to drastically change their investment portfolio at times of market turbulence. Working with an advisor, who serves as a “behavioural coach,” can help prevent investors from making these drastic, sometimes harmful, changes.

“I think if they have a good knowledge of the clients’ priorities, goals, concerns and they also understand the emotional triggers that many investors often get caught up in times of market turbulence, then they have the ability to just refocus a client or an investor client and make sure that they are not prone to reacting emotionally, but rather that they stay focused on the plan,” Ms. Evans said.

“Non advised investors … are prone to making the mistakes that go along with typical situations that prompt emotional responses,” she added. “That can be for down markets and for up markets as well.”

Ms. Evans has also helped formerly non-advised investors diversify their portfolios and reduce the risk level of their investments. This type of guidance is uniquely valuable, and difficult to find beyond the help of a planner.

“Investors who were following the ‘old school’ [method of] just buy bank stocks and let them run, where they had found that may have served them well in the past, we were able to educate them about the importance of diversification,” Ms. Evans said. “Even though they were what they might’ve considered blue-chip stocks, it was really at a risk level that was beyond what was suitable for them.

“The results from transitioning them to a more diversified portfolio and a more balanced, or risk-suitable, portfolio was that they did see better returns and they had a better experience as well.”

Beatrice Grant, certified financial planner at HollisWealth, in Surrey, B.C., says working with an investment advisor is primarily beneficial for clients because it helps them to stay on track to reach their financial goals. For clients who lead busy professional and social lives, this is essential. Managing investments can be a hefty commitment.

Ms. Grant says that advised investors who set up a plan which is periodically reviewed and adjusted do benefit. “Otherwise, people today are so busy, they forget about it, they have tons of money there and they just forget about it. And it’s not good.”

Ms. Grant also notes that advisors are useful for investors who experience major life changes – especially those that may affect their ability to reach their financial goals.

“Things don’t stay the same, new tax things come out. Goals change … new members of the family, there’s all kinds of things that come into play there, and doing it by yourself, you don’t have the time, unfortunately,” Ms. Grant said.

Both Ms. Evans and Ms. Grant agree that non-advised investors commonly opt to work alone in order to avoid the fees of hiring an advisor. Yet, they both say that the value of working with an advisor goes far beyond this initial fee.

“One common misconception that non-advised investors might have is that by not paying a fee, they are ahead of the game,” Ms. Evans said. “I don’t think they have the proper understanding of what getting the value for that fee looks like. And that’s from both translating investment advice from a technical point of view, as well as beyond the numbers, from the relationship and the financial planning point of view.”

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