In the face of the global economic downturn and deterioration of the capital markets, many individual investors that had been "going it alone" have decided to seek professional advice.  It's worth reflecting at this time on exactly what constitutes good financial advice and how investors can recognize it when it is offered to them.

First, good financial advice is not about providing a forecast. The smartest advisors are not those who seek to predict what will happen next in the markets, but the ones who help their clients make smart decisions about their money to secure the capital market rate of return.  This kind of advice is not based on a hunch or guesswork, but on financial principles backed by long observation and research.  For more on the folly of speculating based on a prediction of the future, see this review of market timing.

Second, good financial advice is about structuring an investment strategy that is right for the individual, not one that reflects what the advisor is trying to sell or what will earn them the most fees or commissions. It has to match each person's appetite for risk, while helping them reach their investment goals.

Third, good financial advice is about ensuring clients' portfolios are structured around risks where there is an actual relationship with return.  While all investments that come with additional expected return also come with additional risk, not all risks come with additional returns.

Fourth, good financial advice means ensuring investors understand what they are investing in and that the management of those assets is handled transparently and with a great deal of integrity.

Fifth, good financial advice involves advisors being upfront with their clients about what they can and can't control. If investors want to enjoy long-term equity returns, they need to be exposed to the equity market. That means they can't avoid being exposed to a market downturn. However, they can ameliorate controllable risks such as excessive fees, taxes and their degree of diversification.

 

Sixth, good financial advice means keeping investors disciplined in their chosen asset allocation even when things seem hopeless. Good advisors remind their clients that falling prey to short-term anxiety and dumping their asset allocation to shelter completely in cash may not best serve their long-term wealth. It just means they forgo equity market returns and leaves them at risk of missing the bounce in risk assets when it comes.

 

Investors who have been advised properly have plenty of reason to hope. Their diversified portfolios may be down, but they can take comfort from the fact that potential returns are now at extraordinarily high levels and that, if they keep their nerve, they are positioned for the recovery when it comes.

 

That is the value of good advice.