I am continually amazed at the lengths to which investors and advisors go to make investing complicated. Now, I don’t expect anyone to necessarily agree with my particular way of investing, but it’s like people have no idea of what matters and what doesn’t when it comes to investing.

For example, I got into a Twitter spat recently. It was with a blogger who focuses on choosing dividend stocks. The spat was over how long it took to learn “how to invest.” He was convinced it was a “lifetime process” that would take “at least 5 years.” I pointed out that the only requirement to invest other people’s money is a series 6 exam- for which a typical study regimen would be 3 hours a night for a couple of weeks. Even a “high-level” designation such as the CFP only requires about 200 hours of studying (approximately 2 1/2 weeks of residency) and 3 years of some kind of related experience (which can be 100% in sales of financial products.) Needless to say, I thought 5 years was excessive, not to mention a lifetime. Now, I do think a lifetime of “continuing financial education” actually IS required, but that is a relatively easy requirement to meet. Maintaining a good investment plan can be ridiculously easy. If you don’t believe me, I suggest you spend a little time with Mike Piper who has a very sophisticated, one-fund portfolio.

Despite the ease with which one can manage their own portfolio, I am often asked for referrals to financial advisors. There are some people that simply do not have the relatively low level of interest required to learn enough to manage their own portfolios or lack the discipline to stick with a good plan. Those people, perhaps 80% of doctors, can be best served by putting them in touch with those who give good advice at a fair price. So I have a pre-vetted list of financial advisors who not only give good advice at a fair price, but are sufficiently interested in obtaining new physician clients to advertise on the site. What is incredibly interesting as I go through this vetting process with dozens of advisors over the course of a year is just how much variation there is in the way they do investment management. Almost every advisor I run into acknowledges the merits of a “know-nothingfixed asset allocation of low-cost, broadly diversified index funds, but they all add on their little twist.

However, it is always a different twist. A few months ago I had three advisor applications to review in a single day. One actually had a very reasonable investment management strategy, but I had to turn him down as he hadn’t advised a single physician in the last year. I thought it would be hard to justify that to my readers. The second used low-cost index funds, but added on an options strategy “to control risk,” but when I went to pin him down, he was buying options every month. The third used actively managed mutual funds “where it made sense to do so.” That was pretty vague, so while pinning him down, it turned out he believed indexing didn’t work with certain asset classes, which of course the SPIVA report card does a pretty good job disputing. It would do an even better job disputing that if it went out 20 or 30 years instead of just 5. But if an advisor wants to use actively managed funds, I like to see them using low cost ones, since the real story of indexing is about costs, and this advisor wasn’t doing that. Another frequent one is some version of tactical asset allocation- where the overall portfolio asset allocation is changed in response to, well, something (it varies quite a bit.)

These twists are actually the usual story, and I always have to decide if the “twist” is enough to disqualify them from my recommendation.  I figure if they’re mostly doing things the “right” way, that I can live with that. (There are no perfect advisors anyway.) If they’re not, then I disqualify them. But why do all these advisors have to try to implement their “edge” anyway?

Four Reasons For “The Edge”

The first reason advisors try to always have some little edge is they really think it makes a significant difference. Maybe it does, but I’m confident nowhere near all of the “edges” I’ve seen do that. Most of them probably just add expense and subtract from returns. Now many, many individual investors also try to add a little edge to their portfolios. Maybe it’s an “extra” asset class. Maybe it’s a unique way to rebalance. Maybe it’s a little tactical asset allocation or market timing or use of individual securities. Advisors are hardly the only ones guilty of this.

The second reason is that advisors need to find some way to distinguish themselves from the competition. The “edges” do a fine job of doing this. Now nobody can tell what the heck any one is doing when it comes to portfolio management. This has been studied in medicine, and it turns out that all those little variations generally result in substandard health care. But advisors want to avoid being a commodity, because when you become a commodity, it becomes a race to unprofitability as everyone competes on price alone.

The third reason advisors use these little edges is to justify their fees. If all they were doing is managing a static allocation of index funds, rebalancing it occasionally, and maybe doing a little tax loss harvesting, then they could be replaced with a robot. Hmmm…come to think of it, this explains a lot about the rise of the roboadvisors. But it turns out that the value-add for a “real” advisor isn’t in the “edge” with the investment management, it’s in the financial planning and in the “high-touch” aspects of investment management- building around the random investments in some doc’s 401(k) and keeping him from selling low with every Brexit and Trump election.

Finally, the edge satisfies the demand of advisors, clients, and individual investors to tinker with their portfolios. We all have this idea that we can add value to our portfolio somehow if we just learn enough and work hard enough. We WANT to be active, even when we know the right thing to do is to invest our time actively and our money passively. If you really want to add work and want to add value with it, look to invest in real estate, websites, and other small businesses.

Rappelling into Pine Creek Cathedral, Zion National Park

Rappelling into Pine Creek Cathedral, Zion National Park

What Really Matters

It seems a good time to review what really matters when it comes to investing.

  1. Setting appropriate and important goals
  2. Earning more money
  3. Saving a higher percentage of earned money
  4. Taking an appropriate amount of risk (i.e. a reasonable asset allocation)
  5. Setting up a reasonable investment plan
  6. Sticking with the investment plan
  7. Minimizing taxes and fees

If this list ends at # 7, all of those “edges” start at # 20. That stuff just doesn’t matter much in comparison. It certainly doesn’t matter enough to pay much for. If you’re interviewing a potential advisor, walk away if he spends the whole time trying to sell you on his idea of an edge instead of basic nuts and bolts financial planning and investment management. If you’re functioning as your own advisor, focus your time and effort on what matters and quit looking for an edge yourself.

What do you think? How long do you think it takes to learn to invest? Why do we try to be unique and edgy? Why does every advisor have their own version of “the best way to invest?” What do you think matters most in investing?  Comment below!