Why won't my financial advisor beat the market? Reflections on the ‘Black Swan’

Abstract

Every time we meet with our investment advisors, we go over the same things. We look at the amount of cash contributed during that quarter, the ratio of equities, debt, derivatives, commodities and other financial instruments. We explore the distribution of assets among economic sectors and geography. Finally, we get to the numbers that concern us most, the bottom line rate of return net of fees. Most of us listen to a prepared presentation discussing the implications of geopolitics, macroeconomics, trade negotiations and currency exchanges, among other things, on that rate of return. Most financial advisors will present a coherent viewpoint to proffer an understanding of the rate of return for that quarter. This effectively communicates that the financial professional has some insight that has guided the investment strategy. The implication is that this financial insight has offered the investor an edge and serves as justification for the financial advisor’s fees. The problem, however, is that if these financial advisors are so insightful, knowledgeable and informed, why do they rarely beat the market in the long term? Why can’t our investment portfolios generate the consistently high returns reaped by Warren Buffet, George Soros and David Einhorn? And why do we continue to pay these people significant sums when the rate of return is comparable with an exchange-traded fund, which costs a fraction of personalized investment management?