Unlocking Real Value Blog

Does Going It Alone Increase Risk?

We have talked in the past about the growing trend of investors deciding to “go it alone” – forgoing developing relationships with financial advisors to invest directly through intermediaries like Fidelity and Schwab. In all likelihood, investors likely to fall into this category probably have under $10 million to invest; those with more – considered by many to by ultra high net worth investors, are probably more likely to seek advice due to the complexity of their finances.

In many cases, the meager returns of the past ten years have frustrated investors who have been paying a fee. Intermediaries have responded by offering more investment options. Unfortunately, and what makes me nervous is that the increasing complexity of some of these investments make it hard for many investors to truly understand them – and the associated risks.

Many investors are seeking more income – and many funds have for example increased their allocations to equites to try and accommodate these needs. Many firms have also entered the alternative investment spaces, either by developing their own products or by partnering with hedge fund providers. One example is the large increase in long-short mutual funds over the past few years.

Firms expanding recently in the “retail” alternatives space include Janus, BlackRock and Franklin Templeton.

But do investors really understand the inherent risks associated with these investments? In most cases, I would argue that they don’t. Additionally, many of these new products have substantially higher fees than traditional mutual funds – are investors aware of this fact? Probably not. Interestingly, the SEC just announced the increasing use of alternative and hedge fund strategies by mutual funds, ETFs and variable annuities as a new and emerging risk.

This disturbing trend has a positive side in that it presents an opportunity of advisors to educate clients – and to promote educational materials that they produce to perhaps sway some of these “go it aloners” to come speak with them and allow them the opportunity to show them that partnering with a financial advisor may well be a sound risk-reducing strategy.

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