The Behavior Gap and Why You Need a Financial Advisor

By Twickenham Advisors on May 12, 2017

It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for. – Robert Kiyosaki

Carl Richards trademarked the term “Behavior Gap” when he was a financial advisor. He now writes for national newspapers and speaks about behavioral finance around the world. While a financial advisor, he discovered that the biggest detriment to investor success was their own behavior. A good financial advisor can help.

Continuously researched data supports this thinking. Vanguard, Russell Investments, Aon Hewitt, and other institutions have conducted research showing that financial advisors add anywhere from 2% to 3.75% per year* net of fees of outperformance compared to the average investor. This outperformance is due to many practices such as tax and spending management, proper asset allocation, etc. However, a glaringly important element is that a knowledgeable financial advisor provides investors a degree of emotional separation from their money. Why? Because investing can be extremely emotional. If you could somehow put the emotions of teenage love, soap operas and your wedding day in a bucket, pour gasoline on it and light it on fire, you would come close to the emotions involved with investing your own money. Think of it like this: investing your own money is like performing open heart surgery on your child. Not even the top surgeon in the world would do that.

And if you don’t think 2% to 3.75% per year is that much, may I suggest Googling the phrase “compound interest.” Just 2% more per year after 10 years yields a return that is 22% higher, and 3.75% more each year yields an increase of 44%. Although there are many successful investors without a financial advisor, investors with a financial advisor have historically ended up with 22%-44% more after 10 years than those without an advisor.

The idea of hiring a financial advisor is nothing new. Consider the 3rd law of gold (money) taken from the 1926 classic, The Richest Man in Babylon by George Clason, “Gold clingeth to the protection of the cautious owner who invests it under the advice of men wise in its handling.” For most people, I’m preaching to the choir as it’s not common knowledge to know the difference between a stock and a bond. In other words, you look for financial guidance from a financial advisor, and my hope is that this blog post gives you confirmation that your financial advisor is worth it. To those who are do-it-yourselfers and perhaps, know a thing or two about investing, my plea is on the emotional side. Don’t be the surgeon who operates on his own child.

* https://www.vanguard.com/pdf/ISGQVAA.pdf
* https://blog.helpingadvisors.com/2016/03/15/2016-value-financial-advisor-update/
* https://corporate1.morningstar.com/uploadedFiles/US/AlphaBetaandNowGamma.pdf