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What Is the Advisor’s Role?

2018-06-17T20:02:41+00:00August 2nd, 2010|Categories: Financial Planning|Tags: , |18 Comments

John Lawrence Reynolds’ newest book, The Skeptical Investor, argues that Canadians were badly served by their advisors during the crash of 2008–09. The book has all the wit and outrage of his previous screed, The Naked Investor, which is a favourite of mine. In some of his best lines, he describes money market funds as “a place to waste your money by paying other people to put it in treasury bills,” and says that buying bonds from a broker is “like shopping blindfolded in a foreign flea market where you don’t speak the language.” There’s even a cameo appearance by Preet Banerjee, creator of So far, so good.

But I admit to being irked by the very first sentence of the book, which quotes a frustrated investor named Suzanne: “It seems to me that a financial advisor should be as good at telling you when to get out of the market as telling you when to get in.” Suzanne explains that in 2001 she poured half her retirement savings into just two stocks, both banks. The stocks soared until 2008, when she says she wanted to take some profits. Her advisor suggested she hold on—and we know what happened next. The implication is clear: my advisor made me lose money.

Reynolds goes on to muse wistfully about what would have happened if she had spent those years in safe government bonds, “which would have earned 5.5% annually.” I think I know what would have happened: during the long bull market of 2003–06, Suzanne would have been complaining to her advisor that her crappy bonds were earning 5.5% while Canadian equities were shooting out the lights with 27%, 15%, 24% and 17% returns in those four years.

I never thought I would be defending advisors, but it’s just so convenient for investors to play woulda-shoulda-coulda. Suzanne could have insisted that her advisor take some of her profits and put them in bonds, but she didn’t. He resisted, so it’s his fault she lost money. This subtext pervades the book: that advisors should have seen the crash coming, or at least should have had their clients in more conservative investments.

I thought back to this idea when Kate, the subject of my previous post, asked when it made sense to use an advisor. So I’d like to open that question up to readers. What should you expect from an advisor? Are you like Suzanne, who expects her advisor to time the market, or take the blame when things go wrong? Like Reynolds, do you feel that the advisor’s main role is to help the client understand risk? Many advisors I know say one of their most important tasks is calming their clients’ euphoria during good times and holding their hands during bad times.



  1. Justin August 2, 2010 at 9:31 am

    The advisor is to blame, but not because he failed to time the market.

    He lost Suzanne’s money for two reasons. First, he should have strenuously objected to the lack of diversification (i.e., half her money in two stocks). Second, he should have had a plan to rebalance regularly. If the bank stocks increased in value so dramatically then they should have been sold to rebalance with underperforming assets.

    Neither of these factors has anything to do with market timing but they would have lessened the effect of the crash. It’s investing 101.

  2. Lyne August 2, 2010 at 9:36 am

    I used an advisor, before I educated myself and decided that I could do just as well for much lower fees , and remember having a bit of that discussion with him. He said most of his work in times of trouble was to reassure clients and convince them to stay the course.

    I do think it’s a difficult job, if you want to do it right. Correctly evaluating risk tolerance in clients that don’t know themselves very well, let alone have a clue about how the market can behave seems like quite the task.

  3. Farhan Thawar August 2, 2010 at 11:32 am

    An advisor should present the facts and let the investor make the decisions. They should stress that stock picking is a losers game (i.e. tell the client that stats) and let them decide

  4. Ian B August 2, 2010 at 11:41 am

    Managing the client’s expectations is as important as managing the client’s asset allocation. Every entry strategy should be accompanied by an exit strategy – one that is defined and agreed upon ahead of time. My experience indicates advisors are good at the former, but rarely consider the latter, perhaps because they believe it is either unnecessary, or not possible, even in the face of the damage recently done. A simple stop-loss could have made a huge difference. It sounds like Suzanne’s advisor failed to manage either asset allocations or expectations. It doesn’t go to follow that all advisors are the same, but it does highlight the need to work with a successful one.

  5. Slacker August 2, 2010 at 5:37 pm

    @Ian B: I’d be careful with using stop-loss order as a way to “protect” investments. People lost a lot of money on May 6th “flash crash” with stop-loss orders.

    @OP: I think the role of a financial advisor is to help clients understand their risk tolerance, expectations of returns, devise an asset allocation, and modify/adapt to market and life circumstances. I do not expect an advisor to be able to consistently time the market at all.

  6. larry macdonald August 2, 2010 at 7:30 pm

    Advisors should should also be educators if they want clients who’ll stay. They should make sure their clients know about things like diversification, long run returns on stocks, and importantly, the possibility of bear markets that they may have to endure.

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  8. Alex C August 2, 2010 at 11:31 pm

    Advisors have a role, provided they are actually providing the support and advice they are being paid to provide. Too many people think they should be psychics able to foresee everything, and then blame them completely when things go wrong. In that case 2 stocks was not nearly enough for proper diversification. However I think in most cases there is some duty on the client to take initiative to meet with the advisor more than the minimum phone calls they often make. It is your money after all, take some interest in it.

  9. Sofia August 3, 2010 at 9:48 am

    Investors ideas can often be cloudy and unclear. An advisor’s role is to help clarify a person’s ideas and explain the risks associated with various investments. I agree that it is unfair to expect an advisor to be able to time the market. The reality is that if you can not handle a major downturn in the market in the next 10 years you should not be in the market.

  10. Canadian Capitalist August 3, 2010 at 11:06 am

    I haven’t read the book but I’m not at all impressed with Suzanne’s advisor. If Suzanne had invested 25% of her retirement funds in two banks in 2001, she had a very unbalanced portfolio by 2008. The advisor should have strongly suggested Suzanne rebalance backed up with illustrations of the risk she is taking.

    Having said that, Suzanne also has unrealistic expectations. She cannot expect any advisor to nimbly sidestep bear markets by going to cash and load up just in time for a bull market. An advisor that smart (or lucky or both) will likely be working for a hedge fund or something, not hustling mutual funds.

  11. Financial Cents August 3, 2010 at 12:04 pm

    Great post.
    I would say an advisor is just that; there to help and support. I say this in reference from an accepted, common definition: An advisor normally is a person with more and deeper knowledge in a specific area i.e. a specialist. It may refer to finances, government positions, or other disciplines that require certain expertise. An advisor’s role is not to make decisions for you, but to help, support and educate you to make the decisions yourself.
    If your family physician insisted you exercise more, but you didn’t (to improve your health) do you blame your doctor?
    Advisors for the most part can’t see the crashes or the peaks coming just like the meteorologist cannot predict the weather two weeks from now. Do you blame the weatherman when it rains on your picnic or do you take precautions before you pack your lunch? Analogies abound.

  12. Carl August 3, 2010 at 12:59 pm

    What if there were no “advisors”? Would people skip the “Desperate Housewives” episode and learn the basics of investing? You really don’t need an MBA.

  13. Pacific August 3, 2010 at 11:58 pm

    It’s the classic:

    “Hindsight is the best sight of all.”

    She was not diversified, didn’t take profits, and can not blame anyone but herself, if blame is to be considered.
    I always tell myself:
    “It’s my money and I can do what I want with it – even if that turns out to be a mistake.”

  14. Erick August 4, 2010 at 11:29 am

    I’d have to disagree with Larry’s statement:

    “Advisors should also be educators if they want clients who’ll stay”

    It’s in their own best interest to make the investing process seem difficult and time consuming. Clients (like Lyne) who realize they can manage their own money at a reduced cost are much greater flight risk.

  15. Tiny Potato August 4, 2010 at 7:18 pm

    Individuals have to take responsibility for their own actions.

    The advisor is entitled to make whatever recommendation they want. It’s up to the investor to weight the information and decide for themselves.

    There are too many instances where people nowadays always want to blame others.

  16. ActivelyPassive August 4, 2010 at 7:30 pm

    The question is why don’t advisers do a a better job protecting investors from bear markets? Arrow Hedge Partners has written an interesting article questioning the traditional asset allocation process.

  17. August 9, 2010 at 10:16 pm

    It’s hard for me to rely on any adviser, especially after watching my father lose money with multiple advisers. At this point in time, I think investors need to do some small amount of learning to handle their own investment decisions – no one will take more care of your investment portfolio than you will. With books available now like the Ivy Portfolio, there seem to be reasonable active portfolio strategies that are easy to put into practice by anyone who will put some effort into the education.

  18. larry elford September 12, 2010 at 8:44 pm

    Good question Dan. When this story was written (Aug 2, 2010) investment people in Canada had only eleven months and change of time with their new license category. Up until Sept 28, 2009, 130,000 investment persons in Canada were licensed and registered with the securities commissions in the category of “SALESPERSON”. Telling the truth (disclosure) to clients about this license category would have gone a long way to letting clients make their own decisions about the role of a so called “advisor”.
    I have a blog topic at titled, “salesperson or advisor” and in it are communications from several regulators (notably the OSC) who tell me that it is not lawful to not disclose your true license category to your customer. They will NOT tell me why they do not enforce this law. I have never in my thirty years seen nor heard of an investment seller informing his or her client as to his or her exact license or job category. They have all acted like an Amway guy who once tried to get me to come to a seminar, but would not mention the Amway name lest I be convinced not to attend. By the way, each of the 130,000 licenses in Canada were changed to……..”dealing representative” just to give you a further bit of obfuscation.
    I campaign for the day when sellers of investment products will be legally required to disclose their license, their role and their conflicts of interests, like a fiduciary would have to. When that day comes, the debate about an “advisors” role will be more clear. See my personal story and journey at :

    larry elford, former CFP, CIM, FCSI, Associate Portfolio Manager, retired.
    my youtube channel about professional investment abuses:

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