Can Independent Investment Advice Protect Investors From a Crash?
Posted by Don Martin on Wed, Dec 29, 2010 @ 05:44 PM
Regarding using independent investment advice for investors to protect themselves from a crash, does it work? People are aware that an investment advisor who is not on the "sell side" of the securities industry is more independent and objective than someone on the "sell side". But what about a large independent advisory firm? Can they be objective about making a bearish forecast even though that means losing clients who insist on shopping for a bullish advisor?
It is not enough to simply seek an advisor who is independent from the manufacturing of securities (the sell side). In addition an investor needs to find an advisor who is independent minded, that is to say, someone who is a contrarian.
The true "value-added" component of an advisor is someone who can use a contrarian view to find something wrong with the conventional wisdom and use that insight to warn clients to avoid hidden risk, even though such a forecast would be unpopular.
Usually avoiding hidden risk means getting out of an investment that offers bigger than normal dividends, interest payments, rent payemnts, oil lease payments, etc. And that means reinvesting the cash from the sale of those assets into lower yielding, more conservative, allegedly less attractive investments. It is like the Titanic's owner thinking they could "save" money by not buying enough lifeboats. In that case one simply must reduce their hoped for profit by spending money to buy lifeboats to be safe, or one will be worse off.
So investors should seek out an advisor who is truly independent minded, not simply independent of the "sell side" pressures.