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When hiring a financial advisor, one of the questions to ask yourself is should you hire an advisor that takes investment discretion, meaning the advisor makes investment decisions without getting permission by the client prior, or one that does not?
Ideally, an investor who hires an advisor should let the advisor do their job and not override investment decisions. However, there are investors that cannot emotionally deal with letting go and they would likely terminate the relationship anyway, so for these investors non-discretion (meaning all investments must get pre-approval from the client ahead of time) is best. The question of discretion or non-discretion question can also generate many other questions but in this article, we only address the one question, what is best for an investor, discretion or non-discretion. We are avoiding related questions such as conflicts of interest with discretion, compensation, fiduciary conduct, advisors that refuse non-discretionary clients or other nuanced, but nonetheless important issues.
There is fascinating history on the impact of second-guessing your advisor. On Black Monday, October 19, 1987 when the market dropped 22.6% in one day, clients were calling their broker demanding all their stocks be sold, despite in many cases the broker advising against it. That day remains the largest percentage drop of the Dow Jones Industrial Average. History of course proves out that many of these clients made a grave mistake that day by not listening as the market recovered and made gains in only a few short years later.
There are of course plenty of stories that describe when an investor should have ignored their advisor, most famously Bernard Madoff, who of course was a Ponzi scheme operator. These stories of course are far more written about than the stories of good advice ignored, and are more well known.
When one thinks about what is best in a vacuum, assuming the investor selected the right advisor, it makes logical sense that the investor should not override their investment professional, after all, why have an advisor if you believe your own investment skill sometimes is better?
Adding to the point, as research studies prove out the mathematical value of advisors, very often the most important time to have an advisor is when there is turmoil. Turmoil in the markets, turmoil in your personal life, turmoil in the geo-political environment. During emotional times people tend to make the most mistakes, and this is when the advisor adds the most value.
However, there are investors who have a very hard time letting go and trusting and if their only option was investment discretion, they would never use any advisor at all. For these investors, the non-discretion route is best thing for them.
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