Expert financial advice comes in many varieties, and a wide range of prices. So don't be surprised if these experts sometimes disagree with one another - it's a fairly common occurrence. And often, conflicting advice can be equally correct – or incorrect.
General financial advice from veteran reporters and columnists with backgrounds in finance and investments can be found in the daily newspaper. This advice, however, is usually generic and not customized to the personal needs of a specific investor, estate planner or retiree.
More costly financial advice that is customized to specific personal investment requirements may be obtained by hiring an independent financial planner, a planning firm, a brokerage firm that provides financial advice, or even a hedge fund, which would require a larger-than-average cash investment.
Whether expert advice is cheap or expensive, generalized or customized, the disagreements among financial advisors are caused by many factors.
Advisor Compensation and Investment Philosophy and Strategies
Some advisors, usually those who do not earn their compensation on commissions or brokerage fees, advise a buy-and-hold strategy for the stock market. They recommend buying certain stocks to create a diversified portfolio across several sectors and urge the investor to hold them for the long term, anticipating an increase in share prices. These advisors, typically hired on a fee-only basis, are proponents of a passive portfolio, in which trading – buying and selling equities – is kept to a minimum. Market history has shown that the stock market rises over time, and therefore the buy-and-hold strategy is the choice of these advisors. (Read how investors find stocks that fit this strategy in Finding Solid Buy-And-Hold Stocks.)
Advisors who advocate a managed portfolio, in which equities are traded in response to ever-changing market conditions, earn their compensation based on trading commissions and fees. They have an incentive to buy and sell regularly because of the commission generated by trading. A small faction of these advisors, most often those affiliated with a hedge fund, also receive a percentage of the increase for each portfolio in addition to a management fee, a small percentage of the value of an investor's portfolio at the beginning a trading year.
Buying annuities may be urged by financial advisors who sell them and receive commissions on sales. Advisors who do not sell annuities may advise against them because of surrender fees, the large amount of up-front cash often required, and because the advisor will not receive commission when the client purchases an annuity.
Hedge funds usually charge clients a performance fee, sometimes as much as 20% of the annual increase in the value of a portfolio. Hedge fund managers are therefore encouraged to trade equities or invest in instruments that may be risky in an attempt to increase portfolio value. By contrast, fee-only advisors may be more conservative, and their advice will reflect their risk-averse philosophy.
One of the unspoken sources of expert disagreement between these approaches is obvious: methods of compensation. While these strategies are contradictory, they may generate substantial returns for the investor - or they may all fail - depending on market conditions and performance.
Asset allocation is another area of disagreement among financial advisors. Asset allocation refers to the percentage of the total amount of an investor's portfolio distributed among various asset classes such as stocks, bonds, cash or cash equivalents and other investment vehicles.
As a rule, financial advisors, other than hedge fund portfolio managers, generally do not recommend specific stocks to investors. They may recommend investing in various market sectors, but only as part of a broader, diversified mix of investments. The mix is normally based on an individual investors risk profile, but can deviate from the average based on the advisors preference. (Learn more about asset allocation in Asset Allocation: One Decision To Rule Them All.)
Depending on an investor's age, tolerance for risk and years away from anticipated retirement age, financial advisors will recommend differing asset allocations for each individual.
These variables in the investor profile account for the differences in advice. Younger investors will be advised to take on more risk than older investors. As investors age and near retirement, their advisors will recommend transferring a larger percentage of their portfolios into less risky assets.
For a retired investor, differences in allocation recommendations may be relatively small. For example, a retired investor may be advised by one financial planner to put 60% of a portfolio into high-quality fixed-income instruments. Another advisor may recommend only 55%. Such differences usually represent the personal preferences of the advisor.
Tax considerations are also taken into account when allocating assets. Tax efficient instruments and tax-deferred opportunities, such as the standard IRA versus the Roth IRA, may present points of disagreement among advisors, depending on the needs and circumstances of their respective clients.
Differing Interpretations of Economic and Financial Data
A third major area of disagreement among financial advisors may be their differing interpretations of financial data.
Wealth management advisors and hedge fund executives who manage large portfolios of investment vehicles – often amounting to hundreds of millions or even billions of dollars – may disagree with one another for the same reasons many economists disagree.
They may have preferences for certain market sectors or individual companies, based on their readings of financial data or because of personal bias. They may also have differing perspectives on the efficacy of government intervention in the economy, and may base their investment advice accordingly.
For instance, some economists and financial advisors believe that government stimulus programs and excessive bailouts are ineffective and may eventually create high rates of inflation. Accordingly, if it is believed that this would happen, it may be advised that an investor buys gold, commodities or Treasury inflation-protected securities (TIPS) as a hedge against inflation. (Learn more about TIPS in our article Treasury Inflation-Protected Securities.)
Financial advisors are compensated by various methods, and often their strategies and the advice they give are based on how they're compensated. A point of disagreement may be based on asset allocation formulae. Different advisors will recommend different apportionments of a portfolio's holding across a variety of assets – equities, bonds, cash or cash equivalents, and other investment instruments. And another area in which financial advisors may differ is their analysis of financial data and the advice they give based on these factors. Leading economic indicators, for example, are open to interpretation and may suggest both short- and long-term economic results.
For the most part, honest disagreements among financial advisors are common. However, as a note of caution to the wise investor, financial advisors must be compensated one way or another. Investors are urged to do their research and be wary of the financial advisor whose advice may be based too much on maximizing his or her own compensation. (For more on this topic, check out Shopping For A Financial Advisor and Find The Right Financial Advisor.)