What Do Financial Advisors like Ridgewood Investments Do?
Ever since I can remember, I have been interested in business and investing. Part of this interest may be cultural, as I hail from an area in India called Gujarat where the culture encourages business ownership and entrepreneurship.
Since my parents emigrated to the United States when I was 5 years old, I wanted to make an impact in my adopted country. Even back then, when we lived in a small apartment, I remember having the desire to pursue success in business and investments. So I started working on getting good at this - initially purely to help myself achieve my goals.
Starting in high school (I attended St. Peter’s Preparatory School in Jersey City), I was often reading and preparing myself for future investment success by collecting books and articles on successful people like Warren Buffett. I realized that studying and modeling others who were good at the things that I wanted to become exceptional at was one of the surest ways to achieve my goals.
In today’s complex world, many jobs can seem difficult to understand. I am convinced that for many years, my own mother, who is also a happy client, did not really understand what investment and financial advisors do for a living.
If you have ever wondered what investment advisors, wealth managers and financial advisors do for our clients and how our work “works”, read on below for detailed insights on our profession and the tools we use to help our clients succeed and avoid costly mistakes. We will also share tips on what to look for in a good advisor, and how to tell apart the real experts from the many pretenders who you should avoid at all costs.
Why Even Smart People Can Benefit from Good Objective Advice
In early 2019, we redesigned our website to simplify our message so that it was easier for Ridgewood Investments visitors to immediately understand what we do as a fee-only investment and financial advisor based in New Jersey and California.
Our prior website had a reference to Isaac Newton along with his picture right on the home page entitled “Even Geniuses Need Help”. (If you are curious, you can see this for yourself on the Wayback Machine which archives old websites by going to the old Ridgewood Website)
The reason we highlighted Sir Isaac Newton is that he is very aptly considered one of the smartest men who ever lived with an estimated IQ of around 190. His accomplishments in Physics and as an inventor of Calculus are staggering. He was, apparently, also a successful investor for much of his life. Nevertheless, as is well known, he invested and lost a fortune in 1720 at the advanced age of approximately 78 in a speculative bubble known as the South Sea Company when it collapsed and wiped out his £20,000 investment (approximately equivalent to around $4.5 million in 2020).
So how could such a smart and capable person make such a costly error? After this experience, he is quoted as having said “I can calculate the motions of heavenly bodies, but not the madness of men.”
Newton was gripped by a speculative mania in the South Sea Company that ruined thousands of others and had ripples throughout the economy when it collapsed. Bubbles are not a thing of the distant past, in recent memory we have lived through a tech bubble and a real estate bubble just within the last few decades.
Robert Greene in his talk on “The Laws of Human Nature” in Talks at Google, reviews the above anecdote about Newton and explains in detail that Newton like all human beings was subject to subconscious and emotional forces hard-wired into primitive parts of our brains (like the limbic system) that are far more powerful than the logical capabilities of more recently evolved brain structures such as the neocortex.
At the most basic level, investment and financial advisors can add tremendous value by our ability to guide clients to avoid pitfalls and more consistently stay rational in their investment and financial decisions.
As Newton’s example illustrates, it is very difficult to become (and stay) objective and rational (especially about yourself and your personal situation). This is especially true whenever stress or anxiety (emotional responses) are triggered by the environment.
Most people could really benefit with the help of an experienced, rational, and objective advisor to help them make better decisions and avoid blunders.
At the most elementary level, before even getting into the details of the exact investments we make and the specifics of the tools and models we can bring to bear, a great financial advisor can add tremendous value by helping clients avoid costly mistakes of both omission and commission.
Along with this value, a caring and compassionate advisor can also help clients feel happier and more secure because they know they have someone in their corner who is watching out for them and keeping them safe now and in the future.
Financial Advisor Pretenders
Unfortunately, sometimes people pose as competent advisors, but really aren’t even real advisors at all - sometimes they call themselves advisors but are just glorified product peddlers.
Sadly, financial advisor scams are nothing new. It can be difficult for many people to distinguish between experts who can add tremendous value and dishonest individuals who are in it for their own short-term gains.
Misrepresentation of credentials or capabilities is a typical way in which unscrupulous people and their firms mislead the unsuspecting investing public. Indeed, in the middle of the last decade, the CFP Board produced an amusing advertisement to highlight the problem of unscrupulous financial pretenders that brandish false credentials.
In this ad, a dreadlocked disk-jockey masquerades as a clean-shaven financial expert. Despite the fact that he has absolutely no training in investing or finance, he convinces many of his prospective clients to trust him. Of course, this is an advertisement so at the end of the ad, the “truth” is revealed to the surprise and chagrin of the unwitting victims of this staged charade.
The Core Job of a Financial Advisor
So, what does a competent financial advisor do? Our primary responsibility is to assist clients in making sound investing and financial decisions.
The best advisors start with a detailed understanding of your financial goals and personal situation. They help co-create a plan that fits your situation, take concerns into account, outline the steps that need to be taken and the most efficient ways to work towards achieving those goals.
After outlining the right plan, a good advisor will work on your behalf to execute the plan and check on its progress over time.
Of course, a great advisor is skilled especially with a strong foundation in investments and has the expertise, knowledge and tools to help your portfolio grow and build wealth for you over the long term.
However, most good advisors will also have the ability to advise you more broadly with other tax and estate planning questions, liability management, heath expense funding, investing inheritance windfalls, and retirement income generation, to name just a few sources of valuable advice.
Advisors Help You Make Fewer Financial Mistakes
Perhaps one of the key areas in which a good investment advisor or wealth advisor can assist you is in the avoidance of devastating financial mistakes.
Numerous studies have shown that the average person’s mind is wired to make errors in judgement when operating in the financial marketplace. This is because our brains evolved over millions of years but the modern world is very recent and presents different challenges than we are ill adapted to through evolution to handle. As discussed above, our thoughts and emotions, particularly those of fear and greed, and fight or flight can cause us to do foolish things.
- Some of the common mistakes that many investors make include:
- Waiting too long to start investing
- Holding too much cash not earning anything
- Believing you always have to beat the market to be successful
- Not investing enough when you have sufficient resources
- Buying (and selling) based on emotion.
- Buying when everyone else is excited
- Selling when everyone else is scared
- Excessive trading
- Not basing investments on long-term outcomes and losing patience
- Buying confusing and high-fee commission products like annuities
- Failing to do their own thinking and homework and investing in things they don’t fully understand
- Forgetting to look for value and acting decisively when it presents itself
- Failing to pay sufficient attention to liquidity
- Confusing the difference between good debt and bad debt
- Failing to think as much about risk as they do on reward
By partnering with a trusted and competent advisor, many of these mistakes will be minimized if not eliminated. This is not to say that your investments will always go up in value every month or every year; that’s not the way the markets work and is not realistic. However, a great advisor can add far more in value to you than their fees to cover the cost for their services.
By crafting a long-term plan that fits your objectives and takes risk-mitigation into consideration, and by basing the majority of decisions on logic rather than emotion, a great financial advisor like Ridgewood Investments can help you minimize mistakes and be much more successful over the long haul than you would be on your own.
Tools Used By Financial Advisors
Another benefit of working with a financial advisor is the tools they bring to help you accelerate your financial success. As you may know, sound investing can require hard work and sustained effort as well as an understanding of market history and reliance on sound frameworks like diversification, margin of safety, compounding, asset allocation, reversal to the mean and others.
Skilled investment and financial advisors spend tens of thousands of dollars for access to research and financial planning tools that they can use to optimize your portfolio and your financial plan. Besides the direct cost of these tools, the training needed to use them successfully is also quite costly. Most advisors provide these benefits to their clients as part of their standard fee.
Experience and Education: Core Components of a Good Advisor
When shopping for an excellent financial advisor, make sure you take the time to review their education, experience, credentials and core competencies. A good advisor will be patient and spend the time to talk to you about their education, experience, how long they have been in business and their impact with other clients.
They should possess the following characteristics:
- A passion for and extensive experience in finance, wealth planning and investing
- A top education and credentials
- A positive yet grounded mindset
- A holistic mindset with humility and curiosity about the economic landscape
- The ability to explain and converse in easy-to-understand terms
- An understandable investment philosophy based on long-term value investing principles
- Commitment to be responsive and service-oriented
- Fee-only focus without the conflict of interest that can be created by commissions
- An education-oriented and not sales-oriented approach to their practice
Benefits of Working with Ridgewood
Let Us Help You Grow Your Money
Above All: Integrity and Eating Our Own Cooking
Successful financial advisors put the well-being of their clients ahead of their own interests and set up their relationship so that it does not start with conflicts of interests (such as accepting commissions). Also, they should be following the same investment philosophy with their own investments as they recommend to their clients, a practice that Warren Buffett has referred to as “eating their own cooking.”
Ridgewood Investments is a fee-only investment and financial advisor based in New Jersey and California. We are committed to the success and welfare of our clients who entrust us to advise them and protect them. Our integrity in helping our clients to achieve their goals is core to our mission to help all of our clients achieve freedom and enduring success through the power to intelligent long-term value-based investment strategies and smart financial decision making.
About the Author
Kaushal “Ken” Majmudar, CFA founded Ridgewood Investments in 2002 and serves as our Chief Investment Officer with primary focus on managing our Value Investing based strategies. Ken graduated with honors from the Harvard Law School in 1994 after being an honors graduate of Columbia University in 1991 with a bachelor’s degree in Computer Science. Prior to founding Ridgewood Investments in late 2002, Ken worked for seven years on Wall Street as an investment banker at Merrill Lynch and Lehman Brothers where he has extensive experience working on initial public offerings, mergers and acquisitions transactions and other corporate finance advisory work for Fortune 1000 companies. He is admitted to the bar in New York and New Jersey though retired from the practice of law.
Ken’s high level experience and work with clients has been recognized and cited on multiple occasions. He is a noted value investor who has written and spoken extensively on the subject of value investing and intelligent investing. He has been a member of the Value Investors Club – an online members-only group for skilled value investors founded by Joel Greenblatt, SumZero – an online community for professional investors, and has also written for SeekingAlpha – among others. Ken is active in leading professional groups for investment managers as a member of both the CFA Institute and the New York Society of Securities Analysts.