Do-it-yourself investors seeking professional advice
By Larry Getlen • Bankrate.com

For Douglas Jacobson, a vice president with Advest Inc. in Fort Lauderdale, Fla., the truth came like a sharp pain in the molar.

"I'm in the dentist chair a while back," says Jacobson. "The dentist tells me he bought shares of AOL at $150, says he's doing things with Ameritrade. When I went back two months later for a root canal, I knew those stocks were down 50 percent already, and I wanted to say to him, 'How about you sit in the chair and I do a root canal on you?'"

Jacobson's anecdote illustrates the fundamental problem with a trend that has begun to self-correct. As Jacobson states, "I don't have the training to be a dentist, I should not be the dentist. And he should stop pretending to be the investment adviser."

Services like E*Trade and Ameritrade made it easy for investors to facilitate their own trades without professional advice at a time when owning only three stocks seemed like a wise investment strategy to some, and when, as Jason Whitby, a financial consultant for Noesis Capital Management, says, "Everybody thought they could pick stocks because you could throw a dart at a board and it would go up 20 percent."

Now those days are the stuff of nostalgia, and many former do-it-yourself investors are looking for help.

The first evidence that going with a pro can be a wise move is that even in the face of the horrific market decline of the past two years, the suffering wasn't equal, and many self-investors lacked the knowledge to assemble the kind of diversified portfolio that translates into long-term security.

Allan Chernoff, senior correspondent for CNN and CNNfn, is quick to remind that "the value managers have done much better on a relative basis," and John Moore, a financial adviser with Raymond James in Albuquerque, N.M., says he lost clients in 1999 and 2000 by sticking with more conservative strategies that proved themselves in the long run.

"Certain investment styles didn't drop as much," says Moore, "primarily, small- and mid-cap value. We had great success with an asset-allocation model where we owned six to eight different asset classes, including small- and mid-cap value that tended to offset declines on the growth side.

"It cost us business in 1999 and 2000 because we wouldn't chase the returns in the large-cap growth area, but it eventually proved out the concept of a truly diversified portfolio across investment styles."

Jeff Gembis, a first vice president of investments for Merrill Lynch in Michigan, makes the case for diversified, long-term planning.

"I don't think most do-it-yourselfers had a formal financial plan," says Gembis. "When you have a formalized plan, it allows you to effectively navigate the noise and make an informed and intelligent decision about short- and long-term goals without responding to what happened in the market in the last five minutes."

Gembis also notes how certain intelligent, long-term investment strategies are counterintuitive, especially in the face of a gold-rush mentality.

"Rebalancing is counterintuitive," notes Gembis. "How did one rebalance in the heyday of the Internet? When a position became so big, you trimmed it back. It's the age-old, time-tested process and discipline that has protected investors. A well asset-allocated investor, one that was diversified as to style, growth, value and size, did better than the person who didn't use those techniques."

Wake-up call
Unfortunately, it took financial ruin for many investors to realize this. Whitby, for one, has seen a definite change in investors' attitudes toward investment advisers since the market sank.

"It was pretty difficult to be a money manager in late 1990s," says Whitby. "All these individual investors could go to discount brokers for very low commissions and make 20 percent, so it was like, 'Why should I pay you?' Since about 1999, 2000, when it started to burst, people started to be like, 'OK, maybe I don't know what I'm doing.' They see it wasn't that easy."

Even the purchase of a single stock can require a greater bank of knowledge than many do-it-yourselfers possess.

"One client was going to buy a stock at 14," recalls Jacobson. "It had huge momentum, but everything I read about it looked like garbage. I told my client not to buy it. It got halted soon after, and when it finally started trading again, it opened below a dollar."

Not surprisingly, the folks over at E*Trade have a slightly different take on the trend. (Ameritrade refused to speak to us for this story.) Connie Dotson, chief communications and knowledge officer for E*Trade, emphasizes her belief in the market intelligence of her customers and says that any shift in trading habits has not moved investors to relinquish their input in their investment activities.

"We see that people are moving from a totally self-directed environment to one where they're involved," says Dotson. "I really believe that investors understand the need to be involved because during these market conditions, even people who have had full money managers or financial advisers handling their accounts have been hit hard.

"No one knows better than the investor does about what their plans are, what their objectives are and where they want to go with it. There's so much information available to them, so many sources of knowledge, that I think they have enough tools to make the right choice."

Moore also sees that while many clients are seeking greater professional input, they still remain involved.

"We're finding that people who did their own thing are coming to us for input on their portfolios," says Moore, "and sometimes they don't really want us to take over management, they just want us to survey the damage and assess where they are right now. I think people who do it themselves have a tendency in that direction. They like executing the trade, feeling like they're part of the action, if you will. They just want some more advice."

And, as Gembis notes, the investor always has the final word.

"They are ultimately making the decision," says Gembis. "What I can do is give them the tool box they need to make the decision."

But Moore also emphasizes that clients are turning to him in greater numbers because their final decisions sometimes left them beaten and overwhelmed, estimating that while a few years back 1 percent to 2 percent of his new clients might have been people who had previously invested on their own, that number is now around 10 percent.

"Some of our clients invested on their own on the sly, and they're ashamed of it because they've been pretty well beat up, because most of them owned technology stocks. The others are new clients who had no advisory relationship anywhere, who were doing it themselves, and they're realizing that they've been pretty well beat up. In some cases, devastated."

Full-service placebo?
Some, though, like Dotson and Chernoff, aren't sure that making use of a full-service broker is the elixir to cure the ills of the self-investor.

"Look at what all the full-service brokerages were doing through 2001 and 2002, as the market was sinking," says Chernoff. "They were telling their investors, 'Buy, buy, buy. The market looks great. We're bottoming out. When stocks go down it's like they're on sale.' You can quote from any of the brokerage reports, talk to any of the major brokers and clients were getting burned.

"I'm not blaming the brokers because nobody's so wise they know every move the market's going to make, but it's not as if the full-service brokers were providing such a spectacular alternative. I don't really see the full-service brokers as some savior for the average investor."

While the concept of a market savior is probably as far away as the days of virtually guaranteed 20-percent and 30-percent returns, many agree that as trying as these times are, the smartest investment decision is the one that is best informed, and an investment professional can often provide valuable knowledge and expertise to the individual investor.

Accordingly, some advisers see the current market decline as an opportunity for the investment advisory community to prove their worth to investors who entered the market during the recent boom and may have never relied on an adviser.

"The investment adviser community has an opportunity to create some new relationships and to strengthen some others that were diluted when the money went away," says Moore.

And Gembis adds what all investment professionals hope is true for themselves. "If a new client comes to Merrill Lynch and perceives value in the process, we'll have them for life. If we're able to show the client value in what we provide for them in our advice, then we'll have them forever."

Larry Getlen is a freelance journalist and comedian in New York.

-- Posted: Oct. 9, 2002