Top RIA’s Top Business Model: Keep Your Hands Off!

Hebner believes passive advisors who truly understand and subscribe to the DFA pure passive approach (he believes only a minority of DFA advisors “really do a good job” of this) optimize investment performance.

That is because, first of all, “they get an advisor when they get DFA funds,” but also because “disciplined rebalancers are selling bonds and buying equities after a 50% stock market decline. That is not the behavior of an average investor.”

In bridging the gap between investment returns and actual investor returns, Hebner believes the guidance of a high-quality passive advisor—especially one armed with the data found in his book—may be all there is to thwart investor self-destruction.

“I literally put them through rehab,” he says of many of his own clients. “They still want to buy and sell at the wrong time. The real difference is they have someone to call who has the data to refute what they’re trying to do.”

What those who call want to do is buy based on perceptions of bullish market trends, or sell based on fear of negative trends. These are emotions, which passive investors who embrace market randomness are less subject to. But, he says, passive investors working with advisors become disciplined rebalancers who buy low and sell high in order to maintain a target allocation.

“There is an average of 5 million buyers and 5 million willing sellers a day trading 10 billion shares of stock a day,” he said. “When we rebalance our portfolios, we’re on the other side of the trade of the active trader.”

Another pitfall of unadvised investors is ignorance of their own investment performance, says Hebner. “I’ve yet to see a quality performance report on an individual’s investment return. It takes very sophisticated software to provide an accurate dollar-weighted return.”

“If you don’t measure your performance,” he adds, “how do you really know how well you’re doing? This is your money. You have to live off of it 25 years in your retirement. It’s not something you want to be cheap about,” he says, meaning that the importance of personal finance merits hiring a financial advisor.

“You want to be cheap in the investments you pick, but you want to pay a fair price for your advice,” adds Hebner, whose firm charges a 0.9% fee on the first $500,000 in assets, sliding down to lower fees on higher asset levels.

Those fees pay for the evaluation, selection and monitoring of index investments, and a lot more, says Hebner. “There are thousands of index investments for investors to choose from. It requires a fairly high level of expertise, understanding the academic literature and the risk-related returns,” he says.

His IFA advisors take advantage of “tax-loss harvesting opportunities and monitoring the risk level appropriate for the investor as time goes on, and provide advice on other aspects of wealth management,” such as estate planning, insurance, cash flow management and withdrawal strategies in retirement, he says.

Hebner’s bracing message is not directed only at investors, but to non-passive advisors as well.

“If that’s where you are stuck, you should move,” he says of advisors affiliated with brokerage firms. “Every investment advisor should be a fiduciary for their clients, which means they look out for the best interests of their clients even if it goes against their own interests.”

“Look at every brokerage agreement,” he continues. “It shows that the firm is not acting as a fiduciary for the client.”

Quoting from a brokerage firm agreement that reads, “We do not have a fiduciary or advisory relationship with you,” Hebner says “anyone who understands what those words mean should leave.

“That means they’re going to sell you things that make them money as opposed to doing what makes you the most money,” he says. “When I explain this to potential clients, their jaws drop.”