Charlie Munger (Trades, Portfolio)'s views on Wall Street are well-known. Much like Warren Buffett (Trades, Portfolio), he views the majority of Wall Street as an unneeded enterprise that only exists to suck fees away from investors and destabilize financial markets.
He also has the same opinion when it comes to financial advisers. Here's what he said on the topic of financial advisers in a lecture to the students of Professor Guilford Babcock at the University of Southern California Marshall School of Business in May 1995:
"Finally, I'd like to once again talk about investment management. That is a funny business -- because on a net basis, the whole investment management business together gives no value added to all buyers combined. That's the way it has to work. Of course, that isn't true of plumbing and it isn't true of medicine. If you're going to make your careers in the investment management business, you face a very peculiar situation. And most investment managers handle it with psychological denial -- just like a chiropractor. That is the standard method of handling the limitations of the investment management process. But if you want to live the best sort of life, I would urge each of you not to use the psychological denial mode."
What I find fascinating about this quote is that Munger stopped short of advising against using investment advisers altogether.
The statement that "on a net basis" the whole investment management business gives no value added to buyers, hints at the idea that he believes some managers do indeed provide value to investors, even though on the whole, the industry does not.
He went on to give some more color on this topic in the lecture:
"I think a select few -- a small percentage of the investment managers -- can deliver value added. But I don't think brilliance alone is enough to do it. I think that you have to have a little of this discipline of calling your shots and loading up -- if you want to maximize your chances of becoming one who provides above average real returns for clients over the long pullÂ
...But I'm just talking about investment managers engaged in common stock picking. I am agnostic elsewhere. I think there may well be people who are so shrewd about currencies and this, that and the other thing that they can achieve good long-term records operating on a pretty big scale in that way. But that doesn't happen to be my milieu. I'm talking about stock picking in American stocks."
This is a valuable statement. Munger is saying that some investment managers do provide value by bringing discipline into the investment process -- a topic that deserves plenty of attention in today's world where passive investing is rapidly taking over the active management landscape.
Multiple studies have shown that the most common reason why the average investor fails over the long term is because they lack discipline and consistency. The investment adviser can provide an extra layer of security in this respect, if they have experience and discipline themselves, to stop you from making any stupid mistakes.
Of course, this entirely depends on the quality of your own personal investment adviser. As Munger said, the majority of the industry does not provide value, but there are some individuals who do. This is similar to the way most hedge fund managers do not create value for their investors, but a select few grab 100% of the profits.
Munger concluded the section with the following statement:
"I think it's hard to provide a lot of value added to the investment management client, but it's not impossible."
Investment advisers are not always the enemy. A good one can be worth their weight in gold. Finding a good one, however, can be extremely difficult, although even a mediocre investment adviser can help by acting as a barrier between their client and that stupid mistake.
Disclosure: The author owns no share mentioned.
