Advisor Risks

You have probably know about the risks you face when investing: market risk, inflation risk, timing risk, concentratin risk, investment risk, sector risk, company risk, currency risk, event risk, political risks, etc.


One that you may not be as familiar with is Advisor or Manager risk. In this case we are talking about people who manage other peoples money (mutual fund managers), analysts (like S&P, Moody's, TV commentators, or newsletter writters), hedge funds, money managers, and personal advisors (investment advisors, financial planners, etc.).


Managers and Advisors are also risk-averse, just as they are with their own money and you are with your own. But they're averse to a different kind of risk - the risk of looking bad to the person who's paying you the fee. When they provide their investors their (daily, wekly, monthy or annual) reports, they don't waqnt to be holding investments that have recently done bad or not holding ones that have recently done well. That is not what you are paying them for.

This risk can incline them to buy high and sell low. Avisors then buy what has just gone up and sell after investments have gone down becasue it will make them look better. The problem is that over time, it will not maximize the wealth of their clients.