Posts tagged ‘fee-only’

Beating off the Financial Sharks

There is blood in the water and financial sharks will do their best to consume any weak, floating prey. Now, greater than ever, investors are looking for answers in these perilous economic waters, so it behooves investors to arm themselves with the knowledge and questions necessary in dealing with financial predators.

Unlike other professions, like medicine, law, or accounting, the hurdle in becoming a “broker,” “advisor,” “financial consultant,” or other glorified title is much lower than some other professions. Basically, if you pass an exam or two, you are ready to do business and handle the financial future of virtually anybody.

Not all practitioners are evil, and there is a segment of investment professionals that take their craft very seriously. Separating the wheat from the chaff can be very challenging, so here is a list to follow when reviewing the management of your finances:

1)      Experience Matters: Find an advisor with investment experience. Someone who has actually invested money. Don’t partner with a financial salesperson good at shoveling high-cost, high-commission products and strategies. When you fly in a plane, do you want an inexperienced stewardess or veteran pilot flying the plane? If you were ever to need surgery, would you want the nurse using the knife, or a trained, educated surgeon? Your investment future is a serious proposition, but many investors do not treat it that way.

2)      Education and Relevant Credentials Matter: Find an advisor with credible, relevant investment credentials. Not all investment letters are created equally, and interpreting the alphabet soup of financial industry designations can be thorny. Two credentials in the investment industry that rise to the top are the CFA (Chartered Financial Analyst) and CFP® (Certified Financial Planner) designations. Less than 10% of the industry has one of these credentials and less than a few percent have both. An advanced degree like a master’s degree wouldn’t hurt either.

3)      Low-Cost & Tax Efficiency: Find an advisor who uses a low-cost, tax-efficient strategy, including the integration of passive investment vehicles, such as exchange trade funds (ETFs), index funds, and/or individual securities that are invested over long-term investment horizons (read more about passive investing). Not only are low-cost products important, but low-cost activity is vital too – meaning there should be no churning of the account with high commissions or transaction costs.

4)      Find an Advisor Who Eats Cooking: It is important to find an advisor who eats his/her own cooking (i.e., he/she is invested in the same investment products and strategies as the client). Commissions can often be the number one motivation for the advisor, rather than what is best for the client’s future. When offered a new investment product, one way to cut to the chase is by asking, “Oh, that’s great you will make an immediate $10,000 commission off the sale of this product to me, but do you own this same investment in your personal portfolio?” It is crucial to have someone in the bunker with you as you invest.

5)      Fee-Only – The Way to Go: Find a “fee-only” advisor with a transparent fee structure who can honestly answer what fees you are paying. A fee-only investment advisor mitigates the conflict of interests because if the client portfolio declines, then the investment manager’s compensation is also reduced. There is a built-in incentive for the advisor to preserve and grow the client portfolio in accordance with the client’s risk-tolerance and objectives.

6)      Find an RIA (“Fiduciary Duty”): Find out if the advisor is working with an RIA advisory firm (Registered Investment Advisor), which is required by law to have its advisors make investment decisions in the sole interest of the client. Most brokers/advisors/financial consultants (or other euphemism) – working at firms such as UBS, Merrill Lynch, Wells Fargo/Wachovia, Edward Jones, and Morgan Stanley/SmithBarney, have a much lower “suitability” standard in managing client money.

7)      Don’t Become Chopped Liver: Find out how many clients the advisor serves. Some brokers attempt to service a client list of 100 or more (many brokers have hundreds of clients). Typically the highest revenue-generating clients are given service, and the smaller accounts are treated like chopped liver or swept under the rug.

8)      Get References: You will likely not be forwarded bad references, but see if you can get beyond, “Johnny is such a nice broker” talk and find out how the portfolios have performed versus the relevant benchmarks. Getting this data can be difficult, but you can ask the advisor for an anonymous sample of an appropriate portfolio that you would be invested in.

9)      Background Check:  With proper research, investors can become more comfortable with the professional chosen and the status of the firm employing the manager/professional. Several government and professional regulatory organizations, such as the National Association of Securities Dealers (NASD), the Securities & Exchange Commission (SEC), your state insurance and securities departments, and CFP Board keep records on the disciplinary history of the investment and financial planning advisors. Ask what organizations the professional is regulated by and contact these groups to conduct a background check.

Getting all this information may take time, but protecting yourself from the masses of financial predatory sharks is imperative. Compiling data from the checklist will act as a shark cage, helping safeguard you from potential harm.

Remember, it’s your financial future, so invest wisely!

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, but at time of publishing had no direct positions in UBS, Merrill Lynch (BAC), Wells Fargo/Wachovia (WFC), Ameriprise (AMP), Edward Jones, and Morgan Stanley/SmithBarney (MS). No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

February 9, 2010 at 11:00 pm 4 comments

History Never Repeats Itself, But It Often Rhymes

Mark Twain

As Mark Twain said, “History never repeats itself, but it often rhymes.” There are many bear markets with which to compare the current financial crisis we are working through. By studying the past we can understand the repeated mistakes of others (caused by fear and greed), and avoid making similar emotional errors.

 Do you want an example? Here you go:

“Today there are thoughtful, experienced, respected economists, bankers, investors and businessmen who can give you well-reasoned, logical, documented arguments why this bear market is different; why this time the economic problems are different; why this time things are going to get worse — and hence, why this is not a good time to invest in common stocks, even though they may appear low.”
– Jim Fullerton, former chairman of the Capital Group of the American Funds (written  November 7, 1974)

 

Although the quote above seems appropriate for 2009, it actually is reflective of the bearish mood felt in most bear markets. We have been through wars, assassinations, banking crises, currency crises, terrorist attacks, mad-cow disease, swine flu, and yes, even recessions. And through it all, most have managed to survive in decent shape. Let’s take a deeper look.

1973-1974 Case Study:

For those of you familiar with this period, recall the prevailing circumstances:

  • Exiting Vietnam War
  • Undergoing a recession
  • 9% unemployment
  • Arab Oil Embargo
  • Watergate: Presidential resignation
  • Collapse of the Nifty Fifty stocks
  • Rising inflation

Not too rosy a scenario, yet here’s what happened:

S&P 500 Price (12/1974): 69

S&P 500 Price (8/2009): 1,021

That is a whopping +1,380% increase, excluding dividends.

What Investors Should Do:

  1. Avoid Knee-Jerk Reactions to Media Reports: Whether it’s radio, television, newspapers, or now blogs, the headlines should not emotionally control your investment decisions. Historically, media venues are lousy at identifying changes in price direction. Reporters are excellent at telling you what is happening or what just happened – not what is going to happen.
  2. Save and Invest: Regardless of the market direction, entitlements like Medicare and social security are under stress, and life expectancies are increasing (despite the sad state of our healthcare system), therefore investing is even more important today than ever.
  3. Create a Systematic, Disciplined Investment Plan: I recommend a plan that takes advantage of passive, low-cost, tax-efficient investment strategies (e.g. exchange-traded and index funds) across a diversified portfolio. Rather than capitulating in response to market volatility, have a systematic process that can rebalance periodically to take advantage of these circumstances.

For DIY-ers (Do-It-Yourselfers), I suggest opening a low-cost discount brokerage account and research firms like Vanguard Group, iShares, or Select Sector SPDRs. If you choose to outsource to a professional advisor, I recommend interviewing several fee-only* advisers – focusing on experience, investment philosophy, and potential compensation conflicts of interest.

If you believe, like some economists, CEOs, and investors, we have suffered through the worst of the current “Great Recession” and you are sitting on the sidelines, then it might make sense to heed the following advice: “Some people say they want to wait for a clearer view of the future. But when the future is again clear, the present bargains will have vanished.” Dean Witter made those comments 77 years ago – a few weeks before the end of worst bear market in history. The market has bounced quite a bit since March of this year, but if history is on our side, there might be more room to go.

Wade W. Slome, CFA, CFP®

Plan. Invest. Prosper.

*For disclosure purposes: Wade W. Slome, CFA, CFP is President & Founder of Sidoxia Capital Management, LLC, a fee-only investment adviser based in Newport Beach, California.

September 16, 2009 at 4:00 am 10 comments


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