Finding the Right Financial Adviser for You

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Noel Shaw
6 years ago
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1 Finding the Right Financial Adviser for You Today s investors suffer from no shortage of financial advice, but they do suffer from a serious lack of good advice. While friends, family, colleagues, and endless media resources are quick to offer up plenty of opinions about investments to buy, investments to sell, and generally how you should manage your money, they all suffer from serious flaws. First, those giving the recommendations often lack the expertise and valuable experience of a professional financial adviser. And second, the advice is not tailored to your particular needs and desires your tolerance for risk and your expectations for returns. Given how important your investment success is to your future, settling for anything less than top-notch professional guidance doesn t make good economic sense. From building financial security for yourself, to creating a legacy for your heirs, it is imperative to make the most of your money. At Adviser Investments we understand how hard it can be to take the initial steps to find a qualified financial pro to oversee your portfolio. You aren t sure how to go about finding a good financial adviser you can trust and who will do a good job for you. That s why we produced this special report. The Value of a Good Financial Adviser You no doubt seek out the advice and counsel of many experts in your life. To manage your health you turn to doctors. To set up an estate plan you work with a lawyer. When you buy or sell a home you typically hire a real estate agent. And we all seek out specialists to handle tasks we aren t particularly interested in, or suited to handle be it gardening, plumbing or changing the oil in our cars. We turn to the pros because we know they have the experience and qualifications to give us the best possible advice and service, and we appreciate the value of not having to do the work ourselves. A qualified financial adviser provides the same valuable services as other experts in your life. Teaming up with a financial adviser can help you solve some of the major challenges of managing your investments. THE TIME FACTOR Let s face it, you re busy. Between your work, your family life and your desire to fit in at least a few hours a week to relax, it s hard to find the time to monitor your investments. And even if you are a buy-and-hold investor, you still need to stay actively involved with your money, the markets and the constant stream of global economic and political news. No stock or bond or mutual fund exists in a vacuum; everything in today s world is intertwined; when something happens halfway across the globe, it can very well change the prospects for your investments. INFORMATION OVERLOAD There are more than 10,000 stocks and mutual funds you can choose for your portfolio. Many are terrific, but even more are duds. Moreover, a stock or fund that is doing well today could morph into a bad investment next month or next year. Staying on top of all the options available to today s individual investor is another time drain. THE RESPONSIBILITY FACTOR Just a few decades ago, individuals didn t really have to sweat the details of saving for retirement. Chances are you worked for a company that promised you a fixed pension payout upon retirement. End of story.

2 But the advent of 401(k) and 403(b) defined contribution retirement plans changed the rules of retirement planning: Now it is the individual who bears responsibility for setting aside a portion of his or her salary in a retirement account, while also being in charge of deciding exactly how that money should be invested. As if doing our jobs and raising our families wasn t already a full-time job, we are now required to take on the task of managing our retirement assets. And that s no easy task. Many retirement plans offer a dizzying array of investment choices it s not uncommon for there to be more than a dozen investment options to choose among. Even more vexing for many individuals is what to do with a retirement account at the point you retire or move to another job. In most instances, the smartest move is an IRA Rollover where you transfer your 401(k) or 403(b) money into a selfdirected retirement account at a brokerage firm or mutual fund company. Rather than being limited to the investment choices offered in a company plan, you can then invest in just about any stock, bond, mutual fund or exchange-traded fund. But many individuals are too confused, scared or pressed for time at their new jobs to do a rollover and end up just letting their money sit in their former employer's plan, a bad move. Many baby boomers are also in line to inherit large sums in the coming years; expectations are that in the coming decades the U.S. will see the largest wealth transfer in our nation s history. Add it all up and it is quite common for folks today to end up directly responsible for large investment portfolios well before they reach retirement age. ACHIEVING TRUE DIVERSIFICATION You re probably familiar with the theory that diversification is the key to long-term investing success. But understanding what constitutes complete diversification is trickier than it seems. Diversification is a multifaceted concept that involves all of the following: n Asset diversification. The three main types of investments are stocks, bonds and cash. Each has its place in your portfolio; the challenge is to know, given your age, risk tolerance and investment goals, what the proper mix is for you. n Global diversification. The United States currently generates less than one-third of global gross domestic product. Clearly, some of the strongest investing opportunities exist in international markets. Yet many investors unwittingly stick with U.S.-only portfolios. One of the big myths of investing is that all you need to do to achieve instant diversifications is to invest in a broad market index fund. The problem with that style of investing is that the most popular indexes, such as the S&P 500, don t include stocks of international firms, diminishing diversification and exposure to growth opportunities in foreign markets. n Market Cap diversification. Big established blue-chip firms, often referred to as large capitalization stocks (large caps for short) tend to get the most attention from investors. For example, the S&P 500 is an index of large-cap stocks. But when you focus solely on large-caps, you bypass the world of small company stocks; these are typically younger and less well-known firms where there can be great return potential as the company grows. The table below compares the annual performance of the S&P 500 index to the Russell 2000 index, which is considered the benchmark for small-cap stocks. In eight of the past 10 calendar years, small-cap stocks outperformed large-cap stocks, often by a wide margin. n Style diversification. There are many different ways you can size up an investment. Two of the most popular approaches to stock investing are known as Growth and Value. Growth investing is a bet on firms where there is the expectation of rapid future earnings growth. Value investing focuses on firms that may have had a temporary setback or been overlooked by most investors; the bet is that the current stock price does not correctly reflect the underlying value of the company or its assets. Both approaches have their merits. What s most important is to understand that the styles tend to cycle in and out of favor. Consider the relative performance for Growth and Value over three distinctive stretches: Growth stocks outpaced value stocks for three straight Annual Performance S&P % 4.9% 15.8% 5.5% -37.0% 26.5% 15.1% 2.1% 16.0% 29.6% Russell % 4.6% 18.3% -1.5% -33.8% 27.2% 26.9% -4.2% 16.4% 37.0%

3 Since 2000, Both Value and Growth Stocks Have Had Periods of Outperformance S&P 500 Growth index 6.1% 4.0% 11.0% 9.1% -34.9% 31.6% 15.1% 4.7% 14.6% 32.8% S&P 500 Value index 15.7% 5.8% 20.8% 2.0% -39.2% 21.2% 15.1% -0.5% 17.7% 32.0% In the Late '90s Growth Stocks Outpaced Value Stocks S&P 500 Growth index 36.5% 42.2% 28.2% S&P 500 Value index 30.0% 14.7% 12.7% years at the end of the 90s. But since then we ve been in a value-driven market. It s important for investors to have the proper allocations to both investment styles, at the right time, to ensure that investment returns and risks are kept in balance. n Industry Diversification. One of the most costly investing mistakes is to overload your portfolio with stocks that are all part of the same slice of the market. Investors with huge bets on the technology sector at the turn of the century learned this hard lesson when the sizzling tech sector went stone cold in March Then in the first part of this century, value stocks outperformed for seven years in a row, before growth stocks again came to the fore, outpacing value stocks for five out of the last seven years through FIGHTING OUR (BAD) IMPULSES So often when the market hits a rough patch the natural inclination for many investors is to sell stocks and run to the Tech's Big Losses Since % 30% 20% 10% 0% -10% -20% -30% -40% QQQQ Quarterly Performance Cumulative Performance 00 Q1 01 Q1 02 Q1 03 Q1 04 Q1 05 Q1 06 Q1 07 Q1 08 Q1 09 Q1 10 Q1 11 Q1 12 Q1 13 Q safety of bonds or cash. You just can t bear the thought of seeing your portfolio value decline. The problem is that once you pull out of the stock market you create a new problem: When to get back in? If you stay in bonds or cash, you lose out on the long-term inflation-beating gains that only stocks deliver. (Keep in mind that, over many decades, the average annual return for stocks is about 10%, compared to around 5% for bonds and cash. After subtracting 2% to 3% for inflation, bonds and cash barely grow your money.) Quite often, staying focused on your long-term goals and thus not reacting at all to short-term volatility is the best investment approach. That s exactly what a qualified financial adviser should counsel you on; when volatility strikes, a financial adviser is the dispassionate third-party expert who can help you stay focused on your long-term goals. At the other end of the spectrum are investors who don t ever make changes to their portfolios. Inertia can be an equally damaging trait. Knowing when to take profits on a winning investment or to rebalance your assets among various types of investments, as well as when to move into an underperforming stock, sector or industry in anticipation of a turnaround is a key component to successful investing. From figuring out the right asset mix of stocks, bonds and cash, to knowing when and when not to make changes make changes to your portfolio, managing your money is a complex and time-consuming process. A financial adviser can provide not just expertise, but also confidence that your portfolio is being constantly monitored with a sharp eye to making decisions that will help you meet your long-term goals. How to Find a Good Financial Adviser Choosing a financial adviser who is not only competent, but also meshes well with your personality is crucial. Yes, you are hiring the financial adviser to do a job, but the stakes are high and highly personal. You should be comfortable with the person you intend to entrust with your financial future. There s no harm in asking friends and colleagues for references, but that s just a starting point. We all have different goals, and personalities; what appeals to a friend may not be

4 The Compensation Conversation THERE ARE A VARIETY OF WAYS a financial adviser can be paid by clients. n Commission-Based. An adviser who works solely on commission only makes money when you buy and sell assets. That creates the possibility of a serious conflict of interest: The more you trade the more the adviser makes. Commission-based advisers also earn fees from frontend or back-end loads, hidden 12(b)(1) marketing fees and other potential give-backs from the financial firms whose products they recommend. Before working with a commission-based adviser you must thoroughly investigate and understand all the ways they are compensated. n Fee-Only. An adviser who charges an hourly or project fee for service. Typically, unless you pay a recurring hourly fee there is no constant oversight of your portfolio. n Annual management fee. Typically a percentage of your assets that the investment adviser oversees, say 1% or so annually, usually charged on a quarterly basis n A combination of any of the above. MAKE SURE YOU GET CLEAR ANSWERS on the following: n Do you ever receive any payment based on the specific investments you buy and sell for me? n How many different ways are you compensated in managing my portfolio? n If the adviser uses mutual funds, you need to dig even deeper. In addition to the fee you pay directly to the adviser, you want to know if the firm uses true no-load funds; mutual funds that do not charge an initial sales fee (called a front-end load) or a deferred sales load (a fee levied when you sell fund shares.) Investing in a fund that has those fees means less of your money is left to grow for your benefit. n If the adviser charges an annual management fee, what is the percentage? You should also ask if there are any breakpoints : once your assets reach a certain level is the management fee reduced? the right fit for you. So plan on spending some time interviewing at least three prospective financial advisers. Here are some shopping tips: n Get personal: How long has the individual been a financial adviser and how long has the firm been in existence? Experience definitely has its advantages when it comes to investing; someone who has successfully maneuvered through both bad and good markets is a bonus. You also want to know how much money the individual/firm currently manages for clients, and the typical account size. Ideally you want to fit right into the general profile of a typical client. You should also ask what professional training the adviser and all the investment staff at the firm has. Also ask for the firm s ADV. This is a document each investment advisery firm must file with either their state securities department or the federal Securities and Exchange Commission. It is a two-part document; the first part explains general firm information, while Part II gives a detailed accounting of the firm s services, fees and strategy. n Get philosophical. Every financial adviser should be able to tell you the firm s general investment philosophy. What do they consider success? Just a big return, or a return with less risk than the overall market? Do they measure success month-by-month or are they focused on building financial security over the long-term? Ask a prospective adviser to tell you about their worst investment period. Down markets are a natural part of the investing process; what you are searching for is how forthcoming an adviser is to talk honestly about how he or she handles those tough times, and how the firm s client s have weathered falling markets. Successful investing isn t just about making money in rising markets; it is just as much about preserving capital in lousy markets. n Get down to basics. What does the adviser invest in? Stocks, mutual funds, exchange-traded funds? Do they use options and other derivatives; if so, are you comfortable with that added risk? If an adviser can t clearly explain exactly what they do for clients in language that you can understand, that should be a red light. Ask them in general terms what a client with a similar profile to you is invested in. n Does the adviser have discretionary control over client assets? Make sure you understand how your money is managed. Quite often a financial adviser has discretionary control over a client s money, meaning the adviser can make trades in the portfolio without first notifying the account owner. If that s the setup, find out how soon you will receive written confirmation of any changes to your portfolio. You want to hear immediately (within days) not once or twice a year. n Where will your assets be held? Your financial adviser probably works with one or maybe two firms, or custodians, in managing portfolios for clients. It would simply be impossible for an adviser to manage portfolios at multiple brokerage houses, for instance. But what you want to know is where

5 your assets are going to be domiciled. What is the size and reputation of the custodial firm that will actually be holding your assets? What guarantees or insurance, if any, do they provide their clients? Does your adviser have a good relationship with the custodian? For that matter, is your adviser just one of hundreds of advisers working with the custodial firm or are they a top client of the firm with access to senior management should they need it? n How open are the lines of communication? You need to know how often a financial adviser is going to stay in touch with you. First, if you have questions will you be able to talk directly to the adviser or support staff? If there is a customer service support staff, will you have one individual you can always speak with directly, who will know all about you and your investments? n How often will you get a report card? At a minimum you should receive a detailed annual report of your portfolio s performance, along with basic quarterly updates. Also find out if there is a general letter sent to clients that explains recent market activity; if so, get a few copies to review. n Listen for important questions. A good financial adviser will want to know a lot about your life; not just how much money you have to invest. Building the right portfolio for you requires understanding who you are, and what your goals are. Is the money to be invested for your retirement, or to leave to your children or grandchildren? Do you expect to need to cash out some of the account in 10 years or less to pay for a child s college tuition? Do you have other investments that the adviser is not going to manage that might impact how the adviser will build your portfolio? What is your investment experience to date, and what level of risk tolerance do you have? Those are all crucial issues that can greatly impact how your money should be managed. If an adviser doesn t take the time to ask you a lot of questions, move on to the next adviser. n Does the adviser invest alongside you? It should boost your confidence when an adviser tells you his personal portfolio is invested in the same investments he recommends to clients. In the financial world this is called eating your own cooking and is something investment advisery clients should look for when shopping for advice. About Adviser Investments Adviser Investments is an independent, private money management firm specializing in Vanguard and Fidelity mutual funds as well as exchange-traded funds. Founded in 1994, the firm manages approximately $3 billion for more than 2,500 clients ranging from individuals to trusts, foundations, and not-for-profits in 48 states. Fidelity Investments, one of the largest financial service providers in the world, serves as the custodian for our clients accounts. Adviser Investments believes there are no great funds, but there are indeed great fund managers. While it is true that most mutual funds fail to generate returns that exceed a benchmark index, our investment professionals use our proven proprietary research to find the institutional quality managers that have a proven expertise in producing strong risk-adjusted returns. We use sophisticated return analysis to study manager performance over many different time periods. That analysis includes studying a manager s losses as well as their returns. We look for managers who are able to keep shareholder losses to less than the decline of a target index or are able to overcome losses rapidly when markets turn. In seeking an even deeper understanding of a manager s investment philosophy and commitment, we also personally interview many of the fund managers we invest with, as well as many we don t. And we believe it is always a plus when we find a manager who has a substantial personal stake invested alongside his or her shareholders. When a manager is also a fund shareholder it gives us extra confidence that the manager is highly motivated to do well. That eat your own cooking approach is also something we believe in at Adviser Investments: The principals at Adviser Investments (and their families) invest their liquid assets alongside our clients. In fact, we manage nearly 100 portfolios for friends and family members. Our 401(k) plan, which is available to all employees, also invests in many of the same funds we purchase for our clients. If you would like more information on how we manage client assets, please contact Adviser Investments at (800) or info@adviserinvestments.com. Who s the Custodian? WHILE IT IS COMMON TO GIVE a financial adviser full discretion to make trades for your account, you should never hand over your money directly to an adviser. Any adviser who suggests you transfer funds directly to his or her firm is not someone you want to work with. Your money should be invested directly with a third party: a big brokerage or mutual fund firm. That firm is what is known as the custodian of the account. You want to work with an adviser whose firm uses a large and reputable custodian. And make sure that you have direct access either online or via a toll free number to your account at the custodian.

ALL ABOUT INVESTING. Here is Dave s investing philosophy:

ALL ABOUT INVESTING. Here is Dave s investing philosophy: ALL ABOUT INVESTING Knowing how to deal with debt is easy pay it off! Investing, however, isn t quite so simple. Most people have questions about when and how to invest their money, so here s an inside