Five Essential Questions For Your Financial Advisor
Turning your money into life changing wealth requires planning…for both success and failure. It also requires competent counsel – meaning somebody who will act in your best interests.
But, finding the right advisor is tough.
The Internet is filled with stories of predatory sales practices, manipulative management stories, and just plain incompetence. Chances are good you know somebody who’s had a bad experience just like I do.
It doesn’t have to be that way, though.
There are great advisors out there if you know how to find them and which questions to ask to make sure you’re on the right track for huge profits rather than devastating losses.
1) Do My Investments Match My Risk Tolerance and Expectations?
No doubt this will cause pushback from more than a few financial professionals. But I don’t believe any investor needs to suffer the ravages of a bear market.
I don’t care if you have $5,000 or $500,000 to invest – the principles remain the same.
No financial advisor worth his or her salt would let a client liquidate into a bear market. Moreover, the good ones ensure that their clients have enough cash and ultra-safe investments on hand so they don’t have to.
If your advisor has you leveraged to the eyeballs, or fully invested in such a way that you can’t endure bumpy market conditions or the possibility of a correction much less a protracted downturn, it’s time to find a new advisor.
I don’t care if it’s an up market or a down market, the best advisors will help you pick investments that match your goals within your financial time frame. They’ll also help find a way to make recommendations for your unique situation because they place your interests first.
The problem faced by many investors today is that they’ve always thought in terms of returns rather than risks. That’s backwards, especially at a time when the riskiest investments – bonds, for example – are the ones that were supposed to be the most secure.
This is compounded by the fact that many investors – having lost big twice in the last decade – remain underinvested and are faced with playing catch-up in a market that is arguably toppish right now. They never should have stepped off the court in the first place.
As you know from prior Total Wealth columns, it pays to stay the course – meaning stick to your plan – no matter what the headlines.
In a study of 7.1 million retirement accounts, for example, Fidelity discovered that those who sold their stock mutual funds between October 2008 and March 2009 (the period of greatest volatility we’ve seen yet), more than 50% had not reinvested as of June 30, 2011.
On the other hand, those who stayed in the markets and in stocks specifically saw the value of their accounts rise 50% on average. Those who sat on the sidelines saw an average increase in their accounts of… wait for it… just 2%.
I’m sure those numbers haven’t changed very much, even now.
2) How Do My Total Returns Stack Up?
Many investors are after the next hot stock or the next sure thing, and focus on the percentage returns of specific choices. Understandably, they love being up 25%, 50%, 100%, or more. I do, too.
But, you know what I love even more?
Not losing money in the first place.
That’s why I’d rather invest with the idea of managing my total returns than throwing darts at specific stocks that may hit… or miss. Over time, I know that greater returns are possible that way.
Many investors fail to realize that successful investing is a matter of continuous performance. Not instantaneous performance. It’s one of the reasons I emphasize income and, in particular, the right global growth and income stocks as part of the Total Wealth approach.
For all the lip service people pay to this, very few realize that dividends and reinvestment can account for 60%-90% of total stock market returns over time. Even more.
In some cases, the dividends are so steady and increase so much that you can actually make more in dividends over time than you paid to buy the stocks that produce them initially. It’s like having a second salary if you want to think about it that way – especially when it comes to companies like the five I’ve profiled in this special report with the power to pay you year in year out, in good markets and in bad.
Put bluntly, cold hard cash answers the very real question many investors can’t help but ask, “why the hell am I investing in this?”
The same is true with fixed income, where it’s the income that has made a graphic difference in total returns despite rates dropping to all-time lows and rising ever so slowly today.
Ask anybody who’s invested in the PIMCO Strategic Income Fund (NYSE: RCS) over the past 20 years. RCS is actually trading at a price that’s approximately 10% less than it was 20 years ago – but investors who have reinvested as I’ve suggested have enjoyed the opportunity to turn $10,000 into more than $68,000. That’s compared to just around $29,000 generated by those investors who didn’t reinvest.
No matter which way you cut it, the numbers are impressive and very powerful.
To be fair, people tell me that time is the one thing they don’t have, especially with the markets near all-time highs. They “can’t wait 20 years” goes the litany.
Respectfully, I disagree. It doesn’t matter whether you’re talking about 5 years or 50 years; the principles are the same.
The markets are almost always at or near all-time highs. That’s how they work, considering they have a powerful upward trend over the long term.
In fact, the markets achieve new highs an average of once every 18 days, according to research by Ric Edelman, President of Edelman Financial. I know that sounds like a loaded statement and it is.
As usual, I want to make a point – that even the lows of 2003 and 2008 were “all-time highs” compared to the markets in 1990.
Young or old, you want to learn to work with time, instead of trying to cheat it at every opportunity. And the right advisor can help you do that effectively.
For instance, if you’re a few years into retirement, you probably want to consider having some bonds running around so that you can rebalance if and when the markets give you a chance and head south. If you’re concerned about leaving a legacy, perhaps a strategic move to preserve principal is more in order under the same market scenario.
A good advisor will listen carefully and help you plan accordingly for life’s events, not just big returns.
3) Under What Conditions Will You Sell?
You’d think that market professionals would have this wired but, sadly, most don’t.
Many advisors I’ve met over the years don’t have a sell discipline – meaning they haven’t got a clue about how to protect your profits, let alone your capital. Worse, quite a few don’t want you to sell. It’s one of Wall Street’s dirty little secrets.
Think about it.
Selling is not in their best interest. Wall Street makes their money from your money. They want you in the game, so they will do everything they can to keep you playing.
This includes creating all kinds of fancy dashboards and gee-whiz programs as a means of drawing you in. You’ve seen the commercials. You know what I’m talking about.
At times, they’ll shift gears and highlight some sort of total care package as in “we care for your money.” But trust me, benevolence is not in their vocabulary.
If your financial advisor can’t lay out very specific reasons for when and what you would sell, move on. Knowing when to cut losses – and explaining clearly when to do so – is the hallmark of a worthwhile financial advisor. This can be an elaborate plan, but also something as simple as a 25% trailing stop.
It really doesn’t matter, as long as they have a plan based on your specific needs and can clearly articulate it to you without any hemming and hawing when you ask.
4) When Will We Buy?
This is very closely related to “when do we sell.” And again, most advisors don’t have a clue. You’d think at least they would have this one covered, but most don’t.
That’s unfortunate because there are two broad considerations to deal with here. Both have a direct impact on your money.
First, timing the market is a bad idea. According to Barron’s research, 85% of all buy/sell decisions are incorrect. That’s because emotional bias drives bad decisions, particularly when it comes to attempts to time the markets.
As for how much this will cost you… try more than 93% over 20 years.
The latest DALBAR data shows that the return of an average investor trying to time the market was a meager 7% per year, versus the double-digit S&P 500 return of nearly 12% over the same time period.
Studies show that as much as 90% portfolio volatility comes from structure. Get that right, and chances are good that you’ll come out way ahead of the game, especially if you use something like the proprietary 50-40-10 portfolio I advocate in our sister publication, The Money Map Report.
If you’ve been thinking about trying out this service, now’s the time. My publisher has agreed to offer a 30-day trial of Money Map Report for just $5… yes, you read that right. Click here to learn more.
Second, the markets have a decidedly upward bias over time. That means that outstanding performance is a matter of identifying relative weakness and wading into it, rather than running the other way. Sir John Templeton who was one of the world’s greatest investors called this investing at the point of “maximum pessimism.”
For instance, take a look at this chart.
When the data is laid out like this, you can see just as easily as I can that there are clearly periods that favor buying over selling and vice versa. So you adjust your tactics accordingly rather than trying to be a one-trick pony which is what most investors do unwittingly. What I want you to understand is that investors who buy into the markets without understanding the big picture get hammered trying to chase returns. Yet, investors who buy when things are gloomiest tend to build legendary wealth.
Investors – especially older investors – tell me frequently that this is something they’ll never see in their lifetime. They’re dead wrong. History shows that most investors will see 2-5 specific periods in their investing lives where the relative valuations favor more buying than selling.
That’s why I’d fire any advisor who does not recommend cautious additions to your portfolio when everyone else is running for the hills. At the very least, they should ask you to consider rebalancing periodically to capitalize on prices that would otherwise not be so low.
5) Finally, How Are You Being Compensated?
I don’t believe in paying people for performance they don’t deliver nor am I a fan of paying ginormous account management fees if I’m not getting good results. You shouldn’t be, either.
Over time, the typical 1%-2% management fees charged by many big investment houses and managers can really be a drag on performance that bleeds your retirement of much-needed momentum and future results.
I think fee-only advisors are a much better choice because they sit on your side of the table and have your vested interests in mind. Further, because they are independent, they disclose all conflicts of interest in advance (or at least they should) and are not beholden to investment banking, ratings, or other nonsense that lurks unbeknownst to most investors. They don’t have a financial stake in your investments.
I think that’s especially important at the moment for one simple reason – many of the conflicts that are inherent in today’s investment world are directly the result of conflicted choices. They are presented under the guise of comprehensive planning by brokerage firms that would like you to believe they perform the same functions as investment advisors. They don’t.
What if you don’t work with an advisor right now? Hire one… and don’t delay.
I know that may seem expensive, but it’s a matter of perspective.
Putting $50,000 into a mutual fund charging a 3% load works out to 10 hours of professional, fee-only investment advisor’s time – and that’s at an hourly rate of $150!
Given the risks in today’s markets and the inherent problems with Wall Street – not the least of which are pronounced conflicts of interest – I think that is money well-spent.
Until next time,