investoradvocate-blog - Tumblr blog

[investoradvocate-blog]

How to Choose your Investment Professional

What is a Wealth Management Advisor?

 In the 4 decades that I have been in the business, for some reason or another the position titles have changed.  It’s possible that the titles have changed in order to make consumers more aware of what services these individuals provide, or maybe to make the title more glamorous, leaving the consumer believing that if you have your investment dollars with a Wealth Management Advisor, then you must be wealthy. When I began my career in the industry, I called them Stock Brokers.  Pretty simple… you brokered stocks.  However, the industry became more complex, the investments that were offered became broader and stock broker just didn’t seem to fit anymore. The titles changed from firm to firm, they were known as Account Executives, Financial Consultants, Investment Consultants, Investment Executives, Financial Advisors, Investment Advisor, Wealth Managers, and Wealth Management Advisors.  I am sure they have developed more names in the short period that I have left the industry, but at the end of the day, they all mean the same thing. These individuals take your hard earned money, typically the funds which you have saved for your retirement, and they advise you on the best way to invest it through reliable firm research, economic data reports, yada yada yada….But… at the end of the day..who are they?  Really… who have you entrusted your retirement savings to?  Is there a specific reason why you chose the person you are currently working with?  Were you invited to a retirement planning seminar, did your neighbors or trusted banker refer you, or maybe your heard them speak on the radio?  There are many reasons why consumers choose their trusted advisors, but then the question bodes,  how well do you really know them? 

I have sat on the other side of many arbitration disputes that investors have had with their advisors. I have heard a ton of stories, and they all typically start like this… “I really trusted him/her” “He/She led me to believe they really knew what they were doing?”  “I trusted my banker/neighbor to refer me to the right person”.   

Well, why did you trust them? Was it because they were employed with a large bank or broker/dealer? Did they lead you to believe they knew what they were doing because of the literature, the firm written research reports, or their fancy computer program that shows you where you are now, and where you should be? (of course, you haven’t saved enough!).  Or better yet, you trusted them because someone who you trusted referred them to you? However, before you made that decision to invest what could amount to your life savings with one individual, did you do any research on your own to find out who this person really is? 

I am a firm believer in accountability. Don’t blame others for your failures to do your own research.  Yes, I would trust my neighbor or my banker to give me a referral for a landscaper, a pool company, some one you can try for a bit, see if it works and if it doesn’t move on. But before I gave someone which amounted to a lifetime of hard work, I would want to learn more about that person myself. What are the things you should know? This is my list.

 1.      How Long have they been in the industry? – Personally I would chose someone who had at least 10 or more years in the industry.  The failure rate for investment professionals can be very high due to the nature of how they are paid.  Commissions is and can be a hard way to earn a living in the beginning without a book of business that you can draw on for your compensation.  When building a book, an advisor can have temptations of placing products due to the commissions rate versus if the product really belongs in your portfolio.  Better yet, if the advisor doesn’t make it, chooses to leave the firm for what they deem better opportunities, then you will be reassigned to another advisor whom you have not had the opportunity to vet. 10 or more years is a good indication they are in the business to stay, and this is their chosen career path.

If you are planning on investing just a small portion of what your investment nest egg is?  Be more liberal in who you chose to “play” with your money. Some of the newer advisors are more forward thinking and have the ability to vet out investments that the older advisors don’t want to waste their time with. However, this is “play” money and doesn’t account your long term savings goals, that if you chose the wrong person, or wrong investment, it won’t bankrupt you.

 2.      Do they have a record of consumer complaints? And is there a pattern to those complaints?

BrokerCheck is a great tool to use to find if the advisor has any disclosures or disciplinary action taken against them by FINRA.  FINRA (Financial Industry Regulatory Authority) is the regulatory authority who provides the oversight and regulates the Rules and Ordinances of the Financial Industry (specific to those registered and licensed through FINRA but more on this later).

https://brokercheck.finra.org/

If an advisor has had a complaint where a investor claims losses of over $10,000, there is a disclosure that is maintained through FINRA for 10 years. This is just a claim, it doesn’t require for the client to win an arbitration suit, or even settle a matter. If there is a settlement, or if the matter does go to arbitration, then it is noted on the advisors record as well.

 Now let’s be fair, just because an advisor has a disclosure should you be concerned?  Not necessarily.  Remember the disclosure occurs if a investor has a CLAIM.  Because of this nuance in the requirements for disclosure, it is sometimes quite rare to find an advisor who has been in the industry for 10 years or more without a note on their records.  If there isn’t anything there, consider yourself lucky to find that one person.  However, if you see they have a pattern of complaints, then I would certainly take that into consideration.

 3.      What is their Asset Mix? Do they tend to focus on only one product? Do they sell primarily annuities, mutual funds, managed accounts?  

My personal opinion is that you want an advisor who has a good mix of products. They understand that not every product will fit every investor.  Not every single investor belongs in an annuity, nor should an advisor have 100% of their business in managed accounts. They should have a broad mix of assets that they can offer their clients, so they can custom allocate assets based off of an individuals needs, not what pays them the most, requires them to do the least amount of work or what product companies are wining and dining them on a monthly sometimes weekly basis. 

How do you find this information?  Ask them!  They may not be forthright with you, but you should have the ability to identify if someone is pulling your leg or not.

4.      What is their service commitment to you? An advisor should be able to provide you with a service commitment and have the ability to stick with it.  At the VERY least, they should agree to meet with you once a year, either over the phone, but preferably in person.  If you have at least 200K invested with them, I would insist on a quarterly or biannual review of your assets.  Why?  You deserve it! You know how your checking banking account is working, you balance is monthly, so why wouldn’t you review your largest assets at least biannually with your advisor? Make them work for the commissions which you are paying them. If you are in a managed account, they have an OBLIGATION to offer you a review QUARTERLY.  Make sure you take them up on their obligation, because they aren’t doing you a favor, this is required!

Do they have a commitment to call you back within 24 hours? What will they do if the market falls 5% or 10%.. what level will they reach out to you to let you know what they feel is happening with the markets based off of their firms or their individual messaging? Watching the market in a correction can be very scary, does your advisor have your back to help take off the angst while corrections are taking plate?

 5.      Last but certainly not least, I believe in relationships.  The individual you chose to invest your funds with, should be willing to invest themselves into a relationship with you.  I am not saying you need to be best friends, go to each other houses, but you certainly have to like the person, and believe that their moral values and integrity are equivalent to your own.  An advisor should be one of your “trusted relationships”. You should be able to trust that person, after you have taken the time to get to know who they are, what their investment style is, and what their service commitments to you are.  

In addition, understand the larger part of whom you are really working with. What type of firm have you gone to? Large Broker/Dealer or Bank, what type of reputation do they have within the community?  In 2008 we saw changes to the financial industry that I never thought I would see in my lifetime.  To see Goldman Sachs, Merrill Lynch, JP Morgan all go through major buyouts, or better yet, just closing their doors after hundreds of years in business. Today, we see the regulators looking at some very large banks for opening client accounts without client approval, mortgage lending practices and the list goes one.  

Remember that you are also in a relationship with the company your advisor is employed with. So don’t forget to look at the overall big picture of who will have the “privilege” of holding and investing your assets.

Knowing who is investing your money, how and why they chose the investments that they do is important in developing that relationship.  I was listening to the radio the other day to a financial show on our local channel.  I had to change the channel when I heard the advisor say...

“We are a Registered Investment Advisor and we have a fiduciary duty to do what is in your best interest at all times”  

Shouldn’t it be a given that they will do what is in your best interest all of the time? Why do they have to identify that they are a fiduciary... I believe whether you are or are not in a fiduciary capacity, if you are investing someones hard earned money, you have an obligation to do what is in their best interest EVERY SINGLE TIME!!!

Article is based off of authors opinions only.

[investoradvocate-blog]

Remember Circuit City? Bear Stearns? Lehman Brothers? Sports Authority? Once, all were billion-dollar companies - then gone in a moment. The fatal problem might be fraud or corruption, but more often, it's simply that management didn't see 'over the other side of the hill.

Steve Bannon

[investoradvocate-blog]

Corruption, embezzlement, fraud, these are all characteristics which exist everywhere. It is regrettably the way human nature functions, whether we like it or not. What successful economies do is keep it to a minimum. No one has ever eliminated any of that stuff.

Alan Greenspan

[investoradvocate-blog]

A New Beginning

I started my career some 40 years ago with Merrill Lynch. Really, it was Merrill Lynch, Pierce, Fenner & Smith, but that doesn’t really matter.  What does matter is, that back then, it was simple.  Everything was simple. The way we transacted our business. The way we reported it.  What we bought, and what we sold. There were 1400 mutual funds. Not companies... there were about 1400 different funds.  The total net assets of funds invested in mutual funds was approximately 46 billion, and about 6% of US Households held mutual funds in their portfolios.  Today, mutual funds comprise of 18.75 TRILLION dollars with over 50% of US Households being invested in mutual funds. It isn’t just mutual funds that have changed dramatically since I started in the industry, The DJIA  (Dow Jones Industrial Average) closed on 12/31/1979 at 838.74, today the DJIA closed at 25,583.75!! In 2008, just 11 years ago, people thought that our economy would never recover after one of the worst economic debacles in history.  The DJIA closed on 12/31/08 at 8776.39. I have been through 3 MAJOR market corrections, although most people, and the media thought the world was ending at the time, I knew it wasn’t. To take it further.. companies like Apple,and  Microsoft weren’t even trading publicly. Shoot.. I didn’t even understand what a computer was back then.  

With the changes that have taken place, there have been some really good changes, and some really bad changes.  Good?  Our technology improved vastly. We have the ability to track what is really happening in a clients account. We have a vast amount of more research available, and we have knowledge of the past 40 years.  Bad? Our investments have become so complicated that most average investors don’t really know what they are investing in, and why. The array of investments from a Unit Investment Trust, a Variable Annuity, a Fixed Annuity, a Market Linked CD, a reverse convertible (no longer offered.. but that will be explained in a later blog..trust me), and that is just the beginning.  From Real Estate Investment Trusts, to Corporate Bond Funds, ETF’s, to managed products the list goes on. 

As an investor, do you know what these things are? Most don’t.  Most just put their trust in a person to allocate their life savings into something because they told them so.  Or better yet, to try and do it themselves, because they think they are smarter and know more than a professional. Can you see how this can go sideways really quick? When I left the industry three years ago, I left with my head shaking.  My position with a very large bank was as a regional compliance manager.  I reviewed the trades my advisors placed, and more importantly, I spoke with my advisors clients on a daily basis.  We talked about a multitude of things, but primarily their investment portfolio and how they felt they were being managed by their advisor.  I always felt like I was in a dichotomy in my job.  I was working for the firm, protecting the firm, protecting the advisors, and lastly, protecting the clients. I stepped in when something was egregious, but it was typically always a client complaint.  There were many times when the firm was pushing a new product in which the firm received a larger percentage of the fees that were paid because they were proprietary products ( a product which the firm developed and marketed themselves).  I would tell my supervisor that there was an uptick in the advisors allocation in a particular product, and the response was always positive in the form of, good job, he/she sold more, he/she on their way to making their goals, their in for a record breaking commission month.  Rather than, let’s take a look at the clients who he/she has sold this product to, does it make sense for their portfolio, risk tolerance, investment objective? In  my observation, because the client base knew less and less about the products which they were now investing in, it was easier for the advisor to sway them in a direction that might not have been their original intention.

So the question is... are we better of worse off than we were when times were much simpler? 

I decided to start this blog as a way to bring attention to some of the things that I don’t believe are being focused on today. Do you know how you are currently invested?  Do you  know what your investment strategy is? Do you know how your advisor is being paid, and how much you have paid him/her in the last 6 months, year, 5 years? Do you know your advisor’s history. Do they have any regulatory disclosures, client complaints that may have caused them or their firm to pay a client a significant amount of money?

 I hope that I can bring some of my background and the ability to communicate to you in a way you can understand, and hopefully raise awareness.