Prior to 1975 stockbrokers were called Customers’ Men. Their role was to help clients achieve their financial goals. They did this by performing duties that in modern times are provided by money managers. For example, they helped clients develop strategies and build portfolios. They recommended investments based on company research. And, they bought and sold securities for their clients.
This hundred year-old relationship changed when trading commissions were deregulated. The new regulation created discount brokers and severe price competition between established firms. Stockbrokers could no longer make the money they were used to so they had to change their role. They became salesmen whose primary role was to sell investment and insurance products (mutual funds, annuities) to their clients. They were and still are compensated with commissions that are based on the amount of products they sell. Continue reading →
Would you believe there are seven layers of investment fees that can be deducted from your investment accounts? It would be rare to pay all seven, but four or five are fairly common. The more you know about investment fees the less likely excessive expenses will impact you.
Every dollar of investment fees is one less dollar you have for reinvestment and your future use. Long-term goals, like secure retirements, can be severely impacted by excessive expenses. Continue reading →
How about this for a start? Financial advisors may be money managers, but money managers may not be financial advisors. Or, does this make it even more confusing. The solution is to develop clear definitions of the professionals’ various roles so you select the right advisor based on the services that they provide.
Money managers have two distinguishing characteristics that describe what they do:
They invest your assets in the securities markets. Therefore, Separate Account Managers, mutual funds, and hedge funds are different types of money managers
They provide the same service to multiple clients. Their services have very little variation by client. So when you invest in a mutual fund, you get the same service and results as other people in the fund Continue reading →
Investment performance measurement is a service that has been used by institutional investors since the 1960’s. It refers to the process of measuring the investment performance of institutional assets. Since the 1970’s this data has helped the trustees of pension plans meet their post ERISA obligations for monitoring the performance of their plans’ investments.
However, trustees did not manage institutional assets. They hired money managers to invest the assets for them. This brought another fiduciary requirement into play. Trustees were responsible for monitoring the performance of the managers they selected. This made sense. It would have been imprudent to select managers and ignore their investment performance. Continue reading →
I received a question the other day on a topic most of us take for granted. Why does Wall Street bill my investment account and not me? I believe there are four primary reasons.
First of all, your advisor bills your account because he can. Either his company has physical possession of your assets or his company has a business relationship with the firm that does have possession of your assets. For example, your advisor works for ABC Financial and the custodian for your assets is Charles Schwab. ABC and Schwab have a relationship that permits ABC to bill your account and Schwab will pay ABC the amount of the electronic invoice. Continue reading →
Financial advisors are responsible for helping investors achieve their financial goals. They help them develop financial plans and investment strategy. They help them determine allocations to the various asset classes. They help them select money managers. And, they provide performance reports that document monthly or quarterly investment results.
What if advisors do not provide these services? There is a 95% probability the “advisor” is really a “sales representative” who is paid commissions to sell investment and insurance products. Their responsibilities stop when investors sign their contracts. The advisors’ next steps are collecting their commissions and moving on to the next sale. These advisors are clearly not accountable for results because they have already been paid and do not provide ongoing services. This is the number one reason why investors should not rely on sales reps to help them invest their assets – no accountability. Continue reading →
Most financial advisors report gross performance because the number is always higher, perhaps two to three percent higher. And, most investors accept the numbers because they do not know they should be asking for performance reports that are net of all expenses. The higher the expenses, the more likely the advisor is to report gross results.
There are several layers of expense that you should be aware of. If you know all of the expenses, you can add them up and deduct them from your performance yourself. Or, you can use a free tool that resides on the Investor Watchdog website (http://www.investorwatchdog.com/) that will obtain expense data for you. Continue reading →
Advisors know you want high performance. Some investors even want high performance for low risk (does not exist). If you are a more experienced investor you want competitive returns for reasonable amounts of risk and expense. How do you know if your returns are competitive? You have to compare your return to the returns of other investors with your same characteristics or to the returns of a relevant benchmark (See Performance Benchmarks).
The question is, how do you determine the performance you can expect from an advisor before you select him? This paper provides some important tips about performance and track records. Continue reading →
There are five primary types of fee and commission compensation that are paid to financial advisors.
Most advisors do not like to talk about their compensation unless they have to. That’s because they don’t want you to know how much money they make from their relationship with you for three reasons. First, the compensation may be much higher than you think it is. Second, your expectations for services and results may go up. And third, rising expectations may also mean increasing accountability for results. Continue reading →
Advisors know you want the highest possible investment returns that are consistent with your tolerance for risk. If you are in your 30’s this could be an all equity portfolio of aggressive growth stocks. If you are retired your portfolio could consist of securities that produce the greatest amounts of income. Most advisors believe performance is the key to winning new clients.
On the other hand, financial advisors do not have track records. Only money managers have track records because they provide the same services to multiple clients. Advisor services vary by client so they do not have track records or at least they don’t have legitimate track records. So how do they market their services to investors who put a major emphasis on performance? Continue reading →