Engaging the Corporation

In the event you are among those investors who place their confidence in an ever-solicitous financial planner, let me welcome you to the rapidly evolving securities industry. If there is a single enterprise whose practitioners are becoming more pervasive by the day, it is the financial advisory field. For those of you, like me, whose corporate securities investments date back more than a few decades, you quite probably bought and sold your stocks and bonds through an established brokerage firm and dealt regularly with a stockbroker.

In case you’re not aware of it, the investment business no longer functions as it once did. Today the man – or woman – of the hour is the financial planner … or if you aim for the top rung, the Certified Financial Planner (CFP).

It’s a rare citizen with the ability to invest wisely. This takes a talent few possess. So, with billions of investment dollars in the hands of Americans, professional investment advisors occupy a position of prominence. Unfortunately, many practitioners who offer their advisory services are equally devoid of investment expertise. The result is predictable; huge sums are woefully misdirected.

As a typical client, if you’re lucky you’ll simply be sold into a number of mutual and/or exchange traded funds. Whether the funds relate in any way to your financial expectations is incidental. This is partly because most advisors have little understanding as to what constitutes a sound investment and partly because generating fees is the paramount consideration in their recommendations.

If you’re less lucky, you’ll be prodded into such packages as annuities, futures, or vehicles tied to derivatives. In these cases, instead of simply experiencing inadequate performance you might well encounter true misfortune. Firms specializing in exotic investments of this sort cannot be dismissed as merely misguided. They engage in gross malfeasance – which, incidentally, can be a fairly accurate description of how a hedge fund operates.

To protect yourself, you may try to prequalify your counselor. However, don’t expect credentials, such as certification, will ensure proficiency. Comedian Mel Brooks provided a classic definition of certified: “You’re a nice guy … ve like you … you’re certified.”

Let’s now look a little more closely at the financial experts from whom the general public receives its information. Tune in, if you will, to one of the many radio or television talk shows featuring a financial authority dispensing advice to the unseen audience. Often the viewers are invited to phone in questions. At other times the authority simply discourses at length on one or more subjects. This is the world of the celebrity investment advisor – an exercise in capitalism at its most pretentious.

Under the circumstances, this sort of mass market financial counseling, though long in coming, was a phenomenon bound to happen. Whatever praise or criticism you may direct at the American public school system, one thing must be acknowledged: The handling of personal financial affairs is not a subject to which much attention is devoted. Whatever the average American knows about investing money did not come from the classroom. This is understandable, of course, if only because the typical classroom teacher is equally mystified by the world of money.

And if you pay much attention to the investment advice provided by the media experts, you’ll notice two things. The first is the subjects covered tend to repeat regularly. The second, and even a more notable revelation, is the views offered by the majority of analysts are predictable. A conventional wisdom exists, encasing each problem. This may be acceptable for generally sound advice, but often this is not the case. Of one thing I am convinced: A recognized authority need not always be correct, but he or she must always be certain.

Perhaps my underlying aversion to the omniscient investment advisor is an inherent contradiction of human nature. I believe no one who truly knows what the financial future holds willingly divulges this information to the general public. I confess, if I possessed confidential information whereby I might handsomely profit, I would be extremely reluctant to share it … least of all by broadcasting it for the whole world to know.

Irrespective of the validity of the advice offered, understand that, as with many other products, financial planning is an exercise in pure marketing. You’ve seen the newspaper and television advertisements guaranteeing each client will prosper. A sense of skepticism suggests the persons who write the ads are unrelated to those who recommend the investments.

To put it bluntly, you cannot depend upon a hired advisor to responsibly invest your money. You must develop an understanding of what constitutes an acceptable investment, so the final decisions to be made will be yours.

We’ve now arrived at the point where you are now about to receive a testimonial on what I found to be the preferred method of investing in corporate securities. But before I suggest you accept my recommendations, you must be aware I never functioned as a financial planner – least of all a CFP – nor as a licensed stock broker, nor have I provided guidance to a substantial number of seasoned investors who depended upon and lauded my advice.

My entire corporate investment background consists of 21¾ years as the trustee of a family testimonial trust, with the sole authority to acquire and dispose of assets as I saw fit.

The question you are entitled to ask is: Why might my investment advice be preferable to that of a knowledgeable investment advisor with numerous credentials and a multitude of clients for whom they oversee assets, often in the eight and nine figures, over a period of decades? I will respond:

I am not in the business of selling my services, so have no ulterior motive in the advice I give. There is no way my recommendations will generate for me a commission or a fee of any sort. As I derive no personal financial benefit from my advice, there is no reason for me to slant it in any way. I’m literally free to tell it as it is; this is not the case with a professional advisor.

In any event, with some prior experience, not all of it good, together with a dose of selective reading and – fortuitously – excellent advice from a knowledgeable Merrill Lynch stockbroker, the best approach seemed full investment in common stocks of well-established firms on the New York Stock Exchange.

I selected companies in healthy industries with a history of stable or increasing earnings, a generous portion regularly passed on as dividends. I preferred only companies with reasonably low price-earnings ratios, and reviewed the portfolio every several months so to dispose of those no longer meeting the criteria.

Within five years the asset value rose from $314,194 to $432,459, or a 37.6% increase, and annual distributable income nearly doubled, increasing from $14,074 to $26,743. Over the next nine years trust assets grew to $1,186,361 and the annual income to $53,035, a growth of the corpus by 174% and the income by 98%.

And keep in mind, only two months earlier, on October 19, 1987 – now known as Black Monday – the Dow Jones Industrial Average plunged a record 508 points.

By September 1995, when the final family death triggered liquidation, the trust assets totaled $1,735,356. By adding total distributions of $1,038,753 and administrative expenses of $91,923, together with simulated earnings on the distributions and expenses, the total trust would have risen in value to $3,798,839 over its 21¾-year-duration.

With its starting point of $314,194, I contend there are few if any financial planners specializing in the index fund method of investment who will manage to generate this sort of return for their clients.

I recognize my experience is somewhat dated and it can be argued that technological advances now warrant a more up-to-date style of investment. Nonetheless, I believe the technique I selected nearly a half century ago is as valid today as when I employed it.

The current popular method of burying everyone in a conglomerate of index funds, with all the fees inherent in such an approach, guarantees a mediocre return for the client. This is not the way to fashion a retirement program. Unfortunately, however, the vast majority of Americans can only be described as financially illiterate, so are easily taken advantage of.

It is my firm belief the style of investment advocated by the financial community is not devised to benefit the investor, but rather to benefit its practitioners.

Some concluding thoughts: When entrusting your funds to an advisor, do not ignore human nature. It ensures insider abuse – and in the field of securities this occurs without end. Remember also, Murphy’s Law predicts that complexities lead to mishap – so simplicity is preferable.

And finally, above all, be aware the more removed you are from personal involvement in your financial dealings, the greater the likelihood you will experience unfavorable results. Success demands you view life, not as a landscape to be viewed from a distance, but as a jigsaw puzzle you must personally assemble.

[Editor Note: Al Jacobs, 91, passed away Jan. 15 from injuries suffered in a December automobile accident. In addition to his bi-weekly Beachcomber column, he wrote a weekly column for the Dana Point Times and – for the immediate future – we will be sharing some of those submissions not appearing in our publication.]