Judging Your Financial Advisor

Al Jacobs

While listening on the radio to Ric Edelman – quite probably America’s most astute financial commentator – as I normally do for two hours each Sunday, I heard him stress, for what may have been the hundredth time, the importance of selecting a competent financial advisor if you desire to insure your investments are handled properly.

And each time he makes this statement I nod in agreement, for you cannot expect your financial future to be successful if it is not guided by someone who is both capable and dedicated to your best interests.

Unhappily Mr. Edelman, now 63, will be concluding his program soon, as he and his wife – after over 30 years of these broadcasts – refashion their lives. And if he is replaced by another financial spokesperson, I presume I will hear a different voice advising us all to make certain our financial advisor is thoroughly proficient.

Although I’ll probably continue to nod in agreement, this may be an appropriate time to add a few thoughts of my own on the subject. I cannot avoid pointing out that although the recommendation is well advised, as with so many other sound bits of advice, its accomplishment is more easily said than done.

With this understood, I have a few thoughts on selecting a financial advisor. As a first concern, you should be aware of a current favoritism to the selection of a fiduciary as a guarantor of a client’s best interests. This is a term dating back to 15th Century English common law. A person acting in this capacity is one who assumes a relationship of trust and confidence with another. It literally requires this designee not be in a situation where personal interests conflict in any way with the interests of the client.

Brought down to more present times and relating to financial advisors, it becomes a bit hazy. For many years counselors who receive their compensation through fees on their clients’ gross assets, and who refer to themselves as financial planners, have been trying to eradicate their chief competition, licensed stockbrokers, whose remuneration comes from brokerage commissions on the purchase and sale of securities. The former normally subscribe to the fiduciary code whereas the latter do not.

It’s gotten pretty ugly these past few years, with the U.S. government now running interference for the financial planners by having recommended legislation that will prohibit non-fiduciaries from servicing retirement accounts.

Whether these laws will actually benefit retirees is questionable. In fact, it is no longer clear what constitutes conflict of interest. Perhaps an advisor who perpetually receives fees, irrespective of any value to the client, might claim a fiduciary oath justifies the practice. Whether or not this can be classified as grand theft is debatable, but it most certainly constitutes conflict of interest.

Of course, regardless of the vows and pledges, the reliability of a fiduciary is only as good as the advisor’s moral character. The notorious swindler Bernie Madoff qualified as a fiduciary, but he perpetrated the most massive financial fraud in our nation’s history.

Before we try to zero in on our advisor of choice, let’s take a look at what you will find as you survey the world of financial functionaries. First of all, be aware there is a multitude of salespersons, posing as investment advisors, simply trying to eke out a living as best they can. Insurance agents are pumping annuities; precious metals dealers will assure you there’s no finer investment than gold and silver; even timeshare reps will try to induce you to dump a few of your bucks into one of those losers. You’ll also encounter stock brokers who will assure you they can systematically outperform the market. Perhaps they can – perhaps not.

And finally you’ll be accosted by a varied assortment of self-styled entrepreneurs and confidence artists, who will do their best to coerce you into investing in whatever they have available at the moment. Understand this is a hostile world, and without some defenses you may expect to be eaten alive.

The likelihood is you’ll wind up with a financial planner, certified or otherwise, who will place you into the conventional mutual and/or exchange traded funds, probably the index variety, which are now the investment by default for most Americans.

The rationale is as follows: As the historical stock averages, such as the Dow Jones Industrial Average (DJIA), consistently rise over the decades, you may expect your portfolio to do the same. You will therefore be invested into whatever funds your advisor recommends. Inasmuch as the various index funds do not experience the overhead fees skimmed by both your advisor and the fund management, nor is it subject to state and federal capital gains taxes from rebalancing, as will your portfolio, you’ll not enjoy the predicted return.

Naturally, these details will not be shared with you. Instead, you’ll be assured, regardless of any short term volatility – and irrespective of the boilerplate slogan suggesting “Past performance is no guarantee of future results” – that your long-term future is secure.

Permit me to philosophize a bit. How can it be you’ve relegated your financial future to a labyrinth over which you have so little understanding or control? The reason is fundamental. It’s because, if you’re typical, you know relatively little about handling assets. 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 whereby 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.

So we must acknowledge: Investment is an industry developed to profit from the public’s dearth of expertise. Make no mistake, the mutual fund industry is highly profitable. With such contrivances as sales charges, deferred loads, redemption fees, reinvestment loads, 12b-1 plan charges, and management fees, a substantial percentage of investors’ potential return is filtered off annually.

It is my belief the principal reason mutual funds exist is for collection of fees by the persons who operate them. Everything else is incidental.

This gets us to the logical question: What will you do about it? Perhaps it is time to self-direct your investment portfolio, where you actually analyze the securities you buy and sell, rather than leave it to the discretion of your financial planner.

Although initially you may not feel competent to handle the task, the likelihood is that after a little selective investigation, you’ll be up to it. There’s a lot of information out there on how to go about it. Why not give it a try?

This gets us back to our starting point: How do you find a qualified financial advisor? Although I’m neither a certified financial planner nor the holder of an MBA degree, I’ve developed some pretty firm convictions on this subject. If you’re reasonably astute and organized, there’s no finer advisor than the face in your mirror. Without a doubt, no one else will match your interest in your own well-being.

Investment concepts can be learned and with trial and error you’ll soon get the hang of it. If, for example, corporate securities are your choice, you’ll devote time and effort in selecting specific corporations with lower price-earnings ratios, which show consistent profits, and regularly pass a portion on as quarterly dividends. You then review your personally-managed portfolio regularly, disposing of those failing to continue to meet these requirements.

On the subject of financial advisors, I’ll leave you with this thought: Ideally, your advisor shouldn’t profit unless you do. However, as members of the advisory trade don’t operate this way, there’s usually nowhere else to go.

If you suspect the face in your mirror is not quite up to the task, your best bet is a financially astute friend or relative who provides counsel gratis, often inviting you to join in as a fellow investor. I’ve involved myself in this fashion for many years and it works well.

Before I leave you, having suggested your financial advisor may be someone to view with the upmost skepticism, and that you may be the logical person to personally oversee your finances, I cannot conclude this article without passing on several specific pieces of advice concerning corporate investment.

(1) Do not expect much worthwhile advice from securities analysts. If they really  knew anything, they probably wouldn’t tell you anyway.

(2) In the world of securities, index funds are aggressively promoted for an important reason: Whatever goes wrong, you can’t blame the promoter.

(3) The day after a big drop in the market, a thousand analysts will explain in detail why it happened. But the day before, not one of them had a clue.

(4) There is probably no worse place to get information on a public corporation than from an officer of the company.

Al Jacobs, a professional investor for nearly a half-century, issues weekly financial articles in which he shares his financial knowledge and experience.

Al may be contacted at al@abjacobs.com


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