What To Look For In An Advisor?

First, apologies for not updating this page for a while. The combination of busier at work and fire season in full swing gives me less time.

Before I get into this post let me say this is not a pitch to think about hiring me. This post is in response to something I read. With that, on to the post.

I grabbed the June Kiplinger to look through while I rode the recumbent bike yesterday. There was an article about a couple from Georgia, he is 40 and she is 33, who were looking for a financial advisor.

The article followed their progress and their thought process as they interviewed a father and son team from AG Edwards, a broker from Raymond James and an independent advisor.

The way I read the article the couple had assembled a list of 9 questions to ask an advisor. There was a question about how they assess client needs, one about how they do research and get information, two questions about meeting availability and frequency, two about fees, two about how to complain and one about results of other clients.

While I can't say the questions are unimportant there were some important ones missing. The one that I think is important is how they decide to sell, reduce, get defensive or any other way to describe protecting assets when preservation is more important than growth. I would be surprised if the two wirehouse candidates had a good answer and the independent was a DFA guy so he would probably have a very compelling argument for why taking defensive action is futile, at least the one DFA guy I know says this.

Another line of questioning might be some convincing that the broker himself knows anything about markets and investing. Trust me when I say plenty of folks in the business know very little. If the salesman is the person you will be speaking to I think it would be nice to know that he understands what is going on and furthermore even keeps up with what is going on.

Of course this may not be easy if he has 400 clients and is looking for more.

And speaking of how many clients, if there are 13 weeks in a quarter and the person you hire has 200 clients and is soliciting for more clients, how much time will you get in the quarter?

According to the article the AG Edwards fees would be 1.5%-2.0% and the Raymond James fees would be 1.75% to 2.0%. The brokers need to get paid as do the managers that the brokers select, hence the fees. If you are going to have a manager of some sort ultimately making the decisions why pay for a broker? If you pay a brokerage firm 75 basis points in extra fees on top of the 1% that goes to the manager (I do not know how the fee is split but work with me here) for 20 years on $500,000, well I think that works out to $75,000. That could be a year's worth of living expenses traded in for what kind of extra value?

Another aspect of the article that I wish would have been explored further was that the couple had expectations for annual returns. He wanted to average 12% per year and she would be happy with 9%. This can be tricky. First of all the couple in the article has done a decent job of saving and is committed to saving enough. I do believe that over long periods of time, stock markets will average what they have always averaged. People who save enough money just need to stay close to the market. If they miss 1/3 of the next down 30% stretch they will dramatically beat the market over their investing lifetime.

This is tough to grab onto but the numbers work if you just let them. Too many people get in the way of letting the numbers work for them.

One last thing to touch on is that at one point in the article the husband of the profiled couple questioned whether he would be better off doing it himself with ETFs. Well not having to overcome a 200 basis point bogey every year would help but there was not much said as to how much he knew and how much time he was willing to spend. I am not a fan of relying on just one product but there are people that can learn to do it themselves. The biggest obstacle for these people is their own emotion.

If you are considering doing it yourself you need to have some introspection about your strengths and weaknesses. People that have the wrong emotional make up are absolutely better off paying a fee for help even if the fee seems high.