Are You Getting Sound Investment Advice?
Beloved, I pray that you may prosper in all things and be in health, just as your soul prospers.” (3 John 1:2 World English Bible)
How You Can Benefit from Investing with a Registered Investment Advisor:
In one of our last newsletters we talked about how to get good investment advice. I mentioned the disadvantages of using insurance agents, bankers, and stockbrokers. I left off just short of mentioning the advantages of using Registered Investment Advisor, or RIA. So, let’s pick up where we left off:
Here are a number of important benefits to working with an RIA:
Your money is held by an independent custodian rather than the advisor’s firm. Remember the famous last words of Bernie Madoff before he made off with his clients’ money? “In today’s environment, it’s virtually impossible to violate rules.”
Expertise. Most RIAs specialize in and focus on investment strategies.
Customized guidance—tailored to what’s best for you and your family.
A transparent and simple fee structure. You are charged a fee based on the percentage of assets managed by your RIA.
RIAs are centered on building deep, ongoing relationships with their clients involving regular interactions.
Tax advantages. The fee you pay a RIA may be tax deductible. So, a 1.5% advisory fee could be closer to only 1% when you take into account the deduction. Compare that with the 2% (or higher) fee you pay to a mutual fund manager, which is not tax-deductible.
Accountability. You can fire your RIA at any time. If they don’t live up to your expectations or deliver as promised, you can send them a pink slip and move on.
Client accounts are covered by the Securities Investor Protection Corporation (SIPC[1]) with a limit of $500,000, which includes a $250,000 limit on cash for theft, fraud or misuse of your money.
As you can tell, I am a fan of Registered Investment Advisors. They must, by law, put their clients’ interests above their own, unlike just about everyone else in the financial industry. May I remind you that I am retired? I have no products to sell, no ax to grind and no hidden agenda. I am giving you my honest opinion. You take it from there. I also think most investors need professional help. I’ve seen too many people self-destruct by going it alone. Even Han Solo had a co-pilot!
Successful investing is elusive. If it weren’t, everybody would be shopping on Rodeo Drive. – “The Wealthy Barber” by David Chilton
I can assure you that the stock market will eventually teach you a lesson or two. Unfortunately, these lessons can be very costly. At the end of the day for most folks, there is no way spending a few hours a week looking at various investment products is going to equip anyone to compete with the incredibly talented, highly qualified, extremely well-educated individuals who spend their entire professional careers in finance. It’s not a fair fight.
Most individual investors possess neither the time nor the resources to succeed in managing their own portfolios. The markets are dominated by sophisticated institutional investors, which makes the investment game extremely difficult to win.
The amateur investor has numerous disadvantages in relation to the professional. Recognizing this reality, even if you don’t like it, especially if you don’t like it, will help you a great deal in the long run. Here’s why: According to a recent study done by Aon Hewitt, advice seekers retire with 79% more money that the typical investor. I think you’ll agree that’s a big deal. But wait, there’s more. According to the Vanguard Group, an investment advisor firm, a good advisor can bring considerable monetary value to your portfolio—3.75% per year in added value—by lowering your fees, increasing performance, and behavioral coaching. RIAs help guide you through market declines and extreme volatility. They help you stay the course and focus on your long-term goals instead of short-term events that may distract you.
Think of this way: My wife and I love to travel. We have been just about everywhere on planet Earth, including the North Pole. How wise would I be if I took off for 90 degrees north without a guide? I doubt I would be writing this newsletter. Whenever we travel to a foreign country, we take a guided tour or hire our own tour guide ahead of time. It makes our vacation easier to navigate and far less stressful. I would submit to you that hiring an investment professional would give you the same gratification.
A mountain climber who disclaims the aid of a guide can expect no other epitaph than that he deserves. The penalty of extreme folly! –Arthur Crump
I had a long and successful career in the investment business, mostly as a registered investment advisor. I saw a lot of “stuff” happen over my professional lifetime. Wars, recessions, a stock market crash. But nothing had a deeper impact on my professional life than the events of 9/11/01. I still to this day vividly remember watching the Twin Towers in New York City come down as my staff huddled in my office to catch a glimpse on the television. To say the events of 9/11 were traumatic would be a gross understatement. I lost friends, neighbors, and colleagues that day. My staff looked at me with uncertain eyes and asked, “What now?”
As an RIA, I had a legal responsibility to do what I thought was right for my 1,700 clients. I managed a lot of money for a lot of people back in the day. Many had become close friends. I also had a moral obligation to take actions so these folks wouldn’t get hurt financially. There was no doubt in my mind that the stock market would get clobbered whenever it reopened. I prayed for wisdom and guidance. After a couple of days, the action I should take became clear to me. Sell everything. We sold every stock and stock mutual fund and went to cash the moment the stock market resume trading on 9/17/01. As an RIA, I was able to have our traders push a single button and sell all of our clients’ equity positions in a split second before the market saw its biggest losses (for a single week) in history, nearly 15%. After things settled down, we were able to buy back some of the very same investments we owned months earlier at a substantial discount, making our clients a lot of money. On the other hand, most brokers gave their clients the following advice: “Hang in there; the market will come back!” When? Three, five, ten years? Imagine a 70-year-old retiree waiting ten years to break even!
I tell you this story because a good investment professional can be worth their weight in gold. Finding the best person or firm to invest your money is one of the most important financial decisions you’ll ever make. Seek honest, capable, expert guidance. Your financial future depends on it!
This seems like a good place to end.
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Thanks and Blessings!
[1] The SIPC does not cover market loss or investment products that are not registered with the Securities and Exchange Commission.