SIG Investment Meeting
April 20,2010
Financial Advisors
Who are they?
They go by various titles if they are not certified:
Financial advisor (adviser)
Financial Analyst
Financial Consultant
Financial Planner
Investment Consultants
Wealth Managers
How many of these do you think are in the US?
About 190,000 Non Certified financial type
advisors in the US
Financial Advisors
Who are they?
There are various certifications:
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CPA-Personal Financial Specialist (CPA-PFS)
CPAs only with 3,000 hours of financial planning
experience and a rigorous exam
Certified Financial Planner (CFP)
3 years experience, bachelor’s degree, Series 7 exam,
30 hours of coursework every 2 years
Chartered Financial Consultant (ChFP)
75 hours of course work and comprehensive exam
Certified Investment Management Analyst (CIMA)
2 exams plus on site study, no criminal history etc
Registered Financial Planner (RFP)
No exam, but 120 hours of course work + ethics code
How many of these do you think there are?
About 56,500 certified planners in the US
Financial Advisors
Who are they?
Individual advisors who are self employed
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May be commission paid
May charge a flat fee:
Hourly Rate
Percentage of Account or Assets Managed
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May have a combination of both
May have an offset arrangement
Individual advisors who work for brokerage firms, sometimes
as employees, sometimes as contract agents and
generally paid by commission
Actively Managed Mutual Fund Managers are a form of
advisors too.
They typically are employees of the Fund and are paid
salary and incentives based on the performance of the fund.
While the client ultimately pays, it is an indirect payment
Financial Advisors
Who are they?
There are two very important major classifications:
1. Fiduciary Advisors
These are CFPs certified by the NAFP who take
a Fiduciary Oath to protect the interest of the client and
certify that they do not have a conflict of interest. This
is legally enforceable.
http://www.napfa.org/about/FiduciaryOath.asp
2. Non Fiduciary Advisors
These are generally planners who work on
commissions for brokerages
Financial Advisors
Why would I want to use one?
1.
2.
3.
4.
Lack of knowledge of the broad scope of
financial planning and how to manage
investments
Don’t have access to timely information
to make decisions
Priority—want to spend your time on
other things
Can afford to hire the service, so why not
use your time on more enjoyable things
Financial Advisors
What does it cost to use one?
(Cost vary greatly by locations, size of
portfolio, and reputation of the advisor)
Flat Fees
Asset management: 0.5 to 5% of money managed
Hourly Rate- $100 to $300
Commissions
Front end load- mutual funds: up to 6%
Back end load (surrender charge) up to 5%
Other Fees
Transaction fees: $7 to $50 per trade
Annual account or custodian fee: $10 to $50 per year
Financial Advisors
What do the do, i.e. what is the
scope of their services?
While the common impression is
that the advisors tell you how
to invest your money, those
with certifications take a much
more comprehensive
approach.
Financial Advisors
What do the do, i.e. what is the scope
of their services?
The professionals will want to thoroughly understand you
entire personal situation as it reflects on your finances:
age, income, assets/investments, debts, goals, time
frames, estate planning, possible inheritances,
temperament, fears, prejudices.
He / she will want to coordinate with your other professional
consultants such as attorneys, insurance agents and
CPAs.
He / she will want to match up your back ground with an
investment plan that will satisfy you and give you a
comfortable feeling about your financial security.
Financial Advisors
What do the do, i.e. what is the scope
of their services?
The financial plan will probably include a detailed allocation
of your investments as matched up with your personal
situation, but also will Include a complete accumulation
/ arrangement of your key records: Pension and
retirement, insurance, property, marriage and divorce,
Social Security,tax, property insurance, military,
cemetery lots and instructions, safe-deposit and bank
accounts, life insurance, loan agreements, credit cards
etc
Normally the Advisors will want to meet at least annually to
take in to account any changes in your situation as it
affects your plan and investments.
Financial Advisors
What do they do?
Recently an article in Barron's gave a list of the top 100 Advisors in
the US and described the investment actions that the top 10
were recommending to their clients:
Their comments:
They don’t buy the PIMCO concept of the “new
normal”
Asset allocation and diversification still applies
The big thing is to avoid mistakes and protect capital
The fast recovery is over, now it will be slow
and steady
Return to hedge funds and away from bonds
Large cap dividend payers are better than bonds now
Use fund managers going forward now instead of stock
pickers
Financial Advisors
How can you find an Advisor?
First decide which type of advisor you want to deal
with.
For a Fiduciary Advisor, the NAPFA has a guide for
this:
http://findanadvisor.napfa.org/Home.aspx/Search
They are listed about where ever you want to look:
phone books, on line etc.
Perhaps the best way is to get a referral by a satisfied
client.
Financial Advisors
How can you find an Advisor?
You also need to how to avoid Bernie Madoff and
Robert Stanford type Advisors.
http://www.napfa.org/userfiles/file/Worried About Your Advisor.pdf
What are other ways to avoid getting scammed?
Financial Advisors
How can you find an Advisor?
To avoid getting scammed:
If you choose to work with an advisor there are several ways to avoid this
1.You can just pay a flat fee for a financial plan which will tell you how to make your
investments and then you make the investments your self through various
brokerages or investment houses such as Schwab, Vanguard, Fidelity.
2 Never use an Advisor that handles your money directly. When you write a check,
the payee should be the broker (Scott Trade, Schwab etc) not the advisor.
3. There are two types of ways to authorize an Advisor to invest your money: a. Non
Discretionary-You place the trades
b. Discretionary-you delegate all decisions to
the planner
Choose Non Discretionary.
4. If you allow an Advisor to use discretionary authority, then get regular reports from
the broker that do not get routed through the Advisor.
Financial Advisors
What’s Best thing to Do?
1. If you are still in your career and building your retirement portfolio,
paying for a comprehensive Financial plan is a good idea.
It will point out omissions, mistakes, and give good counsel on
strategy pertinent for your stage of life, family obligations, and
current wealth
Then the implementation of the plan would depend on the
factors mentioned before: Your knowledge of investments,
2.
If you are retired, the opportunity to structure your financial
situation does not have as many options but a plan may still be
instructive if you have never had one.
If you have basic knowledge of investments, and keep informed,
you can probably achieve similar results with out paying the fee.
According to Malkiel, et al, buying index funds will out perform
the actively managed funds 75% of the time. The S & P index
outperforms the average managed fund by 2%.
Financial Advisors
Hmmmm—Another way?
A thought:
A CFP who charges based on the asset base, does so with the
incentive to make your asset base bigger so that he makes more
money. I wonder at the justification for associating his pay on the
asset base.
Perhaps a better way for the client would be to pay him a higher fee
based on what performance he achieves for your portfolio above
what an allocation between equity and fixed income would earn if
invested in Index funds.
If he doesn’t out perform the index, he doesn’t get paid.
Problem is he may make long shots.
Financial Advisors
The End