All industries face the dilemma of putting client/customer interests first and making solid profits. The high road is doing well for your clients, effectively advertising your quality work, and generating those solid profits through volume. The low road is creating a less than transparent product or cost structure and then making solid profits on unsuspecting customers. With all the money sloshing around Wall Street, some there have found the latter irresistible. With that in mind here are a few questions to consider when working with or interviewing an investment advisor.
With the clear transition the markets have been under the last two decades, what shifts have you made to your investment philosophy to help your clients deal with these changes?
The nineties were a great time for stock market investors. Last decade was much more challenging and the majority of advisors were caught flat footed using the same strategy for both periods. This question can also be phrased as:
What mistakes have you made with your investment philosophy?
This is a good question to ask any professional. Granted it is a tough question and can be uncomfortable to ask, but can be very revealing to the character of the person you are looking to entrust your money. Everyone is pretty happy in Bull Markets as it tends to make geniuses of us all. It is when things are not so cooperative that tries us the most and usually reveals who makes effective shifts and who does not. I’d be very wary of any advisor who says they have made no mistakes. The possibility of an advisor not making at least a poor decision in the last ten years seems remote. With two 50% corrections this past decade the probability is that most investors took a bigger draw down than they thought was possible. For those that took that hit, the way I see it as either a miss take on market history or a mismanagement of client expectations. The inability of someone fessing up to their mistakes is always a red flag in my book.
What process do you use in putting your clients' best interest in front yours and your firm's?
Headlines recently revealed that some firms actually devised strategies for their clients to go long and then shorted those same strategies. Fully disclosed and transparent fee structures are things that I would require in any transaction I enter into. I have observed the creation of several packaged products on Wall Street that made the house and the broker/advisor money while the customer was lucky to break even. I have heard the commentary “Well, two out of three is not bad” regarding that outcome. I am not saying that all firms/advisors are this way, but I have seen this happen more than I thought appropriate.
‘I’d be very wary of any advisor who says they have made no mistakes”
How do you use diversification in your strategy?
I have to admit this is a little bit of a baiting question. Just about everyone knows that diversification is mainly applied through a variety of asset classes. Of late many new strategies have been developed and worthy of review (I just happen to have one!). You now have the ability to diversify through strategies as well as asset classes and I believe it makes sense to do that. I feel an informed advisor would offer that.
Is there an event or a level that the stock market reaches that would change your strategy?
As I have recently written the current economic back drop has been challenging to say the least (unemployment, sovereign debt, state and government deficits, etc.) while the income statements and balance sheets of many public companies have revealed a more constructive picture. If the economic data points continue to devolve the impact on corporate earnings and their stocks could follow suit. Having a sell discipline could be key if the major stock indices fall below the lows made in March of 2009. Is your investment advisor ready to change strategies to prevent another significant drawdown to a portfolio? Obviously being additionally flexible over the last decade would have benefitted many portfolios, but hindsight is an easy strategy. I believe the odds that flexibility and the willingness to redirect could be a key component in building a portfolio for the next several years considering the economic challenges.
These are some of the questions you do not normally run across when being coached on how to engage an investment advisor, but then again these are not normal times. To be clear this is not the full array of questions. As with any topic in life the key questions start with you deciding what you honestly want to accomplish regarding that topic and what you are willing to do and not do to achieve those outcomes. When you get past those and the standard questions about choosing an investment advisor you might implement some or all of these into the rotation. Some might seem uncomfortable, but I can’t imagine there is much more important than your money and the ability to retire on a timely basis.
Chart Spotlight
Last time I had to admit the distinct possibilty (even probability) that I was wrong considering my thoughts about what the market was doing at the end of August. The scramble off the cliff’s precipice produced the best September to remember in 70 years. It is quite interesting that one of the more devestating financial and economic collapses have produced some of the strongest positive market returns in decades. The current technical structures appear to be pointing higher? Below are charts of the S&P 500 and Nasdaq 100 and you can see how they have both used the September rally (normally the worst month of the year performance wise) to break above the summer’s resistance levels (green line). The Nasdaq 100 has been much stronger than the S&P 500 of late and that is often a positive sign. The Nasdaq represents more growth companies and their action is often associated with follow through in the market’s leading direction. With corporate earnings starting this week, my guess is that the recent action of stocks is predicting that the numbers are going to be relatively good and the often scary month of October may be more full of treats than tricks? A significant break below the break out levels (again green lines) would necessitate a reevaluation of my optimism. Above all remember my disclaimer below.
Did You Know
More Flexibility - Over the last 20 calendar years (i.e., 1990-2009), the best performing month for the S&P 500 was May, up +2.08% on average (total return). Over the same 2 decades, the worst performing month for the S&P 500 was September, down 0.72% on average. The actual result for the stock index during May 2010 was a loss of 7.99%, its worst monthly performance in 2010 (so far). The S&P 500 gained +8.9% (total return) in September 2010, its best September result since 1939 (i.e., 71 years ago) and its 4th best performance for any month in the last 20 years. On a side note on 9/30/05 (i.e., 5 years ago), famous stock investor Warren Buffett predicted that over the upcoming 7 years (i.e., 10/01/05 to 9/30/12), the S&P 500 would return less than 10% per year. As of 9/30/10, the S&P 500 has gained +0.6% per year on a total return basis over the last 5 years. (source: BTN Research)
Final Thought
“You can’t learn what you think you already know” – Someone Smart
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