Rich in America Secrets to Creating and Preserving Wealth PHẦN 10 pps

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Quoted

by media

Well-known Recommended

by friends

Street smart Top

peformer

Keeps me

informed

Well￾educated Understands me Is trustworthy

Women

Men

FIGURE 7.1 IMPORTANT ATTRIBUTES OF A FINANCIAL ADVISOR

Base = respondents who use professional advisors

SOURCE: U.S. Trust Survey of Affluent Americans XII, June 1997

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about how many clients they handle and the quality of their

backup. People managing hundreds of other relationships may

have a difficult time giving you the amount of time you want

and need.

• Understand how you will receive your advice. Will it be in

person? Over the phone? By mail? Over the Internet? How

frequently can you expect to have meetings? When you have

a question, whom should you call?

• What type of statements and reports will you receive? Ask for

samples. If the samples don’t meet your requirements, find out

if the firm can produce the type of reports you need, and how

much this will cost.

• Don’t let fees be your primary concern. Examine firms without

regard to fees and then select your finalists. Only then should

you examine their fees and compare them to the alternatives

to make sure they are reasonable. Try to understand how all

the fees are calculated. For example, consider the investment

of cash in your accounts: Almost every firm uses money market

funds to invest cash awaiting investment because these funds

offer competitive yields and provide instant liquidity. Most

large firms use proprietary funds to meet this need, giving

them an additional (but reasonable) form of compensation.

But on occasion, a firm may use money market funds unfairly

to increase their compensation by charging higher-than￾average fees. You must do your homework to find out what

you’ll be charged for, and why.

• In addition to understanding the firm’s stated fees, make sure

the fee payment method does not set up insurmountable con￾flicts of interest. If you choose an investment manager who

trades through a captive broker-dealer, not only will there be

a fee charged for managing your portfolio, but also a fee to

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the firm on the trading activity itself. This is business as usual;

you’d pay a similar fee to another firm. However, if the trade

involves buying or selling the inventory of a broker-dealer,

such as municipal bonds, it should be closely scrutinized.

• Make sure all clients pay similar fees. If you sense that a

firm discounts its fees, ask if they will guarantee that you

will receive the lowest fee available for similar services.

• If you are looking for premium service and competitive results,

you must be willing to pay appropriate fees.

• Understand the management of the firm and its culture. If

major changes in management occur while you are a client,

investigate further. For example, does the new management

have appropriate experience in the business of the firm? Firms

involved in mergers or acquisitions also require additional

scrutiny. Why was a firm sold or why did it merge? Do the

reasons for the merger support your interest in the firm? Will

the principals remain active? Usually, mergers make sense for

everyone—clients, employees, and shareholders—but some￾times they fall apart, and the upheaval can adversely affect

your finances.

• Find out how your professionals are compensated. Are their

interests aligned with yours? Could they make money at your

expense?

• Don’t be timid. Ask questions. No question is too dumb.

How your questions are answered, both in terms of content

and the respondent’s demeanor, will give you insight into

the firm’s culture.

Virtually every firm in the personal financial services business has

positioned itself to help clients in the investment planning process.

This process is centered on driving clients to the appropriate asset

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allocation decisions based on their particular circumstances. Accord￾ing to many studies, asset allocation alone is responsible for more than

90 percent of portfolio performance.

As it prepares plans, a firm gathers information about you, in￾cluding your resources, personal circumstances, time horizon, age,

income needs, liquidity requirements, and tax concerns. The firm also

spends time understanding your return expectations and risk toler￾ance, and then uses its modeling tools to formulate the strategy it

feels is best for you.

You must find out if the firm is willing to educate you along the

way. Firms that simply ask you to fill out a form and then hand you a

plan probably haven’t spent sufficient time to understand you and your

needs. Most firms in the investment management business don’t charge

for this personal analysis, because it helps bring in clients so they can

sell them their main offerings. As previously mentioned, there are new

firms that specialize in investment planning combined with some ver￾sion of financial planning. They charge a supervisory fee for providing

the service and placing the assets with independent (from them) port￾folio managers.

Become aware of the products and services you are likely to pur￾chase from your chosen investment firm; that knowledge will help you

interpret the advice they give. For example, if the firm is in the invest￾ment management business and they suggest that you only need to

invest in the value sector (stocks that are known for their steadiness, as

opposed to growth stocks, which are riskier but potentially more prof￾itable), this may be a danger signal. Pushing a specific type of invest￾ment indicates they may be biased—particularly if it turns out the firm

has a stake in the value stocks or the product they are recommending.

You also should inquire whether the firm will take into account

your other assets, such as corporate benefit plans. Will they help you

make decisions within those plans, even though the firm will not be

managing those assets nor receiving a fee?

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Some investment consulting firms offer investment planning,

manager selection, and performance measurement for a fee, but do not

get paid for providing investment services per se. This type of arrange￾ment was generally provided only to the very affluent because the cost

of the service is based on time spent and is usually not justified unless

the asset base (the amount you invest with them) is large. However,

today many advisors provide this service to investors with as little as

a few hundred thousand dollars; the fee is based on a minimum and a

percentage of the assets under supervision. This combined fee is often

high, but may well be the price to be paid to receive unbiased advice.

Also, if you are a self-directed investor, you can find many new tools

and services on line to guide you through this process.

Still, most likely you will be dealing with brokers, registered invest￾ment advisors (RIAs), or banks and trust companies.Their fees are typ￾ically based on the value of your assets under their supervision, and will

vary based on asset class and the use of proprietary products versus

nonproprietary products (products that they own versus products man￾aged by another firm). Some firms will charge a minimum fee for

investment planning and then additional charges if they also help you

implement that planning. Or, they may apply the initial fee against

future fees if you purchase additional services. Let’s look at the various

types of financial advisors.

Types of Financial Advisors

Brokerage Firms

Brokerage firms, which buy and sell stocks, bonds, and other products,

may or may not charge separately for investment planning. Histor￾ically, they have billed for their services on a pay-as-you-go basis. In

other words, you pay a fee to the firm for each transaction. In turn,

the brokerage firm pays the broker a percentage of the transaction fee

as compensation.

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