Questions to Ask Your Financial Advisor – Part I

One of the best personal finance journalists in the business, Jason Zweig of the Wall Street Journal, wrote a column** last Saturday stating that “the burden of finding someone who will act in your best interest is on you.

“The obligation of those who give investment advice to serve clients, not themselves, is called fiduciary duty,” Zweig wrote. Our firm always acts in this fiduciary manner.Many brokers and other advisors do not. This makes a real difference, whether you realize it or not.

Zweig’s column provides 19 questions to ask your advisor and recommends listening for the best answers.

We thought it would be informative to you, our clients and others, to provide his exact questions and our answers in this and a future blog post.

If you are a client of our firm, we hope you find our answers re-assuring and comforting.

If you are not a client of our firm, discuss these questions with your current broker or advisor, and compare their answers to ours. See which one makes you the most comfortable and confident that your interest comes first. Always.

  1. Are you always a fiduciary and will you state that in writing? Yes, we have always acted as fiduciaries and will always continue to do so. As both principals of the firm are CPAs, we are required as CPAs to always act in a fiduciary manner. This means that we always act in our clients’ best interest, ahead of our own interest. The Investment Advisory Agreements with our clients will be amended this fall to specifically state that WWM will act as a fiduciary to each client.
  2. Does anybody else ever pay you to advise me and, if so, do you earn more to recommend certain products or services? No. Our only source of compensation is from the advisory fee our clients pay. We are not paid commissions by any mutual funds. We do not earn more to recommend one type of investment over another. We are different than brokers who may recommend or sell annuities and certain mutual funds, which the brokers may be paid up front commissions of 5-8% and then ongoing compensation as you hold the product (whether you know it or not).
  3. Do you participate in any sales contests or award programs creating incentives to favor particular vendors? No. Never have and never will. We do not receive any compensation from a vendor for any investment which we may recommend. Many brokers receive these types of incentives.
  4. Will you itemize all your fees and expenses in writing? Absolutely yes. We discuss our advisory fee in initial meetings and it is clearly stated in our Investment Advisory Agreement, which you sign when you become a client.
    • In comparing advisors or different firms, you should also review the cost of the underlying investments. We can clearly provide this to you. We recommend stock funds or ETF’s which are among the lowest cost mutual funds in the industry. The average internal cost (expense ratio) was 1.28% for stock mutual funds in 2016.*** We would use individual bonds, which would have no annual expenses or a very low cost bond fund, depending on the size of your portfolio. Other advisors may be much less transparent in this area….and usually much more expensive.
    • In almost 15 years of business, we have never been more expensive in comparing total costs with a prospective client, when all advisory fees and expenses are included.
  5. Are your fees negotiable? We have a standard fee schedule, which begins at 1% for up to the first million of assets which we manage. That fee declines as assets under management increase. We may vary from our fee schedule in certain circumstances, based on the specific situation.
  6. Will you consider charging by the hour or retainer instead of an annual fee based on my assets? No, we do not plan to change the way we charge. We are interested in mutually beneficial long-term client relationships. We want to be very involved with our clients. We want our clients to contact us when they have issues or financial questions to discuss. If we charged by the hour, clients may be hesitant to consult with us as frequently. As stated above, we have found that our fees and the total costs incurred by our clients are very competitive.
  7. Can you tell me about your conflicts of interest, orally and in writing? We strive to be as free from conflicts of interest as possible. As Jason Zweig points out in another column, almost every business has some type of conflict of interest.
    • We do not have the conflicts of interest that many brokers or Financial Consultants may have, such as being compensated more for recommending specific investments or annuities. We advise our clients based on what is in their best interest, not ours.
    • We would have a conflict of interest when advising someone whether they should use money from their investments rather than take a mortgage to purchase a home, for example. We would have a conflict, as we are compensated based on the size of their account. In this situation, we provide the pros and cons, based on the specific situation and recommend what we feel is in that client’s best long-term financial interest.
    • We have frequently told clients to spend money to take trips and gift money to relatives or charities, all of which was in their best interest, but to our financial detriment. We want clients who work with us for the long-term and that means striving to always provide advice which is in their best interest.
  8. Do you earn fees as adviser to a private fund or other investments that you may recommend to clients? No.
  9. Do you pay referral fees to generate new clients? No.

This Week’s Takeaway: Our financial interests are completely aligned with your financial interests. Our only form of compensation is the advisory fee paid by our clients. If you make money, we make money. If your account declines, so does our revenue. These statements cannot be made by many brokers and financial consultants at large financial institutions and banks. Ask these questions. And listen carefully to the answers.

 

**The 19 Questions to Ask Your Financial Adviser, WSJ, August 26, 2017  (link maybe blocked by WSJ paywall)
***2017 Investment Company Factbook, icifactbook.org

Do you notice the change?

This week’s takeaway: This week, I’m adding “This week’s takeaway” at the end of each week’s blog post. It may be a summary of the post or just a concept I want to highlight. Look for it and email me to let me know if you find this helpful. 

This week’s blog post:

Change can happen gradually. You may not even notice very small changes. But over time, small changes accumulate to have a significant impact.

You may or may not really notice as prices go up gradually over time. The cost of your favorite cereal, yogurt, bananas, as well as utilities, health care and other services may go up over months and years.

This price inflation is when the cost of goods and services increase over time. In general, the cost of most items increase. In the short-term, price increases usually do not change your purchasing habits or your standard of living.

(1970)

However, over the long-term, say decades, year to year price increases (inflation) have a major impact.  If you do not have substantial retirement income or savings, and your income and assets do not rise as costs rise, how will you live the life you want to live?

To give you a better idea of the true, long-term impact of inflation, let’s look at the cost of cereal over many decades. An 18 ounce box of Kellogg’s Corn Flakes increased from 27 cents in 1960 to $4.19 in 2017.**

Here is a summary of the cost of an 18 oz box of Kellogg’s Corn Flakes over the past 50+ years:**

(2017)

It’s pretty startling. As this chart shows, the dramatic increase in Corn Flakes prices over the decades is really quite significant. You know the cost of groceries have gone up over time, but seeing it like this probably provides you with a different perspective. It sure surprised me.


How does long term price inflation impact your investments?  
It’s pretty startling. As this chart shows, the dramatic increase in Corn Flakes prices over the decades is really quite significant. You know the cost of groceries have gone up over time, but seeing it like this probably provides you with a different perspective. It sure surprised me.

To maintain your standard of living and keep up with inflation, we generally recommend that most clients have an allocation to a diversified portfolio of stocks.  Over time, stocks and their rising dividends exceed the rate of inflation. Fixed income investments do not keep up with the inflationary effect of rising prices, especially on an after-tax basis. The purpose of the fixed income allocation of your portfolio is to provide you with current income and stability, as this part of your investments will not incur the fluctuation of stocks.

Thus, owning stocks, even with their short term temporary ups and downs, gives you the best chance of out-pacing inflation over the long term. The percentage of stocks in your portfolio would be based on your personal situation, your timeframe and what you want to accomplish in your lifetime.

If you are now 60, your life expectancy is hopefully many decades (20-30+ years), so your investment portfolio needs to be able to provide for growth to keep up with, and exceed, the gradual rise in prices over time. This after-tax, real long-term growth has to come from stocks, for which we recommend a globally diversified stock portfolio.

You want safety and financial security. That comes from fixed income. But you need to have growth to outpace inflation and build your wealth (especially for younger clients), which you get from holding stocks for the long-term.

For many people, there is a tightrope balance of what percentage of stocks and fixed income that need to be held at various stages over your lifetime. We help you determine an appropriate allocation of stocks because it is necessary for your long term financial future. And then we help you maintain this stock allocation, especially when stocks go down. As your financial advisor, these are vital aspects of the value we provide to you.

This week’s takeawayOwning a globally diversified portfolio of stocks will outpace inflation over the long-term, if you don’t sell when stocks go down. If you remember that broad based stock declines have always been temporary, you will be a more successful long-term investor.

**Source:  foodtimeline.org, 8/20/2017, for data through 2000.  Data for 2017 based on local store, 08/20/2017.

This time is different…and why

In the late 1990s and early 2000s, it was different. We were full time CPAs, not financial advisors. We worked closely with our tax clients and they often requested that we review their investments and join them in meetings with their brokers.

Now, we are financial advisors, managing investments for individuals and families, helping you meet your financial goals and providing guidance with other financial matters.

There is one former client’s investment experience from my CPA days that I will never forget. This is one of the instrumental events which led to the formation of our financial firm. You benefit from this “experience” and the lessons learned, in the advice you now receive from us.

A past client I will call “Joe” was a successful doctor in the late 1990s who was planning to retire soon. He had accumulated a good amount of money and expected to be comfortable during his retirement years.

His brokers were relatives. Thus, you would think they would have been extra careful with managing his money. In the mid-1990s, he had a stock allocation of approximately 50%. During the late 1990s, he was heavily invested in technology stocks, as many people were in those days. The tech stocks kept rising and he was enjoying the ride.

By 2000, I was getting concerned. Joe had an adequate amount of money to gradually begin retiring. I met with him and his wife a number of times and wrote him letters of caution during 2000 and 2001. The stocks, and the technology stocks in particular, had rapidly increased and the stock allocation in his profit sharing plan grew to beyond 85% in 2000. I recommended that he reduce his stock allocation. Take some profits. Be much more diversified. Please, sell some of the tech stocks.

But Joe did not listen to me. His advisors held onto the stocks. His portfolio got crushed as the S & P 500 and NASDAQ (mostly technology stocks) went down 3 years in a row during 2000 – 2002. As a result, he couldn’t retire when he wanted to. He went from what should have been a very comfortable retirement to needing to work for more years, in an attempt to rebuild his savings.

Watching and advising people during those years, but not being able to actually manage clients’ investments, were key in the decision to create what is now WWM. We remember the past and learn from the mistakes we observed.

This time is different. Those are four important words, which are often mentioned by people regarding their investments. What is different now?

We often say that we cannot predict the future. We truly believe this. Can you predict the future? Thus, one of our core responsibilities is to provide you and your family with guidance and at the same time realize we are providing guidance, knowing that the future is inherently uncertain.

But if you are a client of our firm, this time will be very different for you than it was for Joe, due to the many disciplines and investment strategy that we utilize.

All our clients have written investment plans. Joe did not have an investment plan of any type, as we define it. Put simply, how much risk did he need to take? If Joe didn’t need to be really aggressive to meet his retirement needs, why did his brokers allow his stock allocation to be over 80%? We work with you to determine a stock/fixed income allocation based on your financial needs and goals, your risk tolerance and timeframe. This is the basis for a written investment plan.

We rebalance. As the stock market increases, we sell stocks and take profits (called “rebalancing”), so you can remain in alignment with your investment plan. As Joe did not have an investment plan, his advisors didn’t sell or take profits.

Once you have an investment plan, say 50% in stocks and 50% in fixed income, we monitor this. If stocks increase, as they have done over the past few years, then we would not allow your stock allocation to continue to grow to 60%, 70% or 80+%, as that is more risk than would be in your best interest.

We recommend being globally diversified, among many asset classes. Joe was not diversified. He was very heavy in the hot stocks of the late 1990s, owning AOL, Intel, Cisco and numerous growth funds loaded with similar types of companies. He was not adequately diversified. He had limited or no allocation to US large value or US small value stocks, International stocks, real estate or emerging market stocks.

Owning a globally diversified portfolio does not prevent major losses. However, as various asset classes often move differently, it is a rational way to structure your portfolio. For example, there is significant academic evidence that a globally diversified portfolio should outperform one that consists solely of US Large companies. See our blog post, Benefits of Global Diversification, for further information.

Being globally diversified means your portfolio will perform differently than major US market indexes, and quite differently some years. We expect this to occur. As the overall portfolio we structure is very different than the S & P 500 (an index of 500 large US companies), the performance of your portfolio should be different than the S & P 500. As we recommend allocations to small, value, International and Emerging Markets, all which have greater long-term expected returns than US Large companies, this should be to your benefit in the long term.

Joe was not diversified, as we define it. If we had a firm in the late 1990s and you were a client, we would have underperformed the Large Cap indexes. This may have tested your patience with our investment strategy. But if you were patient and disciplined, you would have been rewarded in the long term, as our investment strategy would have done very well in the succeeding years. When US Large and technology stocks got crushed in 2000-02, small and value stocks did very well.

Why are we discussing this? Because this time is not different. What is different is your advisor and our advice. 

This time can be different for our clients because:

  • you have a written investment plan, based on your needs and risk tolerance
  • we rebalance to keep your portfolio aligned with your plan
  • you are very diversified
  • we are disciplined and help you to be disciplined
  • we work with you so you will adhere to our successful long term investment strategy

Yes, we really wrote this

This week, the DJIA, an index of 30 large US stocks, is around 22,000.

On June 10, 2014, over three years ago, when the Dow was 16,946, we wrote the blog post below: It is as relevant today as it was 38 months ago.

During the same time period, the S & P 500, a broader index of 500 US large companies, increased from 1,936 to 2,475.

While we recommend a globally diversified portfolio of stocks, small and large, International and US based, the increases in US and International stock indices have been significant since June, 2014.

What should you do now, with the stock market near an all time high? (written June, 2014)

With the US stock market at or near an all-time high, should you be making investment adjustments now? If you have a lot of cash on hand, what should you be doing now?

The US stock market, as measured by the DJIA (Dow Jones Industrial Average) closed at an all-time high of 16,946 on June 10, 2014. But what’s even more interesting is where the stock market has been.

The DJIA is almost 17,000 today, but it was around 11,700 less than 15 years ago during January 2000.

Even more startling, less than 25 years ago, in July of 1990, it was 2,900.

Approximately 34 years ago, in February, 1980, it was 904.

This should help to provide you with the proper long-term investment time perspective.

If you are in your 60s, your life expectancy may be 30 years. For a married couple in their 60s it is very likely that one of you will live into your 90s. If you’re younger, your investment perspective should many decades.

Given this life expectancy information, you should understand why your investments in the stock market should have a very long time-frame. You should not be thinking about, or investing for, tomorrow, a month from now or even a year from now. Your perspective should be much, much longer.

You should not be thinking about what the economy or specific companies are doing right now. You should not be concerned with how Apple, Ford or IBM will do this week or next year. You cannot control or accurately predict any of this.

What matters most and what you should focus on is developing a proper, globally diversified long term investment plan, so you and your family can benefit from the world’s stock markets over the next 5, 10, 20 or more years.

We work with clients to develop an investment plan. This is not a fancy document or 40 page bound booklet. We determine the right amount of their money to invest in the world’s stock markets, based on their goals, age, and ability to handle the volatility of the stock market. Then we determine how much should be invested in very small companies, value companies, internationally and in emerging markets. These asset classes provide greater historical returns, yet most investors are vastly under weighted in these investments.

If you are not invested in the stock market right now, yes, we would invest in a globally diversified portfolio for the future. If you are invested now, we would review your portfolio to see if it is globally diversified.

We help our clients simplify their financial lives and consolidate their resources. We enable you and your family to achieve a sense of financial comfort and security. We manage your portfolio with discipline and take the emotion out of the investment process.

Do you have an investment plan? Are you seeing the real financial benefits of investing in the stock market?

Are you pleased, surprised or worried about the stock market?

Global stock markets have performed strongly during 2017. That does not mean that all individual stocks have done well, but on a broad basis, both in the US and globally, markets are up for the first 7 months of 2017.

How are you feeling about your stock investments?

  • Are you pleased with the gains in your portfolio?
  • Are you surprised by the market increases, given the slow but steady economy and political turmoil throughout the world?
  • Are you worried about the future for US markets, as many indices are at all-time record high levels?

Pleased: If you are a client of our firm, you should be pleased with the performance of your globally diversified stock portfolio. It is important to emphasize that we are firm believers in diversification, as diversification has many long-term benefits. Diversification is always working, which means that sometimes it helps you and sometimes it does not. For example, being globally diversified has been a significant positive in 2017, as International and Emerging Markets are outperforming US stock markets. At the same time, a large portion of the gains of US stock indices are attributable to a handful of US large companies, primarily in technology. For example, Boeing alone accounted for 1/2 of the July increase in the DJIA.

Surprised: You may be surprised by the gains of stocks since early 2016, and particularly this year’s gains. Even after the post-election increase in stocks in late 2016, which was attributed to the pro-business agenda of the Trump administration, stocks have continued to gain in 2017, despite the lack of progress in Washington.

We feel the 2017 gains are warranted as stock growth is generally correlated to earnings and the future expectations of earnings. As companies have reported earnings in 2017, they generally have been far more positive than negative.

This is also another benefit of our adherence to remaining invested in stocks for the long-term and not trying to time the stock market. You never know when stocks will increase, but statistically since 1946, stocks (as defined by the US S&P 500) have risen in 50 of the past 71 years. You are rewarded for your patience and resilience, even when you don’t expect it.

Worried: While stocks have increased significantly in recent years, there has not been a correction of US stocks (decrease of greater than 10%) since early 2016. There can always be reasons for concern and now is no different. Washington has been ineffective in passing health care reform and more important to the financial markets, there has been no real progress on corporate or individual tax reform. There are always global issues to be worried about and unexpected events can occur at anytime.

However, let’s go back to some of our basic principles. We believe in broad, global diversification. Global stock valuations are much lower than US stock valuations per many metrics, so global diversification continues to make sense.

Even if you are worried about certain issues or are concerned about when the next “correction” will occur, what can you do about it? We do not know when a correction will occur. No one can accurately predict this. And when a correction does occur (and they will occur), no one can accurately predict the bottom. You can’t with any consistency accurately predict when to get out of the market before a correction and when to get back into the market before the next recovery. Thus, it is best to stay in stocks for the long-term.

Our way to handle your worry and concerns about stock volatility is to handle it in advance. We work with you to set the stock allocation of your portfolio at a percentage that feels comfortable and reasonable based on your specific financial situation, goals, needs and tolerance for risk (the stomach test).

How do you feel now? We hope that you are pleased and surprised by the advances in stocks and your portfolio, but not worried.

If you are worried, give us a call, so we can talk about it.