A Great Book and a Not So Good Op-Ed Piece

Reading a book can have a lasting impact. It can educate.  It can provide new and vivid perspectives, even to events which have recently occurred.

The outstanding book The Alchemists, by Washington Post writer Neil Irwin is one such book.  The Alchemists, Three Central Bankers and A World on Fire provides insight to the challenges that the world’s central bankers faced during the financial crisis since 2008 (and still face now). Irwin explains how they dealt with the non-stop issues, how they interacted with each other and how they developed new and innovative approaches to economic challenges.

I read and closely follow financial matters on a daily basis, through many types of print and electronic media. Still, I was amazed by how much I learned by reading this book. Irwin’s work reflects how perspective and information can sometimes only be gained through reading a book.

What did I learn from this book?  How will it benefit my clients, as their financial advisor?

Irwin started the book by attributing central bank actions (or inactions) in previous time periods as causal factors to economic depressions and worldwide instability, such as wars. Irwin vividly showed that Bernanke and the other world financial leaders needed to be brave and take actions that were often “wildly unpopular.”

Bernanke’s academic background as a student of The Great Depression, his ability to build consensus and develop creative responses to unpredictable events helped to prevent further economic catastrophe. While some may disagree with the central bankers’ policy decisions, I agree with Irwin’s conclusion.

Will this book help me to predict the future of interest rates?  No.

Will this book help me predict who the next Fed chairman will be? No.

Will this book help me to explain economic events more clearly to my clients? Absolutely yes. And that is one of our roles as their financial advisor, to provide clarity and explanations of complicated topics.(Note: Chapter 20 on the Chinese economy and their banking system are particularly worthwhile, as were sections on regulatory legislation after 2008-09.)

Having just completed this book, I was quite surprised to read the August 20th Op-Ed column in the New York Times titled Wanted: A Boring Leader for the Fed, by Amar Bhide, a professor at Tufts University. He said “we need to return the Fed to dullness and the chairman to obscurity.”  Further, the author wants to “scale back what we can expect of” the Fed.

After living through the turbulence since 2007 and reading The Alchemist, I cannot disagree more with Bhide. While one can argue about specific decisions that the Federal Reserve and Bernanke have made, I do not want in the next Fed chairman to be boring. Boring is defined as monotonous, tedious (which implies dull slowness), tiresome, humdrum (commonplace, trivial, or routine) and uninteresting.

The Fed chairman should be the direct opposite of boring. The chairman needs to be strong, bold, innovative and a leader willing to take risks that he or she feels are necessary for the good of the country and world. While Bhide calls for the Fed “to return to dullness” and the chairman relegated to “obscurity,” the opposite is necessary.

The Fed chair has to rapidly deal with unexpected events, such as the collapse of Lehman Brothers and AIG, as well as set monetary policy. The Fed chair needs to effectively interact with world bankers, fellow Federal Reserve governors and staff, politicians and the media.

The Fed needs to continue to clarify and improve its communication to the financial markets. The financial markets react negatively to uncertainty. The chair needs to act with decisiveness and be willing to speak publicly, as Bernanke has done by adding press conferences after certain Fed announcements.

The term of Federal Reserve Chairman Ben Bernanke ends in January, 2014. President Obama’s naming of Bernanke’s replacement is surely one of Obama’s most important decisions. I hope it will be an effective and experienced appointment, who can lead with consensus. But not a boring choice.

What if something happens to your Financial Advisor?

Do you work with a financial advisor or stock broker? Do you work with one person, or do you have a relationship with a team of financial advisors?

What if something unexpectedly happens to him or her, or the team?  Have you planned for this? Has your advisor thought how this would impact you, as his client? We have thought about this and we did something about it.

We have a fiduciary responsibility to plan for our clients as well as ourselves. We want our clients to plan and be prepared. They should expect that we would do the same. And we have.

Our firm uses a team approach, so that my partner and I generally meet with most clients. We are both familiar with our clients and their investment strategy. We work together, as it benefits our clients to have both of our input.

If something happens to both of us simultaneously, as unpleasant as this is to consider, we have made arrangements to provide continuity for our clients. We recently completed an agreement with our back office firm, BAM Advisor Services, for them to immediately take over our practice if this were to occur.

While this scenario is very unlikely, this is an example of the kind of forward thinking and coordination we have with BAM. We want to ensure that our clients are provided for in the future. We have confidence in the long term benefits of our investment strategy. We have confidence in BAM, as our partner, that they would take excellent care of our clients.

We have planned for the unexpected, so that our clients can be confident of their future and sleep well at night. Isn’t that what you want from your investment advisor?

What are the key factors in selecting an investment advisor?

When you are deciding to work with an investment advisor or financial planner, what should be the key factors?

Trust and connection:  Do you trust the advisor and firm? Do you feel a connection and bond with them, so both you and the advisor can be open and honest?

Investment philosophy: Do you understand the firm’s investment philosophy? Do they have a good track record? Do they have a “reproducible” methodology that is not based on market forecasting and guesswork?

Fee structure:  Does the firm have an easy to understand and transparent way of being compensated?

  • Is the fee structure designed so the advisor is only making recommendations with your best interest in mind?
  • We are fee only advisors. We do not accept commissions or other forms of compensation for the advice that we provide. We have a fiduciary duty to only act in our clients’ best interest.

Other factors:

  • Does the financial planning firm provide advice on other important matters in your life, beyond just investments?
  • Can they assist you to move forward with your estate planning? Do they provide creative ideas and work as a team with your estate planning attorney?
  • Will they provide advice with your retirement planning and college funding?
  • Are they comprehensive planners, so they can function like your family’s CFO?
  • Do they really help to minimize your taxes?

These are just some of the factors you should consider when retaining an investment advisor. The experience and credentials of the advisor and firm are also important.

Does it matter where the investments are held? Is that a key factor?

In real estate decisions, location matters. In insurance, if you talk to an Allstate Insurance agent, they are going to recommend Allstate Insurance for you. We are different. We make investment decisions based on what is in your best interest and consistent with our investment philosophy, not based on the custodian (where your assets are held). As long as the custodian of your assets is a well known and reputable firm, the actual “location” (custodian) should be a secondary factor.

As independent investment professionals, we have selected Fidelity Investments or Charles Schwab as the custodian of the assets that we manage. This is the place where your assets are securely held.

When a new client begins to work with us, we generally move their assets to one of these two custodians. We prefer Fidelity, as they provide our clients with the best combination of low costs, efficient service, easy to read monthly statements and a website that is secure and user friendly.

Think of the custodian as the holder of your assets. As we are independent advisors, we can recommend and purchase nearly any mutual fund, bond or CD that would be in your best interest. Because we recommend to custody your investments at Fidelity does not mean we recommend primarily Fidelity mutual funds. Far from it.

Our investment decisions are completely separate from the decision of where to custody (hold) your assets. Doesn’t that make sense?

“August can be a very tricky month. Be Careful.”

As I drove to meet my son for lunch on Monday, a Wall Street analyst on CNBC made the above comment, which I heard while listening on Sirius radio.

Is this a realistic comment? Is this the kind of advice you want from your financial advisor? Is it really helpful?

Do you want planning and recommendations for the long term? Or do you want investment advice focused only on the next month?

Do you want a financial advisor who will advise you with your investments, as well as assist with your estate planning, retirement planning and reducing your taxes? Or do you want predictions and guesses?

Do you want a financial advisor that utilizes a rational investment philosophy that is understandable and provides you with comfort, peace of mind and security? Or do you want an advisor that tries to time the market with unproven forecasts?

We do not know what August will bring. We don’t know what will happen in any future month. Do you?

We do know that we can provide you with comprehensive financial guidance and advice that will be valuable to you and your family. We do know that it will be more valuable years from now than a prediction for the month of August, 2013.