| id="body"> | | | | Be Willing to Pay Fees for Superior Advice |
| If you're frustrated from having one financial | | | | Superior advice is superior because a lot of hard |
| consultant after another financial consultant provide | | | | work and time go into producing that advice. I |
| you with inadequate returns on your stock portfolio, | | | | remember talking to a potential client one time that |
| then I hope you read my first article "Three Tips for | | | | had a million dollars in the stock market and was |
| Finding a Superior Financial Consultant." In this article, | | | | adamant about not paying fees. He just wanted to |
| I'll drill down some more to really hammer home | | | | pay commissions on stock trades. When he showed |
| those points. | | | | me his statements (by the way he was with a major |
| Finding a superior financial consultant, isn't always | | | | Wall Street firm that I won't name), there seemed |
| about the financial consultant. Sometimes it is also | | | | to be no structure or investment strategy in his |
| about you. Are you willing to also make the | | | | portfolio. He owned a mix of mutual funds and |
| commitments to find a superior financial consultant? | | | | individual stocks, and many times those stocks were |
| In this article, I'll discuss one more crucial behavior | | | | traded as soon as there was a nominal 5% gain in |
| about financial consultants and two regarding the | | | | any of them. Furthermore, the statements by his |
| behavior of you, the investor. | | | | financial consultants were misleading. The consultant |
| Three more tips: | | | | handwrote on his statements that he was doing |
| (1) Don't hold mutual funds; | | | | great because he was up 6% that quarter (which I |
| (2) Don't be stingy if you find a superior advisor; and | | | | believe just about matched the S&P 500's |
| (3) Be patient and ask lots of questions in your | | | | performance that quarter). He told me that |
| search for a superior financial consultant. | | | | annualized, that the 6% translated into 24% returns. |
| Don't Hold Mutual Funds | | | | But when I explained that his net returns would be |
| Let me tell you why I'm not a fan of mutual funds. | | | | much lower because his portfolios quarterly 100% |
| Mutual funds have so many hidden fees that it's | | | | turnover rate produced excessively high capital gains |
| often difficult to know exactly what your costs are. | | | | taxes that would undercut his net returns, he didn't |
| Besides upfront costs that can be upward of 5% for | | | | seem to understand. I guess his financial consultant |
| some funds, there are 12b-1 advertising , marketing | | | | didn't bother explaining this small detail to him. Still, he |
| and distribution fees that range from 0.25% to 1.0%, | | | | insisted on paying no fees no matter what. I could |
| administrative fees that range from 0.20% to 0.40% | | | | tell that he was the type of person that was blindly |
| and of course management fees paid to the mutual | | | | loyal to his financial consultant, so I moved on |
| fund manager of 0.50% to more than 1.0% annually. | | | | without attempting to schedule a second meeting. |
| This doesn't even include undisclosed "soft" costs of | | | | Superior advice costs money. And if your financial |
| trade commissions that can add another 2.0% to | | | | consultant is superior, he or she will be transparent |
| 4.0% in costs. And yes you didn't incorrectly read the | | | | about his fees and your costs, so that you won't be |
| first part of that last sentence. Many mutual funds | | | | confused about what your true gains really are. Don't |
| charge you 12b-1 expenses they incur from | | | | be stingy. After what you just learned about mutual |
| advertisements and commercials that urge you to | | | | funds, why would you not be willing to pay even |
| buy their funds, and if you're buying no load funds, | | | | upwards of 2% annually for superior individual advice |
| chances are that your 12b-1 fees are higher than | | | | and management when you're almost certain to be |
| average. | | | | paying more than that a year just to own a mutual |
| Add to this, intangible costs such as the performance | | | | fund? |
| that is sacrificed to maintain the necessary level of | | | | Be Patient and Ask Lots of Questions |
| liquidity to satisfy share redemption, and your costs | | | | If you persistently ask the three questions I |
| become even greater. For a fund that turns over | | | | mentioned in part one of this article, you may get |
| 100% of its assets annually, Roger Edelson of the | | | | frustrated after talking to ten financial consultants, |
| University of Pennsylvania Wharton School estimated | | | | none of whom can answer those questions. My |
| this sacrificed performance to be 1.5% of returns | | | | advice is to just be patient. Don't give up and don't |
| annually. Lastly to add insult to injury, sometimes fund | | | | settle for a salesperson that is trained to answer |
| managers sell out of their biggest winners to meet | | | | those questions to lead you to believe that he or she |
| liquidity needs, generating a capital gains income tax | | | | has answered your questions when that is not the |
| for you, the investor, even if the mutual fund lost | | | | case at all. What do I mean? |
| money that year. | | | | For example, when you start drilling down about |
| But this isn't even where the negative traits of | | | | specific stock picks, a common sales technique to |
| mutual funds end. If you have one of the many | | | | avoid your question is an answer similar to the |
| financial consultants that merely try to jump on the | | | | following: "I'm not a stock picker. But don't worry. I |
| hot emerging market bandwagon by buying mutual | | | | know how to find the best money managers in the |
| funds in China, India, or any other country, I advise | | | | country to manage your money for you, so you're in |
| you to exercise extreme caution. When pullbacks | | | | great hands." Don't be misled by smokescreens like |
| happen in these country's economies as will inevitably | | | | this. Remember that if your financial consultant truly |
| happen, you are at high risk of losing money quickly. | | | | understands how to find you the best money |
| Why? In a mutual fund, you are at the mercy of a | | | | managers, then he or she must necessarily have |
| herd mentality that more often than not, will induce | | | | discussions about geographical preferences, industry |
| panic upon the release of bad news, and cause | | | | preferences, and specific stocks with those money |
| millions of investors to redeem their shares over a | | | | managers. How can a financial consultant claim to |
| short period of time. If this happens, fund prices will | | | | select the best money managers for you but have |
| plummet before you even knew what hit you. | | | | no understanding of what stocks you own and what |
| But if you choose to own just the best stocks in the | | | | makes those stocks special? |
| best industries in these countries, most likely your | | | | To summarize, buy individual stocks over mutual |
| stock prices will be much more insulated and less | | | | funds, be willing to pay fees for an exceptional |
| volatile in such a scenario. While these stocks may still | | | | advisory if you are so lucky as to find one, and |
| decline, they will most likely decline a lot less than the | | | | remember, the luckiness of finding an exceptional |
| fund will. Strong companies' stock prices tend to | | | | advisor is not really luckiness at all. It comes from |
| weather country-wide economic downturns much | | | | your hard work, tough questions, and your |
| better than fund prices, and if they are in the right | | | | unwillingness to be led astray by the professional |
| niche, they may even continue to flourish. | | | | smoke screens of financial consultants. |