The Investment Scientist

Posts Tagged ‘financial advisor

My Financial AdvisorWhen I am approached by a prospective client, the question they always ask without fail is “Are you properly licensed?”

This is actually the wrong question. The right question should be, “Which license do you have?”

Generally, there are two types of licenses for people who call themselves a “financial advisor.” People who passed the series 65 test and people who passed the series 7 test. The nature of these two licenses are as far apart as heaven and earth.

Series 7 is a securities license. People who have passed this test can legally be a broker. They are actually prohibited by law to give financial advice, except incidental to the financial products they are selling.

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ImageRecently a business owner asked me to review his investment portfolio. He is currently with an Ameriprise financial advisor and his gut feeling tells him something is amiss.

He is paying the advisor 1.6% in fees. First of all, this fee is quite exorbitant. For the size of his portfolio, he shouldn’t be paying more than 1% in advisor fees.

Adding insult to injury, for the fee that he is charging, this advisor puts his money into a collection of very expensive mutual funds like ODMAX.

It is very easy to check the expenses of a mutual fund. I just googled ODMAX and I found out it has a load of 5.75% and an expense ratio of 1.36%. (For those who don’t know, load is a one time charge to pay commision to the Ameriprise advisor who doubles as a broker. Expense ratio is an ongoing annual charge.)

ODMAX is a mutual fund that invests in emerging market stocks. If you use the low cost alternative, aka a Vanguard fund, you will pay no load and the expense ratio is only 0.33%, a saving of 1.06%.

Don’t ever underestimate these tiny savings. Because in ten years, the savings will be more than 10%, in twenty years, more than 20%. This businessman is in his 50s; he can easily live another 30 years. I asked him: “How would you like to be more than 30% poorer in retirement?” That is exactly what this financial advisor will make him.

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ImageSeven years ago when I started my advisory practice, I used to call myself ‘The Investment Scientist’ to differentiate from those run of the mill financial advisors.

My blog was called ‘The Investment Scientist’, and in marketing materials, I highlighted my academic training and scientific approaches toward investing.

Then, for whatever reason, I stopped doing that. Even the title of my blog has been changed to ‘The Investment Fiduciary.’ (The word ‘fiduciary’ signals my intention to put my clients’ interest first, but few understand its true meaning.)

Over the past year, I’ve rarely heard people call me an investment fiduciary, but sometimes would come across a long lost contact who’d say, “Aren’t you the Investment Scientist?”

There is a lesson here for me. Don’t use obscure words people don’t understand in marketing.

So why am I reverting back to ‘The Investment Scientist’ again?

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I read with disgust this news about a “financial advisor” stealing $1.3m from his client who also happened to be his father!

I want all of you to know that not all financial advisors are the same. In fact “financial advisor” is a free term. There is no educational requirement nor legal requisite. Justin Bieber and his grandmother could call themselves financial advisors and begin dispensing advice – and they would not get into trouble for it!

In reality though, there are generally four types of people who like to call themselves “financial advisors”:

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ImageI go to great lengths to meet with my clients regularly. For instance, many of my clients live across the country. I fly to them.

Some might ask: what value is there in meeting regularly? There can be about $100k of value in it, let me tell ya!

Meeting regularly allows me to uncover hidden issues and potential opportunities, thereby helping my clients make smart financial decisions.

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teenreader1. ThinkAdvisor highlighted a Maryland study which showed that states which pay the highest fees to Wall Street (for managing pensions) have the lowest returns. That says it all about Wall Street. No wonder Rick Ferri wants you to steer clear of actively managed funds.

2. Reuters Money reported how Health Savings Accounts (HSAs) can be used as retirement savings accounts. This information is especially useful for small business owners and self-employed individuals who tend to neglect their retirement savings and face high deductibility in their health insurance. Here is the garden variety of ways they can save for retirement.

3. DIY Investor Robert Wasilewski encountered a bear while hiking. He survived to write about it, but he mused that the same reactions that kept him in the gene pool will surely “eliminate you from the investment pool.”

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Rebalancing your portfolio

Rebalancing your portfolio

Recently, I visited a prospective client in New Jersey. He is currently a client with Fisher Investments, and his advisor told him never to rebalance since that involves market timing.

I have to hand it to this financial advisor for recognizing that market timing is an unproductive endeavor, but he is so wrong about rebalancing that I am compelled to write this article.

Rebalancing is not a market timing activity, it is calendar-driven or condition-driven. For instance, you may decide that you will rebalance your portfolio on January 1st of each year or whenever an asset class allocation is off by 20%.

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC.

Twitter: @mzhuang

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