Since so few of us know that much about investment markets, it’s much easier to rely on a professional. They seem very knowledgeable and pleasant to work with. However, we need to know the rules of the game and some good alternatives.
Brokers or investment advisers are only required to make recommendations that are generally “suitable” for the investor. That doesn’t mean that it’s the best investment for you, nor the wisest nor the best value. It only means that it’s not obviously inappropriate.
He could promote more trading, with consequently more commissions, than would be necessary or wise. Cases against a broker for inappropriate trades have usually been unsuccessful. (A manager of an investments account could be called a broker, an investment adviser, a financial adviser or other variations.)
Debate is heating up about whether stock brokers and insurance salesman should have a fiduciary duty to their clients. This would mean that they should be required to always act in a client’s best interest. An investor would have more legal recourse should a professional act against his client’s best interest. The Financial Regulatory Reform bill designed to make this change was anticipated to pass in 2010. However, it became bogged down in Congress.
Be aware that even with a fiduciary duty, things can go amiss. Your own involvement and attention is important. California mortgage brokers (but not lenders) have had a fiduciary responsibility to their clients since 1979. It didn’t stop the recent real estate disaster.
What’s the Right Choice for You?
Brokers and Advisers
Obviously good recommendations and affiliation with a well-known, reputable company can help your sense of trust. Try to establish that the broker is knowledgeable, trustworthy and easy to work with. A diligent, intelligent broker can be extremely useful.
The Financial Industry Regulatory Authority is the self-regulating organization for the industry. It’s not a government site, but you can check for registered complaints against brokers or firms HERE.
With a broker account, you choose from two types of accounts:
A Discretionary Account –The broker manages your money at he sees fit based on your philosophy and goals. Trades are made without consulting you. Typically there is a “wrap fee” based on the size of the account, rather than a fee for each individual trade. There also can be less visible fees within fund expenses as indicated below.
A Non-Discretionary Account – You either direct the broker to make trades for you or you can approve the trades he recommends prior to their being placed.
You may be charged a commission when a trade is made or something is bought or sold. You may also, or instead, be paying continuing fees on certain mutual funds managed by the broker’s company. The affiliation with the broker’s company may not be apparent. Your portion of these fees won’t be visible on the statements. These fees will be included in the expenses of the mutual funds. Higher expense funds may not be a problem if they also cover your adviser or if the funds are much more profitable funds than other funds. However, you have a right to know the arrangement.
Volatile markets such as we’ve been experiencing can cause excess or inappropriate trading, even initiated by you in a bit of a panic. A broker should try to calm rash moves. However, remember brokers make money when stocks or bonds are bought or sold – not when their held.
You could do your own investing in these funds which are pool of monies from many investors. These funds are invested by specified professional investors. The fees and performance of the funds is almost always highly visible. The style of each of the funds is stated and each investor is issued a prospectus outlining all the relevant facts about the fund. Funds may, for instance be emerging market funds or high growth funds or many other styles. However funds have sometimes veered from stated investment strategies due to market or management changes.
Investments in these funds can be done through investment sites such as www.Schwab.com, www.vanguard.com or www.Fidelity.com. These sites also display many performance records on the funds. Www.Morningstar.com is a paid subscription service which provides extensive information on each fund by category of style of investment and monthly performance comparisons among funds.
Certified Financial Planner
The term “financial planner” is used by many financial professionals. The word “Certified” is the key to this different level.
A CERTIFIED FINANCIAL PLANNER™ professional or CFP® practitioner, a Certified Public Accountant-Personal Financial Specialist (CPA-PFS), or a Chartered Financial Consultant (ChFC) has a certification for qualifications from the Certified Financial Planner Board of Standards. These include education, examination, experience and ethical requirements. Much additional information is available on their site http://www.cfp.net/
Fees are based on the type and complexity of planning and activities.
Tips for Managing Your Advisers
No matter what type of adviser or account you choose, you can improve your financial future by using these tips.
- Monitor your account closely. Be sure you are getting a statement every month and actually read them. If you don’t feel entirely comfortable in this area over them with a friend or accountant.
- Meet with your adviser quarterly to review your current situation – sooner if it has changed. Be sure he knows when you’ll retire, your retirement financial needs, impacts of health conditions, or other life changes. Question the broker on how this should affect your investments.
- If you’re uncomfortable in any way or somehow feel the broker hasn’t much interest in your account, do consider making a change for some fresh thinking. Don’t be concerned about hurting someone’s feeling – remember it’s only business. (Just think if one of the Madoff investors had decided to make a change 4 years ago.)
- If you have the time and interest, learn more by holding a small amount in a self-managed investment account at Charles Schwab or Fidelity.
Their websites carry a huge amount of valuable information on stock’s performances.For mutual funds they show Morningstar statistics on a vast array of independent mutual funds over a long period of time. You can use it to check out how similar mutual funds perform. (Morningstar, the subscription site, is easier to use for comparisons and information).
- However, remember, it can be disastrous to fall in love with managing your own trades.It’s very unlikely that you’ll do well buying and selling stocks and bonds for your own account over any period of time. There are far too many sad stories of initial success and long term big disappointments.
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