How You Can Pick Out an Investment Adviser
At age 60, Marlene Malone knows her way around numbers: The Whittier resident, who works as a bookkeeper, has been on her own financially for more than 20 years.
But like many individuals, Malone believes that she’d be better off letting a pro run her investment portfolio--especially the $70,000 she has allocated for stocks.
She has tried stockbrokers, but they didn’t impress her. And though she understands and has used mutual funds, she’s uncertain how to pick and track a portfolio of funds that would fit her changing needs.
“What I want is someone who’d look at the market and say, ‘It’s time to buy this or sell that,” she says.
Malone’s problem isn’t finding an investment adviser--it’s finding one who is competent, unbiased, affordable and, above all, trustworthy. Her predicament is shared by countless small investors whose need for financial advice has mushroomed with the size of their nest eggs.
In theory, it should be easier than ever to get help: The number of people and firms purporting to be “investment advisers” has rocketed from 5,100 to 17,500 nationwide since 1981. And that only counts advisers who are registered with the Securities and Exchange Commission.
Yet the SEC admits that it can’t vouch for the professionalism of most of those advisers: Nearly half are one-person shops, and 61.5% have 14 or fewer clients. The SEC has 46 examiners to keep track of the entire industry.
The result is that this mammoth collection of money managers is for all practical purposes unregulated.
SEC Chairman Richard C. Breeden recently told Congress that “for smaller advisers, the normal interval between (SEC) inspections is almost 30 years, which in most cases means never.” Many states have inspection programs, but they too are generally short-staffed.
Breeden is pleading with Congress to change the law so that the SEC can boost its oversight of investment advisers. One proposal is to sharply raise the annual fees that advisers pay the agency, allowing it to hire many more examiners.
Until then, Breeden admits, individuals should realize that the term “registered with the SEC” has little practical value if you’re trying to decide whether an investment adviser is competent--let alone honest.
Then how does the average person pick an adviser? For starters, you should narrow your search by deciding what you don’t want. Some individuals, for example, don’t want an adviser who’s paid to sell a specific type of investment. That often disqualifies stockbrokers and financial planners who earn commissions on what they sell--even though many such professionals may be able to give you unbiased advice.
If you’re looking for a totally independent investment pro, you have two options: One is to find a “fee-only” financial planner who will manage your investments for a set annual fee, often a percentage of your assets. Such planners usually develop a comprehensive, long-term strategy for your family finances.
Planners’ minimum investment requirements and fees vary widely--and so does their level of competence. If you’re going to find one on your own, you should be prepared to interview at least three in your search. One place to start: Discount brokerage Charles Schwab & Co. will send you a list of fee-only financial planners in your area. You can call Schwab at 800-435-4000.
The other option is to give your funds to a private money manager who focuses solely on protecting your nest egg and making it grow--but who probably won’t be interested in your tax status, your family needs or other aspects of your overall financial picture. These advisers too usually take a percentage of your assets as an annual fee.
Major brokerages including Shearson Lehman Bros. and Merrill Lynch & Co. offer programs that will place your nest egg with a professional manager. These so-called wrap accounts have become immensely popular in recent years with people who don’t trust individual brokers.
The tough part is the cost: There is no uniform charge in the money-management business, but most financial planners and private advisers who take a share of clients’ assets usually demand between 1% and 3% a year--and their minimum annual fees can be $5,000 or more. For that reason, many pros won’t take accounts of less than $100,000 to $250,000.
Robert D. Arnott, president of Pasadena-based money manager First Quadrant Corp., argues that individuals with less than $250,000 to invest are better off creating their own portfolio of no-sales-charge stock and bond mutual funds rather than hiring an independent investment pro. Fees eat up too much of a small nest egg, he says.
Even if an adviser is willing to take smaller accounts, Arnott says, “you’re likely to get 1% of that person’s time. You’re better off throwing darts.”
Even so, some investors would feel better getting any decent advice than running their money on their own. If that describes you, and you can locate an adviser or financial planner who is willing to manage your money for a reasonable fee, you should then focus on two issues: Is the person competent--and trustworthy?
Here are some ways to be sure on both counts:
* Don’t simply assume that a title ensures professionalism or honesty. “There may be as many as 200,000 to 400,000 people in this country holding themselves out as ‘financial planners,’ ” says Bill McDonald, chief of enforcement for the California Department of Corporations.
Before you think of giving someone your money, demand a sit-down, in-person meeting. And then demand references. Arnott suggests asking for the names and phone numbers of three clients who now invest with the individual, and three who formerly invested with the person but don’t currently. “Most managers may be uncomfortable with that,” Arnott says, but if they’re legitimate, they should comply.
* Consider a trip to the nearest Securities and Exchange Commission office. The SEC will let you view records of registered investment advisers, including files showing whether a money manager has ever been disciplined by the SEC.
Another option: The California Department of Corporations may be able to give you such information over the phone, depending on the type of adviser. In Los Angeles, the number is 213-736-2481.
* Scrutinize past performance statistics carefully. There are many ways to present an investment “track record,” some of which are more honest than others. (See accompanying story.) Be wary of hype. “If someone says, ‘I can make you 15% per year with no downside risk,’ I’d be suspicious,” warns Arnott.
* Ask who actually takes custody of your funds. Ideally, though your investments are managed by your adviser, they should be physically held by an independent custodian (such as a bank trust department) to cut the risk of fraud or embezzlement.
* Finally, use common sense. If an investment adviser is right for you, he or she will propose constructing a portfolio that you’re comfortable with--not some mishmash of investments beyond your comprehension.
“If you don’t understand it, you probably shouldn’t be investing in it,” says William Kenefick, assistant commissioner of the Department of Corporations.
Investment advisers boom. . .
Advisers registered with SEC: 1981: 5,100 1982: 5,445 1983: 7,043 1984: 9,083 1985: 11,100 1986: 11,000 1987: 12,690 1988: 14,120 1989: 16,239 1990: 17,386 1991: 17,500
. . .and most are small operators
Percentage of current investment advisers with: 14 or fewer clients: 61.5% 15--50 clients: 19.7% 51--100 clients: 8.3% 100--500 clients: 8.8% More than 500 clients: 1.7% Source: Securities and Exchange Commission
